We are familiar with the taxes levied on salary, business income, other sources, etc. But little do we know about the taxation on gains from securities listed on stock exchanges such as equity instruments, mutual funds, debt securities, and derivatives. If your investment portfolio comprises investments in the stock market, you must update yourself on the tax requirements. This article tries to give you a glimpse into how investments in the stock market are taxed.
If you are a shareholder earning an income from shares trading, you must know whether to show these earnings as Income from Business or Income from Capital Gain. The categorisation depends upon the interval of occurrence of trade.
– Usually, if a person earns the income from shares at regular intervals, it should be treated as business income.
– Traders dealing in intraday transactions should show the income from share trading as business income.
– The income from share trade showed as investment falls under the head income from capital gains.
Let us understand both cases.
If one wants to show his income as Business Income (Speculative / Non-speculative):
Here are the points to remember if one wants to show his income from share trading under the head, business income.
– Shareholders can claim all expenditure paid to brokers or exchanges against the income generated through share trading.
– Shareholders can file their I.T. returns by taking benefit of all expenses incurred.
– The tax here would be as per applicable income tax slab rates (5% / 20% /30%, etc) + surcharge+ cess.
Speculative Business Income
– Income generated through intraday trading is Speculative Business Income as per the tax point of view in trading. It is defined as income generated by buying and selling shares on the same day without expecting stock delivery.
– Speculative business income is taxed with your other income u/s 43 of the I.T. Act. It means that if you also earn a salary, then total income is salary plus any income generates from speculative business income like intraday. Income tax will apply to your combined earnings per I.T. slab.
– Further, individuals can offset speculative losses against speculation profit. One can carry forward these losses for 4 years.
Non-Speculative Business Income
– Tax on trading income generated by derivatives, currencies, and commodities are specified to fall under Non-Speculative Business Income. It includes earnings generated by trading in either futures or options, currencies, commodities in recognised exchanges.
– Similar to speculative business income, non-speculative business earnings are also clubbed with other income, meaning that your gains from contracts/commodities/currencies trading add to your total income and are taxed per individual’s I.T. slab.
– Similarly, one can offset non-speculative business losses against any income other than salary income. One can carry forward non-speculative losses for 8 years.
If one wants to show the income from sales of shares as Investment (Capital Gains):
While showing income from sales of shares as Capital Gains, one must consider the crucial points.
– Capital Gains are two types Long term and Short term, depending on the holding period.
– Long Term: Period of holding for listed equity shares/preference shares, units of equity-oriented mutual funds (listed or unlisted), units of UTI (listed or unlisted) and Zero Coupon Bond (listed or unlisted), debentures, bonds, government securities, derivatives, etc. (listed) is more than 12 months.
– Short Term: Period of holding of above securities is less than 12 months.
– In the case of units of debt-oriented mutual funds (listed or unlisted), individuals need to hold the investment for more than 36 months to be considered long-term capital assets.
Taxability in case of Long Term Capital Gains (LTCG)
For Shares/Equity oriented mutual fund: Not taxable up to the limit of Rs 1 lakh and attracts a tax of 10% without the benefit of indexation for gain more than Rs 1 lakh as per Section 112A of the I.T. Act, 1961.
For debt securities: Debt securities are taxed under Section 112 of the I.T. Act, 1961, either at 20% (with indexation) or 10% (without indexation), whichever is more beneficial to the shareholder.
For non-equity/debt mutual funds or debt ETFs and Gold ETFs: A 20% tax is levied with indexation benefit.
Taxability in case of Short Term Capital Gains (STCG)
For Equity/stocks: Short-term capital gain is subject to tax at a rate of 15% as per Section 111A of the I.T. Act, 1961.
For Equity oriented mutual funds: Subject to tax at the rate of 15% of the gains.
For Debt mutual funds or debt ETFs, Gold ETFs & Debt securities: Subject to tax at the applicable slab rate of the shareholder after combining with other incomes.
– Indexation refers to the process of recalculating the purchase price after adjusting it for the inflation index published by the Income-Tax authorities. Since the purchase price will be adjusted for inflation, the capital gain gets reduced.
– Capital gain realised on the maturity of Sovereign Gold Bonds are exempt from tax.
iii. While calculating capital gains, one can deduct brokerage or expenditure from selling assets from taxable income. However, no deduction is offered on Securities Transaction Tax(STT) in computing income under Capital Gains.
If you wonder whether you can treat some part of the income from capital gain and some portion from business and profession, CBDT has also clarified it.
Per a circular no. 4/2007, dated 15.06.2007, a taxpayer can have two portfolios, i. e., an investment portfolio comprising securities treated as capital assets and a trading portfolio comprising stock-in-trade as trading assets. When a shareholder has two portfolios, he may have income under both heads, i.e., capital gains and business income, subject to conditions specified in the Circular.
– To claim business loss or capital losses against future income under the head, Income from Business or Capital Gains, shareholders must file I.T. return before the due date.
Tax on Dividends/Interests:
– Dividends/interests from securities are taxed as per the I.T. slab rates applicable to the shareholder under the head, Income from Other Sources.
– However, if a shareholder shows trading in shares as business income, dividend income shall be taxable under the head of Business Income.
Further, if any shareholder receives a dividend, the amount is subject to a TDS at 10%, 20%, or other rate as prescribed by the Income Tax Act, 1961. However, if you are receiving less than ₹5000 as a dividend, no TDS will be deducted. To know more about TDS on dividends, read here.
As a trader, you must know to navigate trading taxation challenges efficiently to avoid paying extra. Hopefully, this article has helped you understand the overall classifications of trading income and taxes. The key is to stay updated with the latest tax news and how those apply specifically to your trading style and strategies, now and in the future.