Equity shares are a great way to get more bangs for your buck when talking about investing. But did you know that you can also tap into these stocks for extra cash by borrowing against shares? This way, you access quick capital to handle financial emergencies without selling your assets. The other way to raise urgent funds is to sell off your investments instead of taking a loan against equity shares. Go with what you think better fits your needs. If you choose the former option, the extra burden of taxes will fall on your pocket.
Not everyone knows that the capital gained through the sale of shares is taxable. Even if you know, you will want to comprehend various taxes applicable when selling your stock market investments.
Taxes are an unavoidable part of life, but when it comes to selling shares, taxes can become complicated and uneasy on the pocket. Shareholders must consider various taxes associated with the sale of their securities before completing a transaction. Knowing the tax implications beforehand can help shareholders make informed decisions about their investments and maximize profits.
Understanding the types of capital assets
In times of a financial crunch, many shareholders sell their investments rather than take a loan against securities. In such a case, the transaction or income is considered a capital gain/appreciation, which attracts certain taxes. Let us understand capital appreciation with an example. Suppose you purchased a share worth Rs. 100 and sold it for Rs. 150. Here, the income of Rs. 50 is taxable in either the capital gains head or the business head.
It is worth noting here that the gains from intraday trading are taxable under the business head. Contrary to this, the income acquired from long-term investments is taxable under the capital gains head. In the latter head, there could be two types of gains, depending on the shares or capital assets you sold off. These two types include long-term and short-term capital gains.
Long-term and short-term capital assets lean upon the period of holding, which is the duration for which you hold the assets in your account. If you retain the stocks for up to 12 months after purchase, they will remain a short-term capital asset. Shares held for more than 12 months are considered long-term assets. Both assets are taxed differently in the stock market. So, if you choose to liquidate your stocks instead of taking a quick loan online against them, you must pay taxes under either of the above heads.
Capital Gain Tax (CGT)
The first tax you should take into consideration is the capital gains tax (CGT). The CGT is levied on profits made from selling shares. Depending on where you live, this rate may vary and depend upon your marginal income tax rate or may be set at a fixed rate regardless of your income level.
Tax on short-term capital gains
Under section 111A, if you sell your shares within 12 months of purchase, all proceeds will be considered short-term gains. Gains obtained by selling Securities Transaction Tax (STT) paid shares are taxable at 15% flat. On the other side, short-term capital gains coming from e sale of non-STT paid shares, debentures, bonds, and other listed instruments are taxed under the income tax slabs.
If the SST is unpaid, the sale of such bonds, shares, and other securities, is taxed at a margin rate of the holder from 10% to 30% plus a cessation of 3% plus a surcharge. In the case where debt mutual funds are sold within three years, gains from such sales are regarded as a short-term capital gain and be taxed on the marginal income tax slab applicable to the holder.
Away from all this taxation, there is a catch for investors. You can adjust your short-term capital gain against the basic exemption limit of Rs. 2.5 lakh. For example, your annual short-term capital gain is Rs. 4 lakh, and you had no other income within this period. In this case, you won’t have to pay 15% on 4 lakh. You can get 2.5 lakh exempted, meaning that you have to pay tax only on 1.5 lakh. However, this is applicable only if you are a resident and individual. The resident is one who had been in India for 182 days during the previous year.
Tax on long-term capital gains
Section 10 (38) states that the income generated from the sale of shares held for more than one year is regarded as long-term capital gains. In simpler terms, if you sell your shares within three years of the date of acquisition, it will be treated as long-term capital gains.
Shares listed on recognised stock exchanges and mutual funds must be held for a minimum of one year before being sold and STT-paid sales are subject to 10% tax on profits over Rs 1 lakh. Profits from the sales of non-STT paid bonds, debentures, shares, and other listed instruments are subject to long-term capital gains tax at a rate of 10% when sold after one year. Any earnings from the sale of assets other than STT-paid shares and mutual funds within three years of the date of acquisition will be taxed at a rate of 20%, plus the applicable surcharge and cess. When you sell your debt mutual fund after three years or longer, any revenue from such sales is considered a long-term capital gain.
What if you take a loan against shares instead of selling them?
A loan against stocks or shares is a wiser choice than selling them if you want to avoid paying capital gain tax. This way, the borrower continues to enjoy the benefits of their investment as it stays linked to the market. Another plus is the loan against share interest rate is lower than that of the personal and credit card loan. So, if you need urgent cash, borrowing against shares is better than liquidating them.
The Bottom Line
Before selling their shares, you must understand and assess how much tax you need to pay on the income gained through the sale of your holdings. It will help you make a better and more informed decision.