Know More About Taxation

What is income tax?

As per the Income Tax Act (ITA), any salaried person in India who earns income above a limit, whether they are Indian residents or not, is subject to payment of income tax every year. Indian residents have to pay income tax on income earned in India as well as income earned abroad, also known as global income. Indian non-residents are required to pay income tax only on the amount earned as salary in India, provided it crosses the limit set by the ITA.

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When is Income Tax Applicable?

As the name suggests, the income tax definition suggests that it is deducted in any form of income. However, there are some exceptions. Income tax is deducted on one's monthly salary. It is also deducted on the amount saved through a savings scheme or retirement scheme for those receiving monthly, quarterly or annual annuity. In addition to these two sources of income, apart from these two sections, the Income Tax Department breaks down income from three additional sources.

According to ITA any income earned from renting your property to the tenant is taxable. Taxable returns from investing in real estate, mutual funds and other market-linked asset classes. Interest earned by the policyholder on certain fixed instruments like fixed deposits and recurring deposits is also eligible for income tax deduction. When it comes to the type of jobs eligible for income tax deductions, it involves working as a business owner, employee or freelancer.

What is Income Tax Exempt or Income Tax Deductible?

As per Sections 80C and 80D, income tax does not apply when one invests in ULIP, life insurance or term insurance or medical insurance, provided the premium invested per year does not exceed ₹1.5 lakh. The amount received on maturity from these devices has also been exempted from taxation as per Section 10D. Secondly, any interest paid on loans for financing one's education, buying a house, running a business is also tax free.

Fixed deposits Where the amount has been locked for more than 5 years, there is income tax exemption. National Savings Certificates and Public Provident Fund are also tax free means for consideration. Finally, if you invest in mutual funds through equity related savings schemes (ELSS), you are also exempted from income tax as per Section 80C. However, to avail these tax benefits, these tax exemptions should be filed in one's annual income tax return.

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How is Income Tax Paid?

Now that we understand what income tax is, it is important to learn that there are three ways to pay it by salaried persons throughout the financial year.

Tax deducted at source (TDS)

This is a 10-20% deduction on each payment on your salary, commission, rent and other payments by your employer or bank.

Tax collected at source (TCS)

This is the tax collected by a seller on sale of certain items like alcohol (intoxicating nature), tendu leaves, scrap, toll plaza, parking, bullion, jewelry (worth more than five lakhs), (worth more than two lakhs) and so on.

Advance tax payments

Any salaried person in India with an estimated tax liability of 10,000 or more ₹ per year will have to pay advance tax. This is done by the Income Tax Department through tax payment challans at authorized bank branches to do so.

Self- assessment

If there is an error in your form 26AS, you can correct them by paying the taxes left out before filing the returns.

What are the tax implications on a demat account?

With regard to the tax effects on demat accounts, there are four primary aspects that you should be aware of.

Short-Term Capital Gains (STCG)

As per the Income Tax Act, assets to be held for 12 months or less are classified as short-term capital assets. These assets include equity shares, preference shares, debentures, government securities, bonds and mutual funds. Any profit from selling these assets within a period of 12 months or less is always called short-term capital gains (STCG) and consequently taxed accordingly.

Therefore, if you keep any of the above assets in your demat account and you sell them later within the specified period, you automatically become liable to pay short-term capital gains tax. At present, the rate of tax charged on STCG is at 15% for profit on trades where Securities Transaction Tax (STT) is applicable. For special cases where STT is not applicable, STCG is linked with your total taxable income and then taxed according to your income tax slab.

Long-Term Capital Gains (LTCG)

Capital assets such as equity shares, preference shares, bonds, debentures, mutual funds and government securities are classified as long-term capital assets by the Income Tax Act, 1961. The profits you gain on selling these long-term capital assets are considered to be long-term capital gains (LTCG).

Similar to the provisions of income tax on demat accounts about STCG, if you sell any of the above long term capital assets in your demat account, you have to pay long term capital gains tax. At present, there is a complete exemption from LTCG taxation up to Rs.1 lakh in a financial year. In a financial year, ltcg above Rs 1 lakh attracts a flat rate of 10 per cent tax.

Short-Term Capital Loss (STCL)

When you sell your short-term capital assets for a price below the purchase price, you invariably suffer capital losses. This loss of capital has been classified as short-term capital loss. The Income Tax Act allows you to set-off such capital losses against STCG or LTCG in a single financial year.

In the event that the entirety of your STCL is not fixed during the year, the provisions of the Income Tax Act allow you to carry forward the losses up to 8 financial years. Further damage slipped to the ltcg or STCG during that year to be set off.

Long-Term Capital Loss (LTCL)

Any capital loss you suffer when you sell your long-term capital assets below the purchase price is called long-term capital loss. Till recently, the Income Tax Act had rejected the set-off and carry forwarding of LTCL. However, under the notification dated 4th February 2018, long term capital loss against LTCG has now been allowed for transfers made on or after 1st April 2018.

Similar to the provisions of STCL, any long term capital loss which is not fully set-off can be extended up to the subsequent 8 financial years. The carried forward LTCL can be used only to set off long-term capital gains made during that year.

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Income Tax on Intraday Trading

It is important to know and know the difference between certain important conditions before we get into the tax qualifications of intraday trading. These include:

Stock investor:  A stock investor is the one who invests to earn long-term profits by buying a particular stock. He takes delivery of the stock and holds them to make a profit to increase the share price or earn dividend on the stock in future.

Stock Trader:  A stock trader trades in shares to profit from daily price fluctuations without taking real delivery of shares.

Short-term gains/losses:  If you sell a stock before 12 months and make a profit or loss, they are called short-term profit/loss.

Long-term gains/ losses:  If you keep a company's share for more than 12 months, they are called long term profit/loss.

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