Investing in the stock market? Pay advance tax now

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From 1.88 crore as of FY21-end to 2.23 crore by June-end, the number of active clients on National Stock Exchange jumped by 18% in just three months. There has been a record jump in number of demat accounts opened since 2020. A lot of first-time investors have entered the stock market with direct equities. Not many of them will be aware of tax implications on their stock purchases and sales. Pay as you earn – This is the mantra for capital gains tax in the stock market, suggests Sujit Bangar, founder, Taxbuddy.com.

Investors should pay advance tax on capital gains each quarter instead of waiting to make payments while filing ITR after the end of financial year.

“If you have traded in F&Os or intraday trading or even incurred short-term capital gains, you should pay advance tax on the same. The Income-Tax department will charge interest on the tax liability otherwise,” says Bangar. The interest penalty could be around 12% for the period the tax payment was delayed.

One has to pay advance tax by June 15, September 15, December 15 and March 15 of respective quarters. You are required to pay 15% of the expected annual tax in a financial year by June 15, 45% by September 15, 75% by December 15 and 100% by March 15.

“In case your tax liability on your income including capital gains after taking credit for TDS exceeds 10,000/- you have to pay advance tax on respective dates unless you are a senior citizen and do not have business income,” says tax and investment expert Balwant Jain.

Paying advance tax not only protects you from penalty, but also help you manage your cash-flow. Paying off tax liability in one go while filing ITR could be challenging if it is huge.

Things to keep in mind

Keep a track of your capital gains as you sell stocks in the stock market. “You should either maintain books of accounts or log proper records on something like excel,” suggests Jain. Even if you end up paying higher taxes than required, you can always file tax refunds. The I-T department is prompt at clearing tax refunds.

The tax treatment of capital gains differ depending on when the stock is being sold. There is more to it than just a short-term and long-term gains.

For example, gains in intraday trading and F&Os are considered speculative income while if you buy and sell stocks quite often, you should report it as business income. It is only when you hold stocks for a significant period, selling it within one year since purchase, it makes for short-term capital gains. Gains incurred after one-year are long-term capital gains. STCG is taxed at 15% rate while LTCG is taxed at 10%. LTCG up to Rs 1 lakh each year is exempt from tax.

“Intraday gains are treated like your regular income and taxed at slab rate applicable to you,” says Jain.

The I-T department has specified that capital gains and dividend income will come prefilled in ITR forms this year onwards. However, the experience so far hasn’t been impressive.

“Pre-filled data has many problems. One cannot rely on it. My advice is to compute your taxes yourself,” suggests Bangar.