Before we get started on the taxation of investing in smallcases, let us understand terminologies associated with it.
Capital asset – any form of asset that can be acquired or sold (transfer of ownership). Land, building, vehicles, jewellery, etc are some examples with cases of exemptions.
Cost of acquisition – the value for which the capital asset was acquired by the seller.
Capital gain – any profit made from the sale of a capital asset.
Types – short-term capital gain (STCG) and long-term capital gain (LTCG)
Securities Transaction Tax – STT is the tax you pay only if you buy or sell stocks listed on a stock exchange.
Dividend tax – taxes charged on the extra income (dividend) gained by investing in the stocks of Dividend-paying companies.
Now, to understand taxation in smallcases, we need to understand taxation on equity/stocks or ETFs. As we know, smallcase is a readymade portfolio of equities / stocks. So the same rules apply when you invest in smallcases.
The tax depends on the time period between the date of acquiring ownership (buy) to the date of transfer of ownership (sell).
When you buy equity or stock, you gain ownership of the stock. You become a stakeholder in the stock’s company. Whenever you decide to sell the stock, you transfer the ownership. In such a scenario, you either make a profit or suffer some loss. Now, if you have made a profit, you are taxed on the profit alone.
In the stock market, if you held the stocks for less than 12 months, you’d be taxed under short-term capital gain. Any period longer than a year falls under long-term capital gains.
| TAX TYPE | CONDITION | TAX APPLICABLE |
| Long-term capital gains tax | If STT is not applicable | 20% + cess + surcharge |
| Long-term capital gains tax | When Securities Transaction Tax is applicable | 10% over and above ₹1 lakh + cess + surcharge |
| Short-term capital gains tax | If STT is not applicable | The short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab. |
| Short-term capital gains tax | When securities transaction tax is applicable | 15% + cess + surcharge |
Getting to dividend tax, if any retail investor receives a dividend exceeding ₹5,000 in a fiscal year, the entire dividend will be subject to TDS* @ 10%. The remaining dividend is credited to you, and considered in your total income. Therefore, it is taxable under the Income Tax slabs (old & new regime).
All these guidelines are the same that are applicable to smallcase. In smallcases whenever you rebalance, you are charged STCG or LTCG depending on the period you have owned the individual stocks.
E.g.,
– Ms. Sita earns ₹13 lakh as salary. She has been investing in smallcases.
– In the fiscal year of 2020-2021, she also earned ₹1 lakh as dividends from the smallcases she has invested in.
– She completely exited from a smallcase that she had invested in 2 years ago. The capital gains were ₹1,50,000.
– She invested in another smallcase at the beginning of the year & rebalanced it once every quarter through the year. She made a total profit of ₹50,000 from the rebalances.
OLD REGIME
| SOURCE | INCOME | TAX** | GUIDELINES |
| smallcase A – exited | 1,50,000 | 5,000 | LTCG: 10% if > 1L |
| smallcase B – rebalanced | 50,000 | 7,500 | STCG: 15% |
| TDS on Dividend | 1,00,000 | 10,000 | TDS: 10% if > 5,000 |
| Total Income taxable under Income Tax (Salary+credited dividend) | 13,00,000 + 90,000 | 5% * 2,50,000 = 12,500 20% * 5,00,000 = 1,00,000 30% * 3,90,000 = 1,17,000 | 5% * (5L – 2.5L) 20% * (10L – 5L) 30% * (13.9L – 10L) |
| Total | 13,90,000 | 2,19,500 |
NEW REGIME
| SOURCE | INCOME | TAX** | GUIDELINES |
| smallcase A – exited | 1,50,000 | 5,000 | LTCG: 10% if > 1L |
| smallcase B – rebalanced | 50,000 | 7,500 | STCG: 15% |
| TDS on Dividend | 1,00,000 | 10,000 | TDS: 10% if > 5,000 |
| Total Income taxable under Income Tax (Salary+credited dividend) | 13,00,000 + 90,000 | 5% * 2,50,000 = 12,500 10% * 2,50,000 = 25,000 15% * 2,50,000 = 37,500 20% * 2,50,000 = 50,000 25% * 1,40,000 = 35,000 | 5% * (5L – 2.5L) 10% * (7.5L – 5L) 15% * (10L – 7.5L) 20% * (12.5L – 10L) 25% * (13.9L – 12.5L) |
| Total | 13,90,000 | 1,82,500 |
P.S.: smallcase needs to be treated like an easier & smarter equity oriented investment option. The gains you make in smallcases are to be treated the same as that from single stock investments. At the end of the fiscal year, all your returns from stocks / mutual funds / assets will be taxed as per their individual guidelines.
P.P.S.: smallcase as a platform does not charge / withhold any tax. It is another form of equity investment.
Happy investing!
*TDS stands for Tax Deducted at Source.
