Tax on Trading / Investing income in Stock Market

In present days, the best investing option / passive income option is investing / trading (Day trader / swing trader). But what about the tax implications on income generated from them. Here is the article to give you full clarifications all about tax on your investing / trading income.

Speculative business income – Income from intraday equity trading is considered as speculative. It is considered as speculative as you would be trading without the intention of taking delivery of the contract.

Non-speculative business income – Income from trading F&O (both intraday and overnight) on all the exchanges are considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of the underlying contracts. Even though currently almost all equity, currency, & commodity contracts in India are cash-settled, but by definition, they give rise to giving/taking delivery (there are a few commodity futures contracts like gold and almost all agri-commodity contracts with the delivery option to it).Income from shorter-term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if the frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.

1. Gains from Equity Shares

a. Short-term capital gains and losses

If equity shares listed on a stock exchange are sold within 12 months of purchase, the seller may make short term capital gain or incur short-term capital loss.

The seller makes short-term capital gain when shares are sold at a price higher than the purchase price.

Calculation of Short-term capital gain = Sale price(less)  Expenses on Sale (less)  Purchase price

For Example: 

My salary – Rs.1,000,000/-

Short term capital gains from delivery based equity – Rs.100,000/-

Profits from F&O trading – Rs.100,000/-

Intraday equity trading – Rs.100,000/-

Gives these incomes for the year, what is my tax liability?

 In order to find out my tax liability, I need to calculate my total income by summing up salary, and all business income (speculative and non-speculative). The reason capital gains are not added is that capital gains have fixed taxation rates unlike a salary, or business income.

 Total income (salary + business) = Rs.1,000,000 (salary income) + Rs.100,000 (Profits from F&O trading) + Rs.100,000 (Intraday equity trading)  = Rs 1,200,000/-

 Now i have to pay tax on Rs 12,00,000/- based on the tax slab –

 0 – Rs.250,000 : 0% – Nil

250,000 – Rs.500,000 : 10% – Rs.25,000/-

500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,

1,000,000 – 1,200,000: 30% – Rs.60,000/-

Read: New Income Tax Slab Rates

Hence total tax : 25,000 + Rs.100,000 + Rs.60,000 = Rs.185,000/-

Now, I also have an additional income of Rs.100,000/- classified under short term capital gains from delivery based equity. The tax rate on this is flat 15%.

 STCG: Rs 100,000/-, so at 15%, tax liability is Rs.15,000/-

 Total tax = Rs.185,000 + Rs.15,000 = Rs.200,000/-

 I hope this example gives you a basic orientation of how to treat your income and evaluate your tax liability.

Long-term capital gains and losses

If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make long-term capital gain or incur long-term capital loss.

Before the introduction of budget 2018, long-term capital gain made on sale of equity shares or equity-oriented units of mutual fund was exempt from tax under Section 10(38)

As per the provisions of the Financial Budget of 2018, if a seller makes long term capital gain of more than Rs. 1 lakh on sale of equity shares or equity-oriented units of mutual fund, the gain made will attract a capital gains tax of 10% long-term capital gains tax. Also, the benefit of indexation will not be available to the seller. These provisions apply to transfers made on or after 1 April 2018.

Taxation of Gains from Equity Shares

a. Tax on short-term capital gains

Short term capital gains are taxable at 15%. What if your tax slab rate is 10% or 20% or 30%? Special rate of tax of 15% is applicable to short term capital gains, irrespective of your tax slab. Also, if your total taxable income excluding short term gains is below taxable income i.e Rs 2.5 lakh – you can adjust this shortfall against your short term gains. Remaining short term gains shall be then taxed at 15% + 4% cess on it.

b. Tax on long-term capital gains

Long term capital gain on equity shares listed on a stock exchange are not taxable up to the limit of Rs 1 lakh.

As per the amendments in budget 2018, the long term capital gain of more than Rs 1 lakh on the sale of equity shares or equity-oriented units of the mutual fund will attract a capital gains tax of 10% and the benefit of indexation will not be available to the seller.These provisions apply to transfers made on or after 1 April 2018.

