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How Are Brokerage Accounts Taxed

05 Apr 2023

How Are Brokerage Accounts Taxed?

To invest in bonds, stocks, mutual funds, and other financial securities, you must first open a Demat or Brokerage account. It's also worth noting that any profits you make from selling shares in your Demat account are taxed. As a result, you must be aware of the tax implications of your Demat account under the provisions of the Income Tax Act of 1961. Let's take a look at some tax implications you should be aware of:

Long-term Profits are Subject to Taxation

Long-term capital assets are those you have owned for more than a year. A long-term capital gain is a profit you make on selling a long-term capital asset (LTCG). Longer-term capital gains are taxed in the same way that short-term capital gains are, as explained above. Capital gains made over a more extended period of time are exempt up to Rs 1 lakh per fiscal year; however, any gains above this amount are subject to a flat 10% tax.

Short-Term Capital Gains Taxes

Any profit made from selling debentures, shares, mutual funds, bonds and so on within one year of purchase is considered a short-term capital gain. The Income Tax Act imposes a flat 15% securities transaction tax (STT) on this. In cases where STT does not apply, your short-term capital gain is combined with your total taxable income. The remaining tax is calculated based on your eligible income tax slab.

Capital Loss

Selling your capital assets for less than the amount you paid for them results in a capital loss. Income tax laws allow you to offset short-term capital losses against long-term capital gains made during the fiscal year. If your STCL is not settled in a particular year, you can carry it forward for a maximum of 8 fiscal years in the future. This foregone loss can be offset against any LTCG or STCG you made during the year.

A long-term capital loss occurs when an asset is sold for less than its purchase price after a year. It could not be set off or carried forward until February 2018, when an Income Tax Notice changed the taxation process. Therefore, if you have a Demat account in India and incur a long-term capital loss for a transfer made on or after April 1, 2018, you can deduct it from your long-term capital gains for that fiscal year. The long-term capital loss, like the STCL, can be carried forward for up to 8 years and then settled only against the corresponding LTCG made by an investor during that year.

Wrapping Up

With this information, you can take advantage of the Brokerage account's benefits while also being aware of taxation. If you want to claim a tax deduction while increasing your savings, consider investing in a mutual fund's Equity-linked Savings Scheme (ELSS) or Unit Linked Investment Plan (ULIP). They can assist you in saving up to Rs 1.5 lakh in a fiscal year. While ULIP maturity amounts are also tax-free, long-term capital gains on ELSS funds are taxed only if they exceed Rs 1 lakh.

By timing your trades correctly and selecting the correct strike prices, you can achieve a profitable transaction. If trading doesn't appeal to you, another option is to consider investing in upcoming IPOs. Whatever you decide, make sure you always have a Demat and trading account in your name. You cannot invest in the financial markets without one. Open a Demat account with Motilal Oswal today in a matter of minutes.

 

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

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