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Do You Need to Pay Tax if Your Only Income is from Selling Shares in India?
Introduction
Investing in the stock market can be a great way to earn money, but what about the taxes? If selling shares is your only source of income, it’s important to know what taxes you might owe in India. Let’s break down the tax rules with help from PGA & Co. Chartered Accountants.
Types of Share Sales
Before we dive into the tax details, let’s understand the two main types of share sales:
- Short-Term Capital Gains (STCG): When you sell shares within 12 months of buying them.
- Long-Term Capital Gains (LTCG): When you sell shares after holding them for more than 12 months.
Tax on Short-Term Capital Gains
If you sell shares within a year of buying them, the profit is called Short-Term Capital Gain (STCG). The tax rate for STCG is now 20%, no matter how much you earn in total.
Example:
- You bought shares for ₹1,00,000 and sold them for ₹1,20,000.
- Your STCG is ₹20,000.
- The tax you owe is 20% of ₹20,000, which is ₹4,000.
Let’s say you’re an active trader, buying and selling shares frequently. Over a year, these transactions add up:
- In January, you buy shares for ₹2,00,000 and sell them for ₹2,50,000 (STCG: ₹50,000).
- In March, you buy shares for ₹1,00,000 and sell them for ₹1,10,000 (STCG: ₹10,000).
- In June, you buy shares for ₹1,50,000 and sell them for ₹1,80,000 (STCG: ₹30,000).
- In October, you buy shares for ₹2,00,000 and sell them for ₹2,30,000 (STCG: ₹30,000).
Your total STCG for the year is ₹1,20,000, and the tax you owe is 20% of ₹1,20,000, which is ₹24,000.
Tax on Long-Term Capital Gains
If you sell shares after holding them for more than a year, the profit is called Long-Term Capital Gain (LTCG). LTCG over ₹1.25 lakh in a financial year is now taxed at 12.5%.
Example:
- You bought shares for ₹1,00,000 and sold them for ₹1,50,000.
- Your LTCG is ₹50,000.
- Since this is below the ₹1.25 lakh exemption, you don’t owe any tax.
If your LTCG was ₹1,50,000:
- The exemption limit is ₹1,00,000.
- Your taxable LTCG is ₹50,000.
- The tax you owe is 12.5% of ₹50,000, which is ₹6,250.
Securities Transaction Tax (STT)
Whenever you buy or sell shares on the stock market, you pay a small tax called the Securities Transaction Tax (STT). This tax must be paid for the STCG and LTCG tax rates mentioned above to apply.
Filing Your Tax Return
Even if selling shares is your only income, you need to file an income tax return if your gains exceed the exemption limits. Here are some tips:
- Keep Records: Maintain detailed records of all your share transactions, including purchase and sale invoices.
- Use the Right Form: For individuals with capital gains, the ITR-2 form is typically used for filing returns.
- Report Accurately: Make sure to accurately report all your gains and losses in your tax return to avoid penalties.
Capital Losses
If you lose money from selling shares, these losses can offset your gains:
- Short-Term Capital Losses: Can be used to offset both short-term and long-term gains.
- Long-Term Capital Losses: Can only be used to offset long-term gains.
You can carry forward any unadjusted losses for up to eight years to offset future gains.
Example:
In the 2022-23 financial year:
- You have a short-term capital gain of ₹1,00,000.
- You have a short-term capital loss of ₹40,000.
- Your net short-term capital gain is ₹60,000.
- The tax you owe is 20% of ₹60,000, which is ₹12,000.
In the 2023-24 financial year:
- You have a long-term capital gain of ₹1,20,000.
- You carried forward a loss of ₹40,000.
- Your net taxable LTCG is ₹80,000.
- Since ₹80,000 is below the ₹1.25 lakh exemption, you don’t owe any tax.
Additional Considerations
Dividends
If you receive dividends from your shares, these are also taxable. Dividends from domestic companies are taxed at your applicable income tax slab rates. You can claim a deduction of up to ₹10,000 under Section 80TTA if the dividend is from a savings account. A TDS (Tax Deducted at Source) of 10% is applied if the dividend amount exceeds ₹5,000 in a financial year.
Rebates and Deductions
There are certain rebates and deductions you can claim to reduce your overall tax liability. For instance, you can claim deductions under Section 80C for investments in tax-saving instruments like ELSS (Equity-Linked Savings Scheme) mutual funds.
Conclusion
Understanding the tax implications of your investment income is crucial to ensure compliance with Indian tax laws. While the process may seem complex, consulting with a professional, like PGA & Co. Chartered Accountants, can simplify it and help you optimize your tax liabilities.
If you need personalized advice or assistance with filing your tax returns, feel free to contact us. Investing wisely and being tax-compliant can pave the way for a secure financial future.
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