From Gains to Taxes: The Basics of Stock Market Income Taxation
The stock market can be a great way to grow your wealth, but to be honest, taxes can be confusing. Don't worry, this article is here to break down the tax side of things in a way that is easy to understand. There are different ways to make money in the stock market, there are different tax rules for each type of income. We'll explore what these are and how they might affect you. So, whether you're an experienced investor or just starting out, this article will help you navigate the tax world of the stock market. Stock market income and how they are taxed:
1. Capital Gain
a. Short-Term Capital Gain/Loss:
Short-term capital gain/loss refers to the profits or losses made from selling shares or any security held for a period of 12 months or less. This means that the security was owned for more than one day but less than a year. The tax rate on short-term capital gains is fixed at 15%, regardless of the taxpayer's income bracket. In contrast, if there is a capital loss, it can be offset against either long-term or short-term capital gains for up to 8 years.
Ease of Compliance:
Compared to traditional corporate structures, LLPs benefit from simplified compliance
requirements. The annual filing obligations are less burdensome, reducing the
administrative load on startups. It allows entrepreneurs to focus more on business
operations and growth.
b. Long Term Capital Gain/Loss:
Holding on to your investments for more than a year can provide a significant tax advantage in India. Profits from selling these long-term assets are taxed at a lower rate. You get to keep ₹1 lakh of your capital gains completely tax-free, and any profits above that are subject to a favourable 10% tax rate.
But that's not all. If you experience investment losses, the government allows you to use those losses to offset your long-term capital gains for up to 8 years. This means you can potentially reduce your tax bill even further.
This policy encourages a buy-and-hold approach, which can be beneficial for both your portfolio's growth and your tax efficiency. So, if you're looking to invest for the future, keep this long-term capital gains tax benefit in mind!
2. Intraday Trading
Buying and selling stocks on the same day, also known as Intraday trading, can be exciting, but the tax implications can be a bit trickier. Here's the breakdown in a more relatable way:Quick In, Quick Out:
Imagine buying and selling stocks within the same day. Profits from these quick trades are considered speculative business income. The tax you pay depends on your total income for the year. It can range anywhere from 5% to 30%, kind of like a sliding scale.
Losses Happen:
Even the best day traders might experience losses sometimes. But the good news is, you can carry these losses forward for up to 4 years. This means you can use them to offset any future speculative business income (profits from day trading) and potentially reduce your tax bill. Think of it as a second chance to use those losses to your advantage!
Classifying Intraday Trading as Business or Investment Income
The classification of intraday trading as either business income or investment income depends on factors such as the frequency of trades, the trader's intention, and the nature of the trading activity. Here's how it's classified for tax purposes:
• Business Income: If the intraday trading is frequent and aimed at earning a profit, it is considered a business. Profits are taxed according to the business slab rates, and the trader can claim deductions for business-related expenses.
• Investment Income: If the intraday trading is infrequent and intended for long-term investment, it is considered investment income. Profits are taxed at a lower rate as capital gains, and the trader can claim exemptions and deductions for long-term capital gains.
Deductions for Intraday Traders
Intraday traders in India can claim various deductions and exemptions to reduce their income tax liabilities. Here are some available deductions:
| Direct Expenses | Indirect Expenses |
|---|---|
| Brokerage charges | Rent used for trading workspace |
| Transaction charges | Depreciation on assets used for trading |
| Data subscription related to trading | Salary of employees hired for trading |
| Demat Account charges | Postage and communication expenses |
| Bank charges related to trading activities | Internet and electricity expenses relating to trading use |
Applicability of Tax Audit for Intraday Trading
Whether a tax audit is applicable for intraday trading depends on specific criteria:
- Turnover up to 2 Crores: If your intraday trading turnover is up to 2 crores and your profit is at least 6% of the turnover, a tax audit is not applicable.
- Loss or Profit Less than 6% of Turnover: If you have incurred a loss or your profit is less than 6% of the turnover, a tax audit is applicable if your income exceeds 3 lakhs (basic exemption limit under the new scheme).
- Turnover exceeds 10 Crores:** Regardless of profit or loss if your intraday trading turnover exceeds 10 crores, a tax audit is applicable only if over 95% of your transactions are digital.
These criteria determine whether intraday traders need to undergo a tax audit based on their turnover and profitability thresholds.
Understanding Turnover in Intraday Trading
In intraday trading, turnover is calculated based on the absolute amounts of profits and losses. Here’s how turnover is determined:
Turnover for Intraday Trading = Sum of absolute amounts of Profits and Losses
For example, if you made a profit of Rs. 1,00,000 in the first 6 months and a loss of Rs. 50,000 in the next 6 months, your turnover for the period would be Rs. 1,50,000 (1,00,000 + 50,000). This method considers both positive and negative differences in determining the turnover amount for taxation purposes.
Special Provisions and Deductions
• Securities Transaction Tax (STT):
STT is a tax levied on the purchase and sale of securities on the stock exchanges in India. This tax is already included in the transaction value, and hence, no separate tax calculation is required by the investor.
• Tax Deducted at Source (TDS):
From April 2020, dividends paid by companies are subject to TDS at 10% if the amount exceeds ₹5,000 in a financial year. This TDS can be adjusted against the final tax liability while filing the income tax return.
• Set-Off and Carry Forward of Losses:
Investors can set off short-term capital losses against both short-term and long-term capital gains.
• Rebate Under Section 87A:
Taxpayers with a total income not exceeding ₹5 lakh and ₹7 lakh can claim a rebate of up to ₹12,500 and ₹25,000 which effectively means no tax liability for small investors whose income falls within this limit. Old scheme and new scheme respectively.
Conclusion:
Navigating stock market taxes in India can feel complex, but it doesn't have to be, Remember, short-term gains are taxed more than long-term ones. Dividends are taxed like your regular income. Don't forget, you can use losses to offset gains and save on taxes. By planning strategically, you can keep more of your hard-earned profits and watch your wealth grow!
- Mangesh Bhate
Intern.