We all know that Income from salary, rental income, and business income is taxable. But what about income from the sale or purchase of shares? Many students, homemakers, retired people, spend their time gainfully buying and selling shares but are unsure of how this income is taxed. There is taxation for Investors and Traders. Any gain or profit earned through equity delivery-based trades, mutual funds, and debt MF can be categorized under capital gains. There is different taxation for Investors and Traders.
Taxation for Investors
- Long term capital gain (LTCG): equity delivery-based investments where the holding period is more than 1 year
- Short term capital gain (STCG): equity delivery-based investments where the holding period is lesser than 1 year
For stocks and mutual funds – 0% till Rs 1lakh and @10% exceeding Rs 1lakh
The above taxation rate is only if the transactions (buy/sells) are executed on recognized stock exchanges where STT (Security transaction tax) is paid. As discussed above, LTCG is a holding period of more than 1 year.
If the transactions (buy/sells) are executed through off-market transfer where shares are transferred from one person to another via delivery instruction booklet and not via a recognized exchange by paying STT, then LTCG is 20% in case of both listed and non-listed stocks (Listed are those which trade on recognized exchanges
Tax on short term capital gains for equity and mutual funds are discussed below –
For stocks/equity and mutual funds: 15% of the gain
It is 15% of the gain if the transactions (buy/sells) are executed on recognized stock exchanges where STT (Security transaction tax) is paid. STCG is applicable for a holding period over 1 day and not more than 12 months.
If the transactions (buy/sells) are executed via off-market transfer (where shares are transferred from one person to another via delivery instruction booklet and not on the exchange) where STT is not paid, STCG will be taxable as per your applicable tax slab rate. For example, if you are earning over Rs.10,00,000/- per year in salary, you will fall in the 30% slab, and hence STCG will also be taxed at 30%. Also, STCG is applicable only when the income exceeds the minimum tax slab of Rs 2.5lakhs/year. So if there is no other income for the year and assuming there was Rs 1lakh STCG, it would not entail the flat 15% tax
For non-equity oriented/Debt MF: As per your individual tax slab
You have to stay invested for 3 years or 36 months for the investment to be considered a long-term capital gain. All gains made on investments in such funds held for less than 3 years are now considered as STCG. STCG, in this case, has to be added to your other business income and tax paid according to your income tax slab.
For example, if you are earning around Rs 8,00,000/- per year in your normal business/salary and you had STCG of Rs 100,000/- from debt funds, you will fall in the 20% slab as your total income is Rs 9,00,000/-. So effectively in this example, you will pay 20% of STCG as taxes.
Short and long term capital losses
We pay 15% tax on short-term capital gains and 10% on long-term capital gains, what if these were not gains but net losses for the year.
Short-term capital losses if filed within time can be carried forward for 8 consecutive years and set off against any gains made in those years. For example, if the net short term capital loss for this year is Rs.100,000/-, this can be carried forward to next year, and if net short term capital gain next year is Rs.50,000/- then 15% of this gain need not be paid as taxes because this gain can be set off against the loss which was carried forward. We will still be left with Rs Rs.50,000 (Rs.100,000 – Rs.50,000) loss which is carried forward for another 7 years.
Long-term capital losses can now also be set off against long-term gains.
Long-term capital loss can be set off only against long-term capital gain. Short-term capital loss can be set off against both long-term gains and short-term gains.
Taxation for Traders
- Speculative business income – Income from intraday equity trading is considered speculative. It is considered as speculative as you would be trading without the intention of taking delivery of the contract
- Non-speculative business income – Income from trading F&O (both intraday and overnight) on all the exchanges is considered as non-speculative business income as it has been specifically defined this way. F&O is also considered non-speculative as these instruments are used for hedging and taking/giving delivery of the underlying contracts. Income from shorter-term equity delivery-based trades (held for between 1 day to 1 year) is also best considered non-speculative business income.
Taxation of business income is different from capital gains. There is no fixed tax rate for this income. Both speculative and non-speculative business incomes are added to your overall income including salary.
Here are the income details of a 30-year-old intraday trader:
Annual Salary = Rs.10 lakh
Income from intraday equity trading for the year = Rs.2 lakh [speculative business income]
Profits from trading in futures and options = Rs.2 lakh [non-speculative business income]
Capital Gains = Rs.1 lakh
Interest from bank deposits (annual) = Rs.1 lakh
Given these incomes, the tax liability will be calculated as follows:
Capital gains will be taxed based on the period for which the capital assets were held (long-term or short-term). Let’s say that the capital gains were short-term. Hence, the income will be taxed at 15%. Hence, the tax liability will be Rs.15000.
Total taxable income will be computed by adding all other income heads like salary, speculative business income, non-speculative business income, and interest from bank deposits. Therefore, the total income will be:
Total Income=1,000,000 salary+200,000 intraday equity trading income+200,000 F&O trading income+100,000 interest on deposits=Rs.1,500,000
Hence, the trader has to pay income tax of Rs.15 lakh. Based on the tax slabs mentioned above, the tax computation will be as follows:
Therefore, the total tax liability of the trader is
Total tax liability = Income Tax + Capital Gains Tax = Rs.262500 + Rs.15000 = Rs.277500.
What if you book a loss in a financial year?
Losses arising from speculative transactions are called speculative losses. These losses can be carried forward for a period of up to four consecutive financial years. Also, they can be set off only against speculative business income made during that period.
On the other hand, losses arising from non-speculative transactions (non-speculative losses) can be carried forward for a period of up to eight consecutive financial years. You can set off non-speculative losses against any other business income except salary in the same year.
Money Making Trading Course (MMTC) by Tushar Ghone and Amruta Ghone is committed to providing an Advance level Technical Analysis course with 50hrs training at a nominal price. Our main aim is to enhance student’s financial knowledge and teach them profitable trading strategies. We also provide training for the next 6months along with daily Equity and options Analysis on our telegram Channel. https://telegram.me/MMTC123
We at Tstock Mantra Investments by Amruta Tushar Ghone provide complete Financial Planning for an individual i.e., Mutual Funds, Insurance planning, Retirement planning, and so on.
For more information about trading and the stock market visit our blog page.