Income tax on share trading depends on whether you are showing it as “Capital gain” or “Business Income”.
If you are trading in stock market as an investor (mostly involved in delivery based trading), the gains from trading can be classified as:
|Long term capital gain||Short term capital gain|
If equity shares are sold after 12 months holding then such gain is subject to tax exemption.
However, the security must be traded an Indian stock exchange on which STT has been paid.
Exemption on long-term capital gain tax is not applicable if the shares are sold on the exchange outside India.
Long term capital loss from equity shares is a dead loss – it can neither be adjusted nor carried forward.
|If equity shares are sold within 12 months from the date of purchase, then the short term capital gain tax of 15% is applicable irrespective of the personal tax slab (10%, 20% etc).
If investor’s other income excluding short-term capital gain is less than basic exemption limit then he can take benefit of such shortfall in basic exemption limit.
Any short-term capital loss from equity trading can be set off against any short-term capital gains.
The important points to note here is that long-term capital gain arising on shares sold directly to a friend without routing it through Indian stock exchange are not exempted from tax as STT is not paid on such shares.
If you are trading in the stock market frequently (mostly non-delivery trade), returns from it can be classified as follows:
|Speculative Business income||Non-speculative Business income|
|Profit from intraday trading is categorized under speculative business income. Tax treatment is similar to your Business income tax. It is taxed as per the tax slab you fall in while losses can be offset only against speculative gains.||Income from trading futures & options on recognized exchanges (equity, commodity, & currency) is categorized under non-speculative business income. Tax on share trading in such cases is similar to your business income tax. The profits on F/O trading are taxed as per the tax slab you fall in whereas losses on such F/O trading can be set off against business profit.|
So, the important point is whether to classify income from share trading under “capital gain” or “business income”. In general, if you are mostly involved in delivery based trading with very little non-delivery based trading then it is better to classify the income under “Capital Gain” head.
A company shares a part of its profit with the shareholders in the form of dividend. Dividend in the hand of investor is tax-free. The company has already paid Dividend Distribution Tax. So effectively 15% tax has been already paid by the company on the investor’s behalf. Therefore such dividend upto 10lacs is tax-free in the hands of the investor.
How to optimize post tax returns:
Tax on share trading can be reduced considerably by following certain Tax saving methods
If you consider your trading gain as “business income” then you have to pay tax as per your Tax slab. The benefit is you can deduct your trading related expenses from the gain.
Example: Suppose you made a profit of Rs 1, 00,000 from equity trading and you fall into 20% tax bracket so you need to pay 20% of 1, 00,000 as tax. However, this tax outgo can be reduced by showing related expenses or by adjusting loss from share trading. Expenses on internet bill, telephone bill, newspaper/magazine purchase, computer charge, brokerage etc can be adjusted with your trading profit. For example, consider your internet, telephone bill as 24,000 (full year), Computer depreciation charge as 10,000, newspaper and magazine charge as 6,000, brokerage and related expense is 4,000. So, total trading related expense comes as (24,000+10,000+6,000+4,000) = 44,000. From the trading profit of 1, 00,000 (1Lac) you can deduct 44,000 as expenses and thus net business profit comes at only 56,000. So, instead of paying tax on 1 Lac your taxable income stands at only 56,000.
If you don’t want to classify your trading activity as “business” then you need to pay only short term capital gain tax at 15%. This can be offset against only against short-term capital loss. Long term capital loss is a dead loss it can’t be adjusted or carried forward as long term capital gain is exempt from Tax. An Investor can save tax on its short term capital gain by realizing losses existing in the portfolio.
Example: Suppose, you have Short term capital gain of Rs10, 000. This means you have to pay 15% of 10000 i.e, Rs 1500 as tax. At the same time you have stocks (purchased within 1 year) in your portfolio those are showing loss of Rs. 5,000. You are confident that over long run those stocks will turn profitable. However to lower tax outgo you can sell and repurchase the same stock at the same rate after 2 days (As delivery takes T+2 days). So, your net profit stands at (10,000 – 5,000) = 5,000. Thus you have to pay tax of just Rs 750 (15% of 5,000) instead of Rs 1,500. In this process, you can continue holding the stock having good long-term prospects and also save tax.
Thus investors should clearly understand various taxes on share trading to reap maximum benefits from the investment. As by varying your holding period, classifying income as “capital gain” or “business income” and by taking advantages of tax optimization measures you can reduce your tax liabilities considerably.