In India, there are two types of taxes you would need to keep track of, and these include direct tax and indirect tax. In the context of investments or trading in the stock markets, it is important to remember that every trader or investor has to bear in mind these two types of taxes.
So, what is direct tax?
The answer to the question on what is direct tax is simple. The direct tax definition goes something like this: It is a direct tax if it is levied on your income, and is directly paid by you to the government. Now that you know the direct tax meaning, you should now shift focus on what kinds of direct taxes there are.
As a trader, each time you trade on the stock market, you incur some or the other kind of charges. Some of the direct taxes that you as a trader or an investor will have to consider include:
Capital gains tax
If you have held an investment for over a year, and if you have any profits from buying or selling stock, it is treated as a long-term capital gain. Any gain from equities worth over Rs 1 lakh for a financial year gets taxed at 10 per cent. Prior to Budget 2018, LTCG made on sale of equity or equity-oriented shares did not incur any LTCG tax.
There is also a tax on short-term capital gains, at 15 per cent. The taxation on long-term capital gains is lower because of the thrust given to long-term investing.
Speculative business income
Any trade in which you buy/sell securities on the same day of trading is considered day trading, and profits arising out of this trade are considered speculative income. Since intraday trading is done with the objective of making profits over the very short term it is considered speculation. Income from speculation is taxed at normal rates, and you are liable for tax on the basis of your net taxable income. If you incur any losses owing to your speculative business, you can offset it against other gains from speculative business income. These losses can be carried forward for four years if returns are filed on time.
If you are into futures and options trading, the income from this kind of trading is considered non-speculative business income. Any income gained from F&O is treated as non-speculative as such instruments are used to hedge or involve underlying contracts. An F&O trader can treat income from trading as business income and get deductions for expenditure under the administration category, and also securities transaction tax or STT. Any losses can be used to offset income from other sources (barring the salary of the taxpayer). If income is treated as capital gains, then STT is not deductible and losses will be considered short-term capital loss and can be used to balance out capital gains made from other sources. Your non-speculative losses can be carried forward for a period of up to eight years if you have filed your returns on time.
Securities transaction tax (STT)
Securities transaction tax or STT gets a direct tax meaning or definition in some tax circles. The opinion is divided on whether it should be deemed a direct tax or an indirect tax, and STT is often categorised under both. It is sometimes considered an indirect tax as the broker is involved and it is the broker who collects STT from clients. Securities transaction tax is levied on any security traded at the stock exchanges; these include shares, debentures or bonds. It is levied immediately after a share transaction is done.
Now that we know what is direct tax, it’s time to understand the advantages of such a tax. Direct tax is considered balanced and progressive as they are aimed at social and economic balance. It also helps in curbing inflation and equitable distribution of wealth.
In conclusion, there are multiple layers of taxation that affect your stock market earnings. While some are direct, there are also indirect taxation layers such as Goods and Services Tax (GST) or Value Added Tax (VAT). As a trader or a long-term investor, you would need to keep track of all these taxes so you know exactly how much your gains or losses amount to.