Stock markets offer immense opportunities for wealth creation. It gives the maximum returns amongst the various asset classes. Trading and investments in stock markets can be done only through a stockbroker. A trading account needs to be opened with a stockbroker through which one can buy and sell shares. One also needs a demat account where one can receive or take delivery of the shares bought and also give delivery when one sells. Earlier way of holding physical shares is done away with. One can only hold shares in electronic form and that is why a demat account is a must.
A demat account can be opened with the same broker with who you have a broking account. It can also be opened with any other depository participant known as DP. However, the demat will have to have to be mapped with the broker through whom the shares are bought and sold.
Any gains made out of selling shares or bonds or mutual funds held in the demat account is subject to tax. Income tax charges gains from stock market trading and investment depending upon the holding period. If the stocks are held in demat for more than 12 months before it is sold it amounts to long term capital gains (LTCG) and if it is sold before the end of 12 months then it is treated as short term capital gains (LTCG)
Sale of any capital assets mentioned below are sold after holding it for a period of 12 months then the gains arising out of these are long term in nature and are subject to long term capital gains tax. The gains or profits are charged at 10% over and above Rs.1 lakh.
However, one may also incur a loss in long term assets. Such a loss is known as long term capital loss (LTCL). LTCL on selling assets mentioned above after 31.3.2018 can set them off against any LTCG as profits/gains on long term shares or equity funds are now taxable more than Rs.1 lakh. The unabsorbed LTCL can be carried forward and set off against LTCG in the subsequent years up to a maximum of 8 years.
Gains arising out of the sale of assets like equity shares, preference shares, debentures, bonds government securities, units, mutual funds, zero-coupon bonds mentioned above after holding it for less than 12 months will be considered as short-term capital gains and will attract tax on such gains.
Gains or profits arising out of STCG is taxed at 15% where securities transaction tax (STT) is applicable. In other cases, the gains are added to the total income and taxed as per the slab rate applicable.
Loss on sale of the above-mentioned assets is known as Short-term capital loss (STCL). STCL can be set off in the same year against LTCG or STCG and can be carried forward to be set off against STCG or LTCG arising in subsequent years.
However, one needs to appreciate that any carry forward losses will not be allowed if the returns are not filed on or before the due date.
One can use the demat account to bring down the tax liability if they invest in investments that give significant tax exemptions like the unit-linked equity schemes (ULIPS) or the equity link saving schemes (ELSS).
ULIPS offer double benefits of both insurance and investment. The investment is divided in such a way that one part is used for giving life cover and the other part is used for investing. The units of the investing part are credited to your demat account and are locked in for 5 years. The maturity amount received at the end of the lock-in period is exempt from tax. Investments up to Rs.1.5 lakh annually qualify for a deduction under section 80C of the Income-tax act.
The ELSS on the other hand is a saving scheme that offers better returns and a comparatively lower lock-in period of 3 years. At the end of 3 years, the maturity amount is taxed as long-term capital gains and is taxed over and above Rs.1 lakh. ELSS investment also qualifies as a deduction under section 80C of the Income-tax Act.
No. There is no tax on having a demat account. Only profits from the sale of securities from the demat account are subject to tax.
There are primarily two types of taxes that arise on the sale of investments from the demat account depending upon the holding period. Those are a tax on long term capital gains and a tax on short term capital gains.
No. The tax is not to be paid as soon as the securities are sold.
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