We’re all on the lookout for ways to make our money work for us, and investing in stocks and mutual funds is a popular choice. As we chase after capital appreciation, understanding the tax implications becomes key to smart planning and predicting our actual profits.
So, when you dive into stocks or mutual funds, you’re in for two types of earnings – dividends and the gains from selling your assets. The taxation for both of these will be different.
- Tax on dividend received:
Dividends are basically a share of a company’s profits distributed to its shareholders. If you get these dividends, they get taxed as “income from other sources” at your applicable slab rates.
Moreover, if the dividend payout exceeds ₹5000, the company also deducts a 10% TDS on this dividend.
For instance, if you get ₹8000 in dividends, the company deducts ₹800 (10% TDS), leaving you with ₹7200. Now, if you fall into a higher tax slab, say 30%, you’ve got to chip in the remaining 20% tax on the whole amount.
- Tax on capital gains:
Whenever you sell these stocks or mutual funds, there could either be a profit or a loss. Capital gains arise when you sell a capital asset at a profit, and these gains are taxable.
To know how much tax you’ll be liable to pay on these profits, you will first have to know whether these gains are short-term or long-term, and this depends on how long have you held the stocks for.
In the case of listed equity shares and equity mutual funds, if the holding period is more than 12 months, your gains will be classified as long-term and if it is less than 12 months, the gains will be short-term. For LTCG, the tax will be applicable at 10% and for STCG, the rate of tax will be 15%.
Now, these rates differ depending on the type of asset. The holding period for various assets along with their tax liability are as follows.
“The rules for debt mutual funds were changed from April 1, 2023. Now, debt mutual funds are taxed at your slab rates without any indexation benefits.”
Exemption of ₹1 lakh on LTCG
LTCG of up to ₹1L are exempt from taxes. This means that you will have to pay tax on gains above ₹1 lakh. For example, say you had long-term gains of ₹1.3L. Out of this, ₹1L will be exempt and you will have to pay tax on only ₹30,000.
What if I incur losses?
Well yes, there might be losses as well. In case of capital losses, you do not have to pay any taxes. Even better, you can offset these losses. So, if you have short-term losses, you can set these off with LTCG as well as LTCG. But, when you have long-term losses, those can be set off against only LTCG.
If there are not enough gains in the current year to set off the losses, you can also carry forward the losses for 8 years and can set them off whenever there are gains in subsequent years.