Income Tax Implications in Indian Stock Market 2021
Many readers are having questions regarding Income Tax on share trading profit in India.
Important terminologies that you must be familiar with before you can understand the income tax implications in the Indian Stock Market.
Short Term – Shares held for less than 12 months (other than intraday trades)
Long Term – Shares held for more than 12 months
Profit – You have pay taxes on them, depending on the type of profit, details will be explained below.
(All profits are not taxable, some type of profits are exempt from taxes.)
Losses – Profits are considered as net of losses incurred.
If you earn a profit of Rs. 5000 & incur a loss of Rs. 2000. You have to pay taxes net off ( 5000 – 2000 ) that is Rs 3000.
However, you can only “set off losses” against the profits of the same kind. This will be explained further below.
Set off – It is the privilege of a not paying taxes on a profit due to other losses. As explained in the above example.
Carry Forward – If your losses are more than the profits for that specific year, then in specific cases you can carry forward to the next year to set off against next year profits.
Slab Benefit (General Tax Rate) – As per the Income Tax Act, you get a benefit of not paying any tax on the first Rs. 2.5 lac income, further for the next 2.5 lac is tax rate is 5%, next 5 lac is taxed at the rate of 20% and for income above 10 lac, the tax rate is 30%. (for Individuals below the age of 60 years)
Apart from this, you need to pay Health & Education Cess which is 4% of Income Tax.
Income tax is calculated based on the income you earn during a financial year.
Whatever the income you have earned has to be divided among the following five categories of income for tax purposes.
- House Property (Rental income belongs to this category)
- Salaries (Income earned by an employee from an employer belongs to this category)
- Capital Gains (It is further subdivided into Short Term Capital Gains & Long Term Capital Gains)
- Profits and Gains from Business and Profession (It is further subdivided into Speculative Business Income and Non-Speculative Business Income)
- Income from Other Sources (All other income apart from the above four is classified here)
After classifying you need to add the income from all the categories and arrive at your total income.
2Income Tax is calculated based on this total income.
Income from Stock Market can be listed only under two heads of income which are :
- Capital Gains
- Business Income
Whenever you buy equity shares you either buy it as a “Capital Asset” or as “Stock-In-Trade“.
If you consider it as a Capital Asset your income will be taxed under the head of Capital Gains, and if you consider it as Stock-In-Trade then your income is taxed as Business Income.
A person who holds equity shares as Capital Assets is an Investor and the person who holds equity shares as Stock-In-Trade is a Trader.
Income Tax on Capital Gains
Now that you have understood the classifications, let’s get to the income tax on share trading.
Income Tax on Short Term Trading
Before you proceed, you must know for short term the holding period is from 1 day to 1 year.
Income Tax on Short Term Trading Profit
Regardless of your income tax slab, a special tax rate of 15% is applicable to short term capital gains if the stocks are bought and sold on recognised exchanges wherein STT has been paid.
If the short term capital gains (STCG) are made off-market for example stock transfer to another person, wherein the exchange is not involved and STT is not applied, the special rate of 15% is not applicable. In this case, the short term capital gains are taxed at the same rate as per your tax slab rate as given earlier.
First slab benefit of Rs 2.5 lac is applicable to short term capital gains, so if your total taxable income is Rs 1 lac, all in STCG and no other income, then you are exempt from income tax for that financial year.
Income Tax on Short Term Equity Mutual Funds
Just as STCG for equity delivery trades, profits from equity mutual funds held for more than 1 day but lesser than 12 months is considered as STCG and tax rate is 15%.
Equity mutual funds have 65% of the funds invested in domestic companies.
Income Tax on Short Term Trading Loss
You can set off short term losses against short term profits & long term profits both. Furthermore, if losses are more than the profits for a year, you can carry forward the losses for 8 consecutive years to set off against short term capital gains and long term capital gains.
For example if the short term capital loss for this year is Rs 2 lac then this can be carried forward to next year, and if net short term capital gain next year is Rs 1 lac, then you don’t need to pay 15% of this gain because this gain can be set off against the loss which was carried forward. You will still be left with Rs 1 lac (2 lac – 1 lac) loss which be carried forward for another 7 years.
Income Tax on Long Term Capital Gains
Before you proceed, you must know for short term the holding period is more than 1 year.
For long term capital gains there is no tax upto Rs 1 lac.
Above Rs 1 lac, tax rate of 10% is applicable to long term capital gains.
