Introduction

When you take your first steps into the investing world, it won't be long before you find yourself owning shares, mutual funds, and bonds in the digital space. With this, a Demat account enables you to hold what you own digitally, which may help you trade more easily. However, you must also understand the income tax applicable to transactions related to a Demat account to remain compliant and get the most out of your investments. Income earned from your Demat account can include capital gains, dividends, and interest on some investments, which is taxable under Indian law. This guide will take you through the tax implications of a Demat account, how to calculate tax on a Demat account, and how to file your Demat account income tax return to allow you to manage your investments better.

What Is a Demat Account?

Your Demat account is essentially an online safe or vault that securely holds your financial securities like stocks, exchange-traded funds (ETFs), and bonds. A Demat, trading and banking account should offer full integration between the accounts for a seamless trading experience. While your Demat account itself is not tax-deductible, the profits you make from selling or re-investing in securities, regardless of any dividends and interest you may receive from those investments, are generally taxable. Understanding how the income tax process works for returns on your Demat account ensures you are not caught off guard when submitting your tax return at tax time.

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Different types of income from your Demat account

There are three main types of taxable income produced from your Demat:

1) Capital gains, or profits from selling securities like shares or mutual funds.

2) Dividend income, or payments from companies for holding their shares.

3) Interest income, or money earned from bonds or debt securities in your Demat account.

As all types of income have tax implications, it is crucial to know the proper rules for calculating and legally reporting your tax liability.

How to Calculate Income Tax on Demat Account: Capital Profits

Capital gains result from selling securities where a profit is realised. Taxes will differ depending on how long you have held the asset. It is classified as either Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG).

Short-Term Capital Gains: The profit from selling listed equity shares or equity-oriented mutual funds will be taxed at 15% under Section 111A, plus cess and surcharge, if the sale occurs within 12 months. For a profit of ₹50,000, you will be liable for tax of ₹7,500 plus cess.

Long-Term Capital Gains: Listed equity shares or equity-oriented mutual fund units held for more than 12 months will qualify for long-term capital gains (LTCG) tax-free of ₹1 lakh in any financial year. Above the ₹1 lakh threshold, LTCG is charged at 10% without indexation, plus applicable cess and surcharge. For example, if you make a ₹2 lakh gain, only ₹1 lakh will be taxable, meaning you will have to pay ₹10,000 plus cess.

Tax on Dividend Income

Since the Finance Act of 2020, dividends have now been taxable in the hands of the recipient at the proper income tax slabs. So, if you received dividends of ₹10,000 & you are in the 30% slab, you would have to pay tax of ₹3,000 (plus cess) to the government. Companies will deduct TDS at 10% for dividends exceeding ₹5,000 in a financial year for residents, or at 20% if you haven't provided your PAN, and there is a different TDS rate for NRIs. You must declare all dividends in your income tax return regardless of whether TDS was deducted, & regardless of where the dividend came from.

Other costs you need to be aware of

Other than the income tax on the Demat Account, you'll incur costs that will affect your overall net returns:

Securities Transaction Tax (STT) is charged to you when you buy or sell shares, and it will change your price, but it can't be deducted as a cost.

Stamp Duty: charged when you purchase securities.

Brokerage Fees: will include 18% GST, meaning it takes away some of your profit.

These are not tax-deductible, but you must include these costs in your calculation of capital gains.

Filing Your Demat Account Income Tax Return

If you're trying to report your income from your Demat account, your first job is to choose the correct ITR form:

ITR-2: If you have dividends and capital gains, but no business income.

ITR-3: Suitable if you treat trading as a business.

ITR-1: Not applicable for capital gains.

Use your Demat account statements, contract notes, and Form 26AS to ensure accurate reporting. File by July 31 each year to avoid penalties.

Conclusion

Understanding how income tax applies to your transactions in your Demat account gives you confidence to invest. By knowing how the taxes on your Demat account are calculated and how to complete your income tax return correctly, you can comply with and reduce the taxes you pay. For a resident or NRI, you should keep careful notes and consider getting a tax adviser to execute the risk vs returns plan. With some simple planning, your Demat account can be an excellent tool for creating wealth.

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