It is common knowledge that income from businesses, salaries, and rentals is subject to taxes. However, what about the profits from the sale or acquisition of stock? That is also subject to taxes!
Many homemakers and retirees generate money by buying and selling shares, but they are unaware of the tax implications of this activity.
We will thus talk about the taxation of the capital gains we make on our investment in today’s blog:
Stocks Taxation :
“Capital Gains” refers to the profit or loss from the selling of equity shares. So, revenue is categorized as follows under the heading “Capital Gains”:
(i) Long-term gains in capital.
(ii) Gains on short-term capital.
This classification is predicated on how long the shares have been held. It refers to the period of time we hold the investment, which runs from the purchase date to the sale date.
When equity shares listed on a stock exchange are sold within a year of purchase, short-term capital gains are realized. Therefore, regardless of the tax bracket we are in (10%, 20%, or 30%), we must pay 15% of our gain. In the case of short-term capital gains, a fixed-rate tax of 15% is applicable.
Similar to this, when equity shares listed on a stock exchange are sold a year after being purchased, long-term capital gains are realized. In this instance, taxes are only due if our gains surpass one lakh rupees. We shall be required to contribute 10% of our gains if they surpass Rs. 1 lakh.
Additionally, sales of bonds, mutual funds, and listed and unregistered shares are subject to separate regulations.
It’s also important to remember that dividends on equities and mutual funds are subject to taxes. They are taxed, nevertheless, at the same rate as regular income.
One should also note that any dividends that we get from our investments like stocks or mutual funds are taxable. They are taxed at the same rate as our regular income.
Mutual Funds Taxation :
Mutual fund taxes vary depending on the type of fund and the length of the holding period. The following categories apply to capital gains that are realized upon selling mutual fund units:
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Equity Funds
Mutual funds classified as equity funds have a portfolio with an equity exposure of more than 65%. The taxation of equity funds is identical to that of stock investments, as previously mentioned. Regardless of the income tax bracket, the fixed rate of 15% is applied on short-term capital gains. If long-term capital gains surpass Rs. 1 lakh, they are subject to 10% taxation.
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Debt Funds
Mutual fund types classified as debt funds have a portfolio with a debt exposure of greater than 65%. When we redeem the debt fund units within the three-year holding period, we get short-term capital gains, which are added to our taxable income and subject to income tax at our income tax slab rate.
When we sell debt fund units after a three-year holding period, we receive long-term capital gains from our investment. After indexation, these capital gains are subject to a flat fixed rate of 20% tax. In addition, you are assessed the appropriate tax fee and cess.
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Hybrid Funds
The amount of equity exposure in the portfolio determines the capital gains tax rate for hybrid or balanced funds. The fund is taxed similarly to an equity fund if its equity exposure exceeds 65%; otherwise, it is taxed similarly to a debt fund.
For tax purposes, we therefore need to be aware of the hybrid scheme’s debt or equity position.
In summary :
It should be noted that this investment will become more tax-efficient the longer we keep onto our mutual fund units. As the section above demonstrates, long-term capital gains are subject to a lower tax rate than short-term gains.
