When it comes to investing in the stock market, it is important to understand the tax consequences. A demat account that allows investors to store their securities in electronic form raises separate tax considerations. In this article, we analyze the key tax implications of demat accounts and what you need to know to manage them successfully. Check more on how to create demat account.
Capital Gains Tax: One of the major tax consequences of a demat account is capital gains tax. When you sell securities held in a demat, the profits made are subject to capital gains tax. The tax rate depends on how long you have owned the account. If you have held securities for less than a year, it is considered a short-term capital gain and you will be taxed at the applicable income tax rate. If you hold securities for more than a year, it is considered a long-term capital gain and your tax rate is generally lower.
Dividend Tax (DDT): Another tax impact to consider is the Dividend Tax (DDT). When companies pay dividends to their shareholders, they have to pay a DDT on the dividend amount. As a shareholder receiving dividends in your demat account, you do not have to pay any additional tax on these dividends. Check more on how to create demat account. However, be careful because DDT will be deducted at the end of trading before the dividend is credited to your demat.
Securities Transaction Tax (STT): The Securities Transaction Tax (STT) is a tax levied on the purchase and sale of securities on a stock exchange. It applies to both equity funds and equity-oriented mutual funds. STT fees vary depending on the type of transaction and the security being traded. The STT is automatically deducted by the exchange at the time of transaction and reflected in your demat statement.
Tax on bonus issues and stock splits: Bonus issues and stock splits, in which additional shares are awarded to existing shareholders, have no direct tax consequences. The purchase price and holding period of the original shares will be adjusted proportionally. However, if you later sell the bonus shares or split the shares, capital gains tax will be calculated based on the adjusted cost and holding period. Check more on how to create demat account?
Tax on Inherited Securities: Special tax implications need to be taken into account when inheriting securities held in a demat account. The cost of acquiring inherited securities is generally considered to be their market value at the time of inheritance. When you sell these inherited securities, capital gains tax is calculated on the difference between the sales price and the fair market value at the time of inheritance. Check more on how to create demat account?
Tax Deduction at Source (TDS): TDS is applicable when you earn interest or receive income from certain securities held in your demat account. For example, if you hold bonds or debentures, the interest earned on these securities may be subject to TDS. The TDS rate and threshold vary depending on the type of security and the income earned. Check more on how to create demat account?