Demat account holders: Key points to note while filing income tax returns

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Demat account holders are statutorily required to file income tax returns. Since Demat accounts hold equity shares, mutual funds, bonds, and other securities, their generated income needs to be properly reflected in the ITR. Defaults or mistakes can lead to penalties, tax notices, or loss of benefits. These following are the important points Demat account holders should keep in mind while filing tax:

Reporting capital gains appropriately

One of the crucial ones is reporting capital gains. If you are selling mutual fund units or shares, profit or loss must be reported as short-term or long-term capital gains depending on the time you have held it. Ensure it is placed in the correct category to avoid tax liability calculation mistake.

Comprehending short-term vs long-term regulations

Equity shares and equity mutual funds that are being held for less than 12 months are short-term, and profit is subject to tax at 20% according to the revised Finance Act, 2024. If held for over 12 months, they are long-term, and profit in excess of ₹1.25 lakh is taxed at 12.5% without indexation. The 24-month holding period rule is applicable for other securities like debt funds, gold, or property.

Dividends must be announced

Any dividend received on mutual funds or shares from your Demat account is taxable based on your income slab. They credit it to your bank account in most cases, but you will have to report them in your income tax return so that you are in compliance.

Losses are allowed to be carried forward

If you have capital losses, report them even if your total income is below the taxable amount. Reporting them allows you to carry them forward for up to eight years and offset them against future gains, thereby reducing tax expenditure in subsequent years.

Broker statements are significant

Your consolidated account statement and annual information statement (AIS) received from brokers and depositories have trade details, dividend and corporate actions information. Always cross-verify these with your own records to prevent mismatches before filing.

Corporate actions and tax treatment

Transactions like bonus issues, stock splits, and rights issues do not immediately have any tax implications but their impact on cost of acquisition needs to be correctly accounted for. Incorrect calculations will add to your bill for capital gains tax.

TDS on certain incomes

Though capital gains may not attract tax deducted at source (TDS), some securities and dividends may attract TDS deducted by companies or intermediaries. Verify these credits in your AIS and claim credit while filing.

Interest on margin and loans against securities

If you have financed through margin or collateralized securities for a loan, interest paid would be an allowable expense if the revenue is tax deductible under business head. For salaried or casual investors, it generally cannot be deducted.

Multiple Demat accounts must be monitored carefully

More than one Demat account is owned by most investors. Ensure rolling over details from all accounts, as tax authorities are supplied with inputs from brokers and depositories directly. Non-filing will invite examination.

Maintain papers for audit readiness

Hold broker statements, contract notes, dividend statements, and proof of expenses for a period of six years. These may be required when your return is chosen for scrutiny or in mismatch in AIS.

To Demat account holders, ITR filing is not just a procedural compliance process—it is accuracy in reporting gains, dividends, and losses. Broker statements, reconciliation with AIS, and knowledge of the modified tax rules will guarantee accuracy and reduce the chances of notices.

FAQs

Q. Do I need to file ITR if I have not sold shares but simply have them in my Demat account?

No, mere ownership of shares does not make you file ITR. But if you receive dividends or any other income that is taxable, filing may still be needed.

Q. Can I avoid tax if I do not mention small capital gains?

No. Even small gains should be reported. Failing to report it can lead to AIS mismatches, notices, and penalties.

Q. What if I failed to report capital losses?

Unreported losses can't be brought forward to subsequent years. It is for this reason that reporting them, even in the absence of taxable income, is desirable in order to minimize tax burden in subsequent years.