The thrill of stock market profits often overshadows the tax implications lurking in the fine print. Investors earn primarily via dividends and capital gains, each governed by specific Income Tax Act provisions. Decoding these rules empowers smarter financial planning.
Dividends form part of ‘income from other sources’ and are taxed slab-wise. Your overall income bracket dictates the rate—favorable for modest earners, burdensome for the wealthy.
Loan interest for share purchases qualifies for deduction, limited to 20% of dividend receipts. No relief on brokerage or commissions, though.
For instance, ₹1 lakh dividend with ₹35,000 interest allows only ₹20,000 deduction, taxing the remaining ₹80,000.
Selling shares triggers capital gains: LTCG for holdings over 12 months (tax-free up to ₹1.25 lakh, 12.5% thereafter if STT-paid); STCG for shorter holds at 20% (STT condition applies).
Multiple purchases of the same stock? FIFO rules the day—earliest buys are first out. This standardizes cost basis and holding period calculations for demat holdings, curbing tax evasion tactics.
Pro tip from advisors: Split demat accounts. Dedicate one to buy-and-hold strategies, another to active trading. It prevents FIFO from forcing premature sale classification on your best holdings, optimizing tax outcomes.
Regulators permit unlimited demat accounts, but PAN-linked ITR disclosure is mandatory. Master these rules to maximize after-tax returns in India’s dynamic markets.