Sharekhan Blog

Demat Account and Taxation: A Complete Guide

  • Mar 5, 2024

However, while enjoying the convenience of paperless holdings, one aspect that still gives many investors headaches is grasping Demat account taxation rules.

Understanding the nitty-gritty around capital gains, dividends, and ITR reporting can ensure you stay compliant as well as leverage available tax benefits optimally. This exhaustive guide on taxation developments concerning demat accounts will help you grasp key concepts and principles and plan smartly.

Overview of Tax Implications on Demat Accounts

Broadly, your Demat account tax liability depends on:

  • Type of instruments held - equity, debt, etc.
  • Period of holding before sale
  • Quantum of total earnings
  • Residential status

However, primary tax components include:

Capital Gains Tax

Levied on profits when selling securities held in demat form. Further classified into:

  • Short Term Capital Gains Tax (under 1 year holding period)
  • Long Term Capital Gains Tax (over 1 year)

Rates and calculation methods differ based on duration and type of instruments.

Dividend Taxation

Any dividends earned from shares or equity-oriented mutual funds held in demat form also attract applicable tax as per the latest regulations. Earlier, under the Dividend Distribution Tax (DDT) regime, companies distributing dividends directly paid tax on behalf of investors at a flat rate before payouts.

Securities Transaction Tax

Securities Transaction Tax (STT) is charged on all purchases or sales of securities done through recognised stock exchanges. This includes transactions of shares, derivatives, equity mutual funds, etc. executed using the demat account.

STT is automatically deducted by the broker or RTA while settling trade obligations and adjusting settlement obligations.

Taxation of Capital Gains on Demat Account

Capital gains earned from securities attract varying tax treatment depending on holding period categorisation and type of instruments.

Equity Shares & Equity Mutual Funds

Short Term Capital Gains

  • Holding Period: Under 1 year
  • Tax Rate: 15% flat on gains
  • Calculation Method: Profits are taxed at normal slab rates if STT is not paid

Long-Term Capital Gains

  • Holding Period: Over 1 year
  • Tax Rate: 10% flat on gains above ?1 lakh
  • Calculation Method: Indexation benefit not available

Debt Mutual Funds & Instruments

  • Any interest earned from debt mutual funds and fixed-income instruments held in the Demat account is considered income and is added to the investor's total taxable income for the year. This interest is then taxed as per the applicable income tax slab rate.
  • In addition to interest income, capital gains from redeeming debt mutual fund units or from transferring debt instruments also attract tax as per income tax regulations. The categorisation of capital gains for debt-oriented assets covers both short-term and long-term, based on the holding period.

Tax on Demat Account Dividends

Earlier, under the DDT regime, companies distributing dividends directly paid tax on behalf of investors. But post DDT abolition since FY 2020-21:

  • Dividends received by resident individual investors are now taxable in their hands
  • Flat 10% tax rate under Section 194K on dividends up to ?10 lakhs
  • Above ?10 lakhs dividends added to total income; 30% tax for very high earners

Reporting Demat Account in ITR

You must report full details of all holdings and transactions made in demat form during the financial year correctly while filing Income Tax Returns:

Details to be Furnished

  • Capital gains/losses - Equity/Debt/MFs/Other instruments
  • Dividend income earned from shares & mutual funds
  • Details of bonds, debentures, NCDs held with accrued interest
  • All demat accounts held along with balances and entries

Accurate disclosure ensures smooth processing and tax calculation.

Strategies to Reduce Demat Account Tax Liability

Smart tax planning can help lower overall tax outgo on your demat MF and share portfolio earnings:

Harvest Gains Strategically

Book long-term capital gains exceeding ?1 lakh in different financial years to enjoy zero LTCG tax multiple times.

Do Not Churn Blindly

Assess genuine value before hastily booking losses to offset capital gains. Needless churning only results in higher transaction costs.

Hold Debt MFs Up To 3 Years

For debt funds, the highest tax efficiency kicks in after a 3-year holding period. So, aim to remain invested for over 36 months.

Maintain Records Systematically

Meticulously maintain personal investment records to reconcile with Form 26AS while filing ITR.

With some prudent planning, you can reduce tax incidence on your overall demat account earnings by optimising exemptions and thresholds per current laws.

Summing It Up

This detailed coverage of all key facets concerning demat account taxation - ranging from capital gains calculations, dividends, and ITR reporting guidelines to planning strategies - helps you grasp key rules and principles.

Equipping yourself with expertise in these key rules, principles, and changing regulations is essential to precisely determine your tax incidence on demat account earnings in any given year. Meticulously reconciling disclosed incomes in tax returns while claiming all eligible deductions and rebates can ensure investors take advantage of available tax-saving opportunities.

Team Sharekhan
by Team Sharekhan

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