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How income from equity shares are taxed in India?

How income from equity shares are taxed in India?

Welcomed to an another interesting discussion regarding stock market where we will be discussing about the taxation of income received from equity shares in the hand of investors. Let's start.

Types of Income from Stock market

There are three types of income which an investor can earn from equity shares.

1. Dividend Income
2. Short Term capital gain
3. Long Term Capital gain

Let's discuss about the taxation of these income.

Taxation of income of shares

1. Dividend income

Equity shareholders get dividend from companies which is a kind of distribution of profit earned throughout the year. It is given on the face value of shares. 

Suppose a company's share's face value is 5/- and company paid 200% dividend, that means each investor in equity shares will get 10/- per share.

Earlier dividend income was fully exempt in India and so many foreign investors were interested in investing in India. But  now it is not fully exempted rather partially exempted. 

As per section 115BBDA of Income tax Act, now you have to pay taax on dividend if you recieve any dividend exceeding 10 lakh in a financial year. What does this mean? Let's understand it by an example.

Mr. Amitabh Bachhan earned 1500000/- as dividend in this financial year. His daughter in law Mrs Aishwarya Rai Bachhan earned 1000000/- as dividend income in the same year and his son Mr Abhisekh Bachhan earned 800000/- as dividend income in  the same year.

Now Mr Amitabh Bachhan will pay tax @10% of 1500000, which will be 150000/- as his income exceeds 10 lakh in a financial year. 

But Mrs Aishwarya Rai Bachhan and Mr Abhisekh Bachhan will not pay any tax as their income is not exceeding the prescribing limit.
In this way dividend income in India is taxed.

2. Short Term Capital Gain

Whenever we buy a share of any company and sale the same share within a year then the income arising from such transaction are fall under short term capital gain. If you suffer loss then such loss will fall under short term capital loss. So if you earn any short term capital gain in any financial year then as per section 111A of Income Tax Act, you have to pay tax @ 15% provided the shares are listed in any stock exchanges. We will discuss about the shares which are not listed in our coming articles. So stay tuned for that.

Let's take an example.

Mr. Sunny Deol buy 1000 shares of Maruti Suzuki @7000 on May 2019. He sold 500 shares @7500 in July 2019. He again sold 500 shares @6800 in August 2019. So his capital gain will be calculated as under.

July 2019

Sale Proceeds 500*7500 = 3750000
Cost 500*7000 =          3500000

Short term capital gain = 250000

Aug 2019

Sale proceeds 500*6800 = 3400000
Cost  500*7000 =         3500000

Short term capital loss = 100000

This loss will be set off with the gain and tax will be paid on net income i.e 150000

Tax = 150000*15% = 22500

3. Long Term Capital Gain

If we buy a share and sale it after holding it for one year, then the income arising from such transaction will come under long term capital gain. Same will happen if you suffer loss. It is interesting to know that earlier long term capital gain are fully exempted in India. 

But after 1/2/2018 everything changed. Now long term capital gain is taxable if your total long term capital gain  exceeds 100000/- as per section 112A of Income tax Act.

Let's take an example.

Disha Patni holds 5000 shares of HUL. She had bought it in 2015, @1600 per share. in May 2019 she sold all the shares @ 1800. Calculating long term capital gain is now a complex thing for beginners who have no idea of tax. I will try to explain it in a simpler way.

Scenario 1 - Check the highest traded price of HUL on 31st January 2018. Suppose the high of that share is 1680. Then we will take this value as cost of acquisition.

In this case long term capital gain will be (1800-1680)*5000 = 600000

Tax will be on 500000 as income form long term capital gain upto 100000 is exempted. 

So tax will be 500000*10% = 50000

Scenario 2 - If the highest traded price was 1580, which is less than her actual cost then cost for calculation of long term capital gain will be 1600.

long term capital gain will be ( 1800-1600 )* 5000 = 1000000

Tax will be (1000000-100000)*10% = 90000

Scenario 3 - if highest traded price was 1790 on 31st January 2018, then long term capital gain will be ( 1800 - 1790 )* 5000 = 50000

No tax is payable as the long term capital gain is not exceeding 1 lakh.

So this was the taxation of equity shares for investors. For traders we will discuss the taxation of income from trading in our next article.

Thanks for your time.

If you have any doubt you can ask in comment section.


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