Loss from Equity Shares

a. Short-term capital loss

Any short term capital loss from sale of equity shares can be set off against short term or long term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for a period of 8 years and adjusted against any short term or long term capital gains made during these 8 years.

It is worthy to note that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an Income Tax Return is a must for carrying forward these losses.

b. Long-term capital loss

Long term capital loss from equity shares until Budget 2018 was considered to be a dead loss – It can neither be adjusted nor carried forward. This is because Long Term Capital gains from listed equity shares were exempt. Similarly, losses from them were neither allowed to be set off nor carried forward.

Read: How to analyse Operating Statement

After the Budget 2018 has amended the law to tax such gains made in excess of Rs 1 lakh @ 10%, the government has also notified that any losses arising from such listed equity shares, mutual funds etc would be allowed to be carried forward. The income tax department has vide its FAQs issued dated 4 February 2018, inter alia clarified that long term capital loss from a transfer made on or after 1 April 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, the long term capital loss can be set-off against any other long term capital gain and unabsorbed long term capital loss can be carried forward to subsequent eight years for set-off against long term gains.

Securities Transaction Tax (STT)

STT is applicable on all equity shares which are sold or bought on a stock exchange. The above tax implications are only applicable for shares which are listed on a stock exchange. Any sale/purchase which happens on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.

Guidance for treating share sale as business income

Certain taxpayers treat gains or losses from the sale of shares as ‘income from business’, while certain others treat it as ‘Capital gains’. Whether your gains/losses from sale of shares should be treated as business income or be taxed under capital gains, has been a matter of much debate. In case of significant share trading activity (e.g. if you are a day trader with lots of activity or if you trade regularly in Futures and Options), usually your income is classified as income from business. In such a case you are required to file an ITR-3 and your income from share trading is shown under ‘income from business & profession’.

Calculation of income from business v. capital gains

When you treat the sale of shares as business income, you are allowed to reduce expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year, and consequently be charged at tax slab rates.

If you treat your income as capital gains, expenses incurred on transfer are deductible. Also, long term gains from equity above Rs 1 lakh annually are taxable, while short term gains are taxed at 15%.

Read: Tax on NRI property Sale in india

Speculative losses can be carried forward for 4 years and can be set-off only against any speculative gains you make in that period.

 Non-speculative losses can be set-off against any other business income except salary income the same year. So they can be set-off against bank interest income, rental income, capital gains, but only in the same year.

 You carry forward non-speculative losses to the next 8 years; however, do remember carried forward non-speculative losses can be set-off only against any non-speculative gains made in that period.

Offsetting Speculative and non-speculative business income

Speculative (Intraday equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.

 If you incur speculative (intraday equity) loss of Rs.100,000/- for a year, and a non-speculative profit of Rs 100,000/-, then you cannot net-off each other and say zero profits. You would still have to pay taxes on Rs 100,000/- from non-speculative profit and carry forward the speculative loss.

What is tax-loss harvesting?

Towards the end of a financial year, you might have realized profits and unrealized losses. If you let it be, you will end up paying taxes on realized profits and carrying forward your unrealized losses to next year. This would mean a higher tax outgo immediately, and hence any interest that you could have earned on that capital which goes away as taxes. To avoid more taxes on these, you can ask your brokerage company to provide tax loss harvesting report.

BTST (ATST) – Is it speculative, non-speculative, or STCG?

BTST (Buy today Sell tomorrow) or ATST (Acquire today sell tomorrow) is quite popular among equity traders. It is called BTST when you buy today and sell tomorrow without taking delivery of the stock.

 Since you are not taking delivery, should it be considered as speculative similar to intraday equity trading?

 There are both schools of thought, one which considers it to be speculative because no delivery was taken. However, I come from the second school, which is to consider it as non-speculative/STCG as the exchange itself charges the security transaction tax (STT) for BTST trades similar to regular delivery based trades. A factor to consider is if such BTST trades are done just a few times in the year show it as STCG, but if done frequently it is best to show it as speculative business income.

How to treat sale of unlisted shares in this context

However, in case of sale of unlisted shares for which no formal market exists for trading, the department has given its view. Income arising from transfer of unlisted shares would be taxed under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.

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