Calculating tax on your trading income in India – All you need to know

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Calculating tax on your trading income in India – All you need to know

0Comments December 28, 2021
Calculating tax on your trading income in India – All you need to know

Trading in the share market allows you to create an additional source of income and possibly build a corpus for the long term. As a share trader, you stand a chance to book profits on your capital investment amounts by investing in well-performing companies listed on the stock exchange. The income you earn through trading is often variable, and so the regular taxation laws are not applicable. As such, when you file your returns, you also have to include your trading income.  As per the latest update, for the year ended 31st March, 2020, you need to file your returns by the 31st of December. Filing your returns on time helps you set off any losses incurred during the year and also saves you from penalties associated with late tax filing. If you have started investing in share markets this past year, you may find that calculating your trading income can be a bit confusing. So, here’s all you need to know.

Classifying income earned through trading

The Central Board of Direct Taxes (CBDT) has classified trading taxes under four distinct categories. As a trader, you need to establish which category applies to you. The four categories are as under:

Long Term Capital Gains

If you have booked profits by buying or selling shares in your investment portfolio for a period exceeding 365 days (1 year), you need to pay tax on any gain earned, known as long-term capital gains (LTCG). As per Section 10(38) read with Section 112A of the Income Tax Act, 1961 (the Act), you have to pay an LTCG tax of 10% on any profits earned exceeding Rs 1,00,000 in a financial year.  Profits lower than Rs 1,00,000 in a financial year are exempt from tax. In such an event, you get to keep all the profits accrued. However, you need to ensure that all transactions are done via a recognised Exchange, where it is mandatory to pay the Security Transaction Tax (STT). Also, if your total income including gains are below the exemption limit, you stand to get such benefit as any shortfall will first be adjusted against long-term capital gain and any balance gain only will be taxable.

Further, it should be noted that no deductions or benefits for any investment made in Chapter VIA deductions, like LIC or PPF, will be allowed from the LTCG while computing taxes on the same.

Treatment of long-term losses on shares and equity funds

In accordance with the Budget announcement of 2018, you can set off your long-term capital losses incurred from selling shares and equity mutual funds after 31st August, 2018. The losses may be set off as LTCG earned after 31st March, 2018. As per the announcement, any gains/profits on long-term shares/equity funds are now taxable in excess of Rs 1,00,000. Furthermore, you may carry forward your losses for setting off for up to 8 assessment years.

Prior to the announcement of Budget 2018, investors were not taxed on long-term gains on shares and equity funds. As such, these losses were deemed as dead losses and could not be carried forward or set off.

If you continue holding equity funds and shares for a period exceeding 12 months, then these investments are deemed as long-term capital assets.

To get the benefit of carrying forward your long-term capital losses for a given financial year, the Income Tax department has made it mandatory that you file your taxes before the due date. Even if you have earned losses and you haven’t earned any income from shares and mutual funds, it is recommended that you file your returns on time.

LTCG on selling shares outside India

Note that the LTCG tax exemption does not apply if you sell your shares outside India. Any income earned from selling shares, including capital gains and dividends, will be subject to taxation in India. If you hold shares and mutual funds of overseas companies for a period exceeding 24 and 36 months respectively, you have to pay 20% LTCG, plus the applicable taxes, with indexation benefits on the acquisition cost.

Short Term Capital Gains

If you hold stocks for more than one day but less than 365 days, you are liable to pay a 15% tax on their profits. For the STCG tax to be applicable, the delivery of your shares should go into your demat account. Typically, when you buy shares from an Exchange, the normal settlement time for the issues to reflect in your account is T+2 days.

This tax implication applies to all traders irrespective of the tax slab they belong to. So, you could be in the 20% tax slab, and you would still have to pay the 15% STCG tax unless your total taxable income is less than Rs 2,50,000 p.a. In such a case, you can adjust the shortfall against the STCG, with the resulting amount being taxed at 15%. Thus, if your total income from STCG is less than your basic exemption limit, you stand to benefit from a shortfall in your tax-free amount. If you have a short-term loss in the last financial year but you did book a short-term profit this financial year, you can claim a set-off against the losses. For instance, let’s say you lost Rs 1,00,000 in the last financial year but booked a profit of Rs 2,00,000 in this year. In such a case, you can offset your losses of the last financial year into this year.

Further, it should be noted that no deductions or benefits for any investment made in Chapter VIA deductions, like LIC or PPF, will be allowed from the STCG while computing taxes on the same.

Speculative business income

Speculative business income is that which is concerned with Intraday trading. A day trade is one where you buy securities and sell them off on the same trading day (called squaring off), typically after booking a small profit due to market volatility. All gains made through day trading transactions are classified as speculative activity. Under Section 43 (5), profits booked from day trades are to be added to your additional income. In this case, you will be taxed according to the total income slab you fall under. STCG tax is also referred to as progressive tax, and the total value of your tax obligations will essentially depend on the total profits you’ve booked at the end of the tax year.

Non-speculative business income

The non-speculative business income category concerns the Derivatives trading market; that is, Futures & Options. Derivatives like F&O are typically viewed differently than most other trading instruments. Any income you earn from trading in either Futures or Options on any recognised Exchange in India is deemed as non-speculative business income. Like with speculative business income, the profits accrued are added to your total income and the tax payable will again be as per your tax slab. However, since this income is deemed as business income, you may offset it against any business expenses you may have incurred, such as software charges, advisor’s fees, internet bills, and so on.

Final note: The trading market is rife with risks and rewards. As a trader, you must obtain all the necessary information about the securities you invest in and comply with the tax implications associated with them, after consulting with your Tax Consultant. Tax rules are also updated every few years, which is why you must keep up with the latest tax-related news. All this will make tax filing easy and breezy!

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