Capital gain taxes impact on Stock Market Investment.
Capital gain taxes are a tax on the sale of shares in the market. It is important to understand how taxes work before investing in the stock market. The following are two types of long-term capital gain & short-term capital terms.
Long Term capital gain (LTCG).
When the holding period of your equity investment is more than 12 months, then it is called a long term investment. The gain on selling your equity investment after holding for 12 months is called Long term capital gain.
The tax rate is 10% of income exceeding 1 lakhs from LTCG from 1/04/18
Let suppose you brought stock worth ₹ 15 lakhs & it went up in value to ₹ 17.5 lakhs. The total profit i.e. LTCG is ₹ 2.5 lakhs, but the Government of India has given a relaxation of tax of ₹ 1 lakhs. So the actual LTCG is ₹ 1.5 lakhs which will be taxed @ 10%.
Short Term capital gain (STCG).
Equity investing in which the holding period is less than 12 months is called short term investment. The gain on selling stocks before 12 months holding period is called short term capital gain.
The tax rate is flat 15%
If a person’s total income is less than the basic exemption limit i.e. Income is less than ₹ 2.5 lakhs then only the amount above ₹ 2.5 lakhs will be taxed @15%.
For Example:- A person’s salary is ₹ 2 lakhs p.a. & he have a STCG of ₹ 1 lakh than ₹ 50K (i.e. ₹ 3 lakhs – (₹ 2 lakhs + 1 lakh) – ₹ 2.5 lakhs) only be taxed @ 15%.
Few important point
STCG can be set off against short & long-term gain. But not against salary & business income.
Do one needs to pay capital gain taxes even if he does not sell his position?
A. No, one does not get taxed until and unless he has sold his position.
What are tax implications on dividend income?
A. Dividend income is taxed as per the individual slab rate.