How are Your Earnings from Stocks Taxed in India?

Investing in stocks is a great way to optimize your returns. However, the tax element always comes into the picture whilst dealing with equity instruments, including stocks. Earnings from stocks can be in the form of capital appreciation or a dividend. Both these types of earnings are taxed, albeit differently. Here we look at how each of these aspects is taxable.

What is dividend income?

Dividends are payments made by the company where you own stocks. It is a means of rewarding the investors when the company’s performance has been noteworthy. Companies pay dividends mostly in cash. Typically, they are paid 2 times a year, based on the company’s performance and upon mutual agreement among board members. The dividend is declared close on heels with the declaration of half-yearly, quarterly results or annual results of company performance. A dividend declared during the half-yearly or quarterly results is called an interim dividend (paid during the year), and the one at the end of full-year results is called a final dividend (paid at the end of the financial year). Although most companies pay dividends in cash, they are also allowed to pay them as stock or property of any other form. Stocks that declare dividends regularly are considered to be stable and growth-oriented.

Taxability of dividends:

Before April 2020, dividends were tax-free in the hands of the recipient. The companies were levied with DDT (Dividend distribution tax) of 15% on the gross dividend amount declared. However, now dividend is taxed in the hands of the recipient. As per section 115BBDA, dividends over Rs. 10 lakhs are taxable at 10% in the hands of the recipient. However, the Finance Act of 2020 changed things further.

With the advent of the new act, the concept of DDT was eliminated, and the onus of the taxability of dividends was upon the shareholders. The taxability of dividend income is different for resident Indian and non-resident India. Here is a detailed account of how the dividend is taxed in the hands of resident Indians:

• If the shareholder is in the business of trading in stocks, then the dividend received is taxed as business income

• If the shareholder is an investor who has earned dividends from stocks held, the quantum earned as a dividend is taxed as income from other sources. The dividend income may be from Indian or foreign stocks. The taxes applicable would be at normal rates on Income from other sources (depending on which slab he/she falls into).

For example, if an individual received Rs. 10,000 as dividend income from the stocks he held, he would be taxed under income from other sources. If he was within the 30% tax bracket, his tax liability for the dividend income earned would amount to Rs. 3,000.

For a Non-resident Indian, the taxation of dividends is subject to the provisions specified under India’s Double Taxation Avoidance Agreement (DTAA) with the country where the individual resides. DTAA has been put in place so that the income is not taxed twice at the country of origin of income and the country of residency of the assessee. If the NRI pays taxes on dividends in India, he need not pay taxes on the same amount abroad. If, by any means, the taxes have been deducted twice from the income, then the individual is allowed to claim double taxation relief to that extent.

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What is capital appreciation?

Capital appreciation refers to the rise in the principal amount invested over the period the investment remained invested in the avenue. For example, if Rs. 1000 was invested for 1 year, then with a return of 10%, the amount would have grown to Rs. 1,100. The difference of Rs. 100, in this case, is referred to as capital appreciation. Such capital appreciation is taxed in the hands of the recipient. Further, it is important to note that taxability on capital appreciation arises only upon redemption or sale of the asset. If you have bought a stock at Rs. 1000 and the subsequent year it has grown to Rs. 1100, however, if you do not sell the stock, there is no requirement to pay taxes. Upon the sale of the stock at the end of the year, Rs. 100 earned as capital appreciation will be taxable under the head capital gains. In this context, it is also important to understand the importance of the holding period.

• If the stocks are sold after being held for more than 12 months, they are assessed for long-term capital gains.

• If the stocks are sold before the completion of 12 months, then they are assessed as short-term capital gains.

Capital gains are taxable under these circumstances for both resident Indians and non-resident Indians.

Taxability of capital gains for resident Indians and NRIs:

Short-term capital gains are taxed at 15% if the asset has been subject to STT (Securities Transaction Tax) while transacting. However, if the short-term capital asset has not been subject to STT, then as per the individual’s income tax slab rate, the taxability occurs alongside a cess of 3% and surcharge (if applicable).

NRIs can invest in Indian stocks through Portfolio Investment Scheme (PIS) account. Alternatively, they can use Indian funds from an NRO account to invest in Indian stocks.

For NRIs, Short term capital gains are taxed at 15% and subject to TDS at the same rates.

Long-term capital gains are applicable at 10% (cess and surcharge applicable) if the capital gain is above Rs. 1 lakh. There is no indexation benefit available for capital gains from equity shares. Capital gains up to Rs. 1 lakh are exempt from taxes.

For NRIs, the long-term capital gains are taxed similarly to resident Indians, that is, 10% on gains above Rs. 1 lakh. Also, TDS at 10% is applicable on such long-term capital gains.

Taxability of dividend income and capital gains for foreign investors:

Under the Income Tax Act, of 1961, Section 115AD specifically deals with income tax applicable to the income of foreign investors. Dividend income received by them is exempt under section 10(34). The gains from mutual fund transfers are also exempt u/s 10(35). The below table depicts the taxability for both company and non-company foreign investors.

Details	Company	Non-Company
Income from securities (other than exempt income)	Aggregate income > Rs. 1 Crore 21.012% (surcharge @ 2%) Aggregate income <= Rs. 1 Crore	20.6%
Short-term capital gains (where STT is applicable)	Aggregate income > Rs. 1 Crore 15.759% (surcharge @ 2%) Aggregate income <= Rs. 1 Crore 15.45%	15.45%
Long-term capital gains (where STT is applicable)	Exempt u/s 10(38)
Short-term capital gains (where STT is not applicable)	Aggregate income > Rs. 1 Crore 31.518% (surcharge @ 2%) Aggregate income <= Rs. 1 Crore 30.9%	30.9%
Long-term capital gains (where STT is not applicable)	Aggregate income > Rs. 1 Crore 10.506% (surcharge @ 2%) Aggregate income <= Rs. 1 Crore 10.3%	10.3%

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Hope this brief note gives clarity on the taxability of shares. It remains a great means to optimize returns on your investments.