Know the Income Tax on Demat Account & Transactions

In recent years, the usage of demat accounts has become increasingly popular among investors in India. Demat accounts provide a convenient and secure way to hold and transact in securities electronically. You too may be using a demat account to generate returns. Therefore, it is essential for account holders, like you, to understand the implications of income tax on demat transactions and the income generated from other investments.

This article aims to provide an overview of the tax implications on demat accounts in India, including the tax on demat account transactions, income tax on demat accounts, filing income tax returns, tax planning strategies, and frequently asked questions.

Tax on Demat Account Transactions

Demat account transactions can attract various taxes, including:

• Capital Gains Tax

  When you sell securities held in a demat account and realise a profit, it is considered a capital gain and is taxed based on the holding period of the securities. The capital gains tax appears in two forms:
  • Long-term Capital Gains Tax (LTCG)
    LTCG refers to the profit earned from the sale of securities that have been held for a period of more than 12 months. The tax treatment for LTCG is different from that of STCG.
    LTCG exceeding Rs. 1 lakh is subject to tax at a concessional rate of 10% without indexation benefit. However, gains up to Rs. 1 lakh in a financial year are exempt from tax. It's important to note that this revised tax regime is applicable only for listed equity shares and equity-oriented mutual funds.
  • Short-term Capital Gains Tax (STCG)
    STCG refers to the profit earned from the sale of securities that have been held for a period of less than 12 months. The tax treatment for STCG is different from that of LTCG.
    STCG is added to the individual's total income and taxed at the applicable slab rates. The tax rates vary based on the income brackets, ranging from 5% to 30% (plus applicable surcharge and cess). It's important to note that individuals with taxable income below the basic exemption limit are not liable to pay tax on STCG. However, if STT is applicable, then the rate of tax is 15% for STCG.

• Securities Transaction Tax (STT)

  STT is a demat account income tax levied on the purchase and sale of securities in the Indian stock market. It is applicable to equity shares, equity derivatives, and units of equity-oriented mutual funds. STT rates vary depending on the type of transaction and are paid at the time of trade execution.
  It's important to note that STT is collected by the stock exchanges and paid by the brokers on behalf of their clients. The tax is automatically deducted and reflected in the contract notes provided by the broker.

• Goods and Services Tax (GST)

  GST is applicable to specific charges levied by depositories, registrars, and brokers for the services provided in relation to demat accounts. GST rates vary based on the nature of services and are added to the transaction charges. The rate of GST varies depending on the type of service provided, and it can range from 18% to 28% as per the applicable tax slabs.
  It's important for demat account holders to review their contract notes and statements provided by brokers to understand the GST component and ensure compliance with the tax regulations.

Tax Planning and Strategies for Demat Account Holders

You can employ several tax planning strategies to optimise your liabilities arising out of the demat account income tax. Here are a few examples:

• Holding Period for Capital Gains Tax

  By holding securities for more than 12 months, you can qualify for the concessional tax rate on long-term capital gains. This strategy can help in reducing the overall tax burden.

• Offsetting Capital Gains and Losses

  You can offset capital gains from the sale of securities with capital losses incurred during the same financial year. This strategy allows for the reduction of taxable gains, potentially resulting in lower tax liabilities.

  • Long-Term Capital Loss (LTCL)

    LTCL refers to the loss incurred from the sale of securities that have been held for a period exceeding 12 months. It occurs when the selling price of the security is lower than its cost of acquisition. LTCL can arise from investments in equity shares, equity-oriented mutual funds, or other capital assets held for a long duration.
    LTCL can be set off against any LTCG made during the same financial year. By setting off LTCL against LTCG, you can reduce your taxable gains and, consequently, your tax liability. However, LTCL cannot be set off against any other type of income.
    If an investor has an unused LTCL after setting it off against LTCG, it can be carried forward to subsequent years. The unused LTCL can be carried forward for up to eight financial years immediately following the year in which the loss was incurred. It can be utilised to set off against future LTCG in those years, thereby reducing the tax liability in the future.

  • Short-Term Capital Loss (LTCL)

    STCL refers to the loss incurred from the sale of securities that have been held for a period of 12 months or less. It occurs when the selling price of the security is lower than its cost of acquisition.
    STCL can be offset against any Short-Term Capital Gains (STCG) made during the same financial year. Similar to LTCL, STCL can reduce your tax liability. However, STCL cannot be set off against Long-Term Capital Gains (LTCG) or any other income.
    Just like LTCL, STCL can also be carried forward for up to eight financial years immediately following the year in which the loss was incurred.

• Tax-Saving Investments

  You can consider investing in tax-saving instruments such as Equity-Linked Saving Schemes (ELSS), Unit Linked Insurance Plans (ULIP), or National Pension System (NPS) to avail of deductions up to ₹ 1.5 Lakhs in a financial year under Section 80C of the Income Tax Act. These investments not only help in tax planning but also offer long-term wealth creation potential. Before investing, do check out the terms such as a mandatory lock-in period or exit load to factor in your calculation. For example, ELSS comes with a lock-in period of 3 years while you’re required to hold on to your ULIP investments for a minimum of 5 years.

In Conclusion

Understanding the applicable tax on a demat account and its implications is crucial for investors in India. By being well-informed about the tax rules and regulations, you can ensure compliance with the tax laws and optimise your tax liabilities. It's also essential for you to accurately calculate and report your capital gains, taking into account the holding period and the applicable tax treatment (STCG or LTCG) while filing your income tax returns.

Do note, tax laws and regulations may change over time, and it is advisable for you to stay updated with the latest tax provisions and seek guidance from tax professionals when necessary.