Only two things in life are certain – Death and Taxes. Most working professionals are well aware of this fact and so the idea of avoiding tax payment is still a modern fantasy. We are all well aware of taxes that are levied on salary, business income, and more. But if you make profits on stocks, then should you pay taxes? In this blog, we’re going to talk about the modern-day question of investors – What If I Don’t Pay Taxes On Stocks In India?
Taxation Of Income From Selling Shares
Money made from the sale of equity shares in India comes under the heading of “Capital Gains”. Under this heading, equity shares are further taxed based on two criteria –
Short-Term and Long-Term Capital Gains.
Short Term Capital Gains (STCG)
If you buy listed equity shares and sell them within 12 months, it will either be considered a short-term gain or a short-term loss. If you do make profits by selling within 12 months, then you will have to pay a tax of 15% on your profits. This is irrespective of your tax slab.
Short Term Capital Gains are calculated as = Sale Price – Expenses On Sale – Purchase Price.
Short-Term Capital Loss
On the other hand, if you make a short-term capital loss, you can offset your losses against long-term and short-term capital gains. Suppose you don’t offset all your losses, you still have the option to carry it forward for 8 years. This means you can realize these short-term losses anytime in the upcoming 8 years against short-term and long-term capital gains.
Long Term Capital Gains (LTCG)
A long-term gain is when listed equity shares are bought and sold after 12 months of purchasing them, for a profit. Similarly, if you sell the shares after 12 months of purchase for a loss, it is a long-term capital loss.
Before the 2018 Budget, shareholders were exempt from paying taxes on equity and equity-related instruments (mutual funds) on long-term capital gains. But the law has changed in the 2018 budget and now, an LTCG above ₹1,00,000 from the sale of equity shares and equity-based mutual funds will be charged a 10% tax (plus additional cess).
Long-Term Capital Loss
The same applied to long-term capital losses, which were considered dead losses prior to the 2018 Budget. As taxes were exempt, you could neither carry it forward nor adjust these losses. After the new law came into force, you could also carry forward the long-term capital loss from listed equity shares & mutual funds.
Note – Long Term capital loss cannot be set off against short-term capital gains. It can only be done against other long-term capital gains. You can, however, carry it forward for eight years only against LTCGs.
What If I Don’t Pay Taxes On Stocks In India?
Now that you have a general idea of taxation on listed equity shares, you know the different ways in which tax is applicable on stocks. But keep in mind that you are only supposed to pay taxes on realized profits. This means that only when you sell the shares and make a gain (short-term or long-term) you are liable to pay taxes.
As long as the stocks are held and the profits are unrealized, shareholders are not liable to pay taxes on shares.
The transaction of listed securities is digitally recorded using an investor/trader’s PAN card and Demat Account. This means that all your stock transactions of buying and selling are recorded. Failure to disclose your assets, including financial assets such as stocks, leads to penalties and also might come on the borders of tax evasion.
To get a full understanding of the different types of fines and penalties that might fall under “Capital Gains” you can refer to this section of the Income Tax Department.
If you are not disclosing your income and thereby not paying taxes on it, you will attract several fines and penalties. Furnishing incorrect statements can attract fines in the range of ₹10,000 – ₹100,000.
Furthermore, if you disclose your income during the course of the investigation by the government, a 30% penalty is payable. If you do disclose the income after the search and in any other situation, the penalty doubles to 60%.
Another important term to remember is Securities Transaction Tax (STT) –
STT is a tax that is applicable to all equity shares on recognized stock exchanges. Irrespective of buying or selling a share on a stock exchange, it is subject to STT. Note that STT is paid on stocks that are traded on listed exchanges such as NSE and BSE.
On Which STT Is Not Applicable?
Security transaction tax is not applicable for transaction that are off the market. It also not applicable on currency or commodity transactions. Securities Transaction Tax is also not applicable on GOLD ETFs, LIQUID/Gilt ETFs, and International ETFs.
Investors don’t have to pay taxes on stocks if –
- The gains made from stocks are not realized i.e., you do not sell your shares even after making a profit.
- The gains are offset by losses made in the market (Short Term Losses against LTCG & STCG, Long term capital losses against LTCG)
The government is open and transparent when it comes to the stock market and investors. If learned thoroughly, investors can use the tax laws to their benefit when filing their tax returns, as there are more rules and regulations that give a clearer picture to investors. We hope this article answered the question – What If I Don’t Pay Taxes On Stocks In India?
Happy Investing and don’t forget to file your taxes!
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