Nowadays, investors expand investment management from just earning returns to saving taxes legally as it requires investment planning in order to save taxes legally. Many people open a Demat account to trade in shares, bonds, mutual funds, or ETFs. However, not many of them realize that a Demat account can also help reduce tax liabilities, and that too legally.
Getting familiar with a Demat Account
A Demat account is a necessary prerequisite for holding all financial securities in electronic form. You simplify the buying, selling, and holding of securities like real stocks and mutual fund units. Investors can open a Demat account through registered Depository Participants (DPs), apart from Central Depository Services (India) Limited and National Securities Depository Limited in India. Apart from convenience, a Demat account helps with tax-efficient investment decisions. Investors should know how tax rules work in their investment activities so that they do it efficiently.
How a Demat Account Will Save Tax Legally
1. Easy Capital Gains Tax Access
The fabled businessman conducts all his transactions through a Demat account. According to this, when a person sells any shares or other securities, the sale proceeds classify as short-term gains or long-term gains under the capital gains category.
Short-Term Capital Gains (STCG): Gains from the sale of listed shares within 12 months get taxed at 15%.
Long-Term Capital Gains (LTCG): Gains from the sale of listed shares after 12 months remain tax-free up to 1 lakh and get taxed at 10% for any amount exceeding ₹1 lakh.
Keeping investments beyond a year in your Demat account helps reduce tax liability under the LTCG provisions.
2. Tax-Efficient Investments
A Demat account offers tax-saving instruments like these:
Equity-linked savings scheme (ELSS): These mutual funds provide tax benefits under section 80c of the income tax act. Though ELSS units mainly reside in mutual fund folios, a few fund houses have added this facility in the form of tracking through Demat accounts for added convenience.
Tax-Free Bonds: When you purchase these bonds using a Demat account, interest income from these bonds becomes exempt from tax.
3. Keeping Track of Dividend Earnings
All dividends paid for shares kept in your Demat account get credited directly to your bank account. Dividend income is taxable and made according to the taxable slab rate of the individual, but proper documentation, as well as monitoring through the Demat account, guarantees that you can accurately declare the income. This way, it reduces the chances of misdeclaring the same, which can lead to penalties.
4. Offsetting Losses Against Gains
If you use a Demat for trading, you can offset capital losses that arise from selling securities at lower nominal values against capital gains. For example:
- Short-term capital losses can offset both short-term and long-term capital gains.
- While long-term capital losses can net against long-term capital gains.
This would bring down your taxable income legally but only if you record all transactions properly, which happens automatically through your Demat account.
Trading Hours and MCX Holidays in India
Knowing the trading hours in India and MCX holidays is also important because all these affect one’s transactions if one is an investor or trader by activity:
- The regular Window for Trading Stocks in India runs from 9:15 AM to 3:30 PM from Monday to Friday.
- For commodities, MCX (Multi Commodity Exchange) has several sessions within which trading extends till 11.30 PM.
- The commodity and derivative markets close on MCX holidays. Hence, no trading activity can occur during those days.
Trading and investing in time with these timings prevents last-minute hassles in tax planning. Young professionals should be more aware of this in planning their investments because going through those details allows them to invest better and also avoid missing critical deadlines that may have adverse tax implications.
Conclusion:
A Demat account does not serve just as a window for the investment process but also functions as a legal vessel for tax management. It cuts down taxes on investments by keeping investments strategically based on tax-saving options like ELSS, tracking dividend incomes, as well as capital gains and losses. Prior to opening a Demat account, it is good to understand such concepts, which allow you to stay in sync with your tax objective regarding investments.