Again this rate is applicable only on trades made on recognised exchanges with STT being paid.
However, if the shares are transferred off-market from one person to another via delivery instruction booklet and not via a recognized exchange then LTCG tax rate is 20% in case of non-listed stocks and 10% on listed stocks.
Income Tax on Long Term Equity Mutual Funds
Just as LTCG for equity delivery trades, profits from equity mutual funds held for more than 1 year is considered as LTCG and tax rate is 0% upto Rs 1 lac and 10% above it.
Equity mutual funds have 65% of the funds invested in domestic companies.
Long Term Capital Loss can be set off only against Long Term Capital Gains and can be carried forward for eight consecutive years.
So this is all for stocks held as capital assets (investors).
Let us get to the income tax on Business Income.
Income Tax on Business Income
As shown in the chart above, business income is of two types: Speculative and Non-Speculative.
Intraday Trading comes under Speculative Income while Futures & Options trading (intraday as well as overnight) comes under Non-Speculative Income.
Income Tax on Intraday Trading
As discussed, income from intraday trading comes under Speculative Business Income and the tax rate on speculative income is as per your slab rate.
You can carry forward speculative losses (intraday) for 4 years, but you can set-off speculative losses only against any speculative gains you make in that time.
Income Tax on Futures & Options Trading
As discussed previously, income from Futures & Options Trading comes under non-speculative business income and the tax rate on non-speculative income is as per your slab rate.
You can set off non-speculative losses (FnO) against any other heads except salary income the same year. You can set off non-speculative losses against income from the bank, income from rent, LTCG, STCG etc, but only in the same year.
You carry forward non-speculative losses for 8 consecutive years but then you can’t set off against other heads of income. You can only set off against any non-speculative gains made in that time-frame.
Income Tax on Commodity Trading in India
Income from commodity trading comes under non-speculative business income and you are requited to pay tax as the per as per your slab rate.
Business Income Important Points
The most important thing here is that intraday, commodities, currencies, futures and options trading comes under the head of business income so it must be reported as a business. Just like any other business you need to create a balance sheet and P&L / income statement for the financial year.
Both these financial statements might need an audit based on your turnover and profitability. Audit is needed if the turnover is more than 2 crores or for equity traders, an audit is mandatory where turnover is below Rs.2 crores but profits are lower than 6% of the turnover and total income exceeds minimum exemption limit. The audit can be done by any CA of your choice.
Since you are reporting trading as a business there are benefits too 🙂
You can deduct expenses from your income which may include rent or maintenance expenses of place used for the business, mobile or telephone, internet cost, demat account charges, brokerage, STT (yes this too!), depreciation on PC / laptop used for trading, salary paid to your helper, advisory fees, cost of books, newspapers, subscriptions and anything else directly related to your business.
Intraday Trading Turnover Calculation (for Income Tax purposes)
First thing here is that, this turnover is not your contract turnover (don’t worry).
What you need to calculate here is the business turnover.
Suppose Nifty is at 10,000. You bought 75 x Nifty and sold at 10,100.
Your contract turnover would be (10000 x 75 + 10100 x 75 ) = 15,07,500
This is not the business turnover.
The business turnover is the profit or loss in the trade. So here it would be 7,500.
Futures & Options FnO Trading Turnover Calculation (for Income Tax purposes)
The sum of the absolute value of the profit and loss for the trades is to be taken as the turnover.
While selling the premium received is also taken as the turnover.
You can either calculate the turnover trade wise or scrip wise.
Business income – Advance Tax
You need to pay advance tax if you have business income.
Advance tax has to be paid every year – 15% by 15th Jun, 45% by 15th Sep, 75% by 15th Dec, and 100% by 15th March. % is of the expected annual income tax for the financial year.
Income Tax on Dividend Income
The income tax on dividend for financial year 2018-19 is nil upto Rs 10 lac and 10% for the excess above Rs 10 lac.
You can read more about dividends in Indian stock market here.
Bonus: Income Tax on Bitcoin India (Cryptocurrencies)
If treated as Capital Gains, which generally is the case the income tax rate is as follows:
The tax rate is 30% if the cryptocurrency is held for short term (1 day to 36 months)
The tax rate is 20% if the cryptocurrency is held for long-term (More than 36 months)
Hope this article has cleared all your queries regarding income tax on share trading profit in India.
If you have any other queries/feedback, let us know in the comments section below.
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