How Returns on Stocks are Taxed!

In spite of the risk factor, investment in stocks has always been a tempting option because of the returns it gives. Earning handsome income is the only motive of your investment. But every Income brings taxes along with it. Therefore, before going on for any investment option one should be clear about its tax implications. Returns on Stocks can be classified into Normal Income (i.e. the Dividend Income) & Capital Gains.
Dividend, as we all know, for an Indian resident in any Indian Company is exempt from tax. Since the companies pay taxes, the receiver of dividends have been exempted from such taxes. The company declares dividend every year depending on the profits made. Dividend part is easy & one need not worry about that.
What one needs to know is the Capital Gains. How they are calculated & taxed? & How we can save them?
When you sell your stocks on the exchange i.e. in the market, you make profit / loss depending on the price you buy & sell your stocks. Whatever profit you make is taxable as capital gain.
Short Term & Long Term Gains
When you hold your stock (shares) for a period of 12months or more it will be considered as invested for long term. The reason you should know this basic difference is the tax implications.
For shares listed on the Indian Stock Exchange Long Term Capital Gains would be exempt from tax if Securities Transaction Tax (STT) has been paid on it. Therefore, even if the company is a foreign company & is listed on the Indian Stock Exchange then it would enjoy the benefits. For those not listed on Exchange capital gains would be taxable @ 10 % without indexation & 20% with indexation benefits. (Indexation is an adjustment of price to the current years inflation, which helps lower the gain by effectively increasing the cost)
If Mr. A buys 1000 unlisted shares on 1/2/10 for Rs. 200 per share & sells them on 20/03/14 for Rs. 420 per share then the tax effect would be as follows

Therefore, in this case we observe that paying taxes without indexation is more beneficial than indexing. In this case Mr. A should pay taxes without the indexation benefits.
(cost inflation index for F.Y. .9-10 & F.Y. 13-14 have been considered for calculating indexed cost)
Short Term Capital Gains on the other hand would be taxable @ 15% if STT has been paid. This would mean a loss to an individual who falls in a NIL or 10% tax bracket. In case where STT has not been paid or Company not listed, the gains would be taxable as per the normal tax bracket of the individual.
One benefit you can avail is of exemption u/s 54EC. If you have any sort of Long Term Capital Gain (LTCG) then, the said amount would be exempted to the extent of investment made under NHAI or RECL. The maximum one can invest is upto Rs. 50 lakhs. Therefore, if you earn a LTCG from shares which are unlisted then you can invest the said amount into NHAI or RECL to save your taxes. However, interest that you earn from these investments would be taxable.
Another benefit one can avail is of set-off your loss against your gain to reduce your taxes. Since you buy & sell shares you ought to make profits & also losses, at times. Short Term losses can be set off against both LTCG or STCG while Long term losses can be set off only against LTCG. You are also allowed to carry forward the losses if any to further 8 Financial years.
There are also other areas like dividend stripping & taxation to NRIs or investing in foreign companies which one should know about, which I will address in my upcoming articles.
Hope you find this article useful. Any queries or constructive criticism is welcome.