Almost every Indian Taxpayer irrespective of his/her earnings is involved in the trading of shares because it is seen as the fastest way of earning some handsome amount of money. Also trading becomes very easy with the rapid development in technology. Thus it becomes necessary to know about the taxation on the earnings made from share trading.
Before going into the taxation part, first it is important to understand what type of share trading activity you are involved in:
Income Tax in Case you are an Investor
If you do not frequently buy and sell shares then all the gains made from share trading is to be assessed as capital gains and the dividend received shall be assessed as Income from other sources [currently exempt under section 10(34)].
If you have held shares for more than a period of 12 months before selling then the gains earned would be treated as long term capital gains which are liable to be taxed at the rate of 20% under section 112 of Income Tax Act. In case you have sold the shares through recognized stock exchange by paying STT (security transaction tax) then this LTCG is exempt under section 10(38) and no tax shall be payable. On the other hand if the shares are sold off in the market then 20% tax becomes payable on the gains earned.
In order to prove the gain as a long term capital gain, you need to attach the contract notes for the concerning trades and the DEMAT statement which reflects the credit or debit of shares.
In case you have sold shares within a period of 12 months of buying them then, the gains earned shall be treated as short term capital gains which are liable to be taxed at the rate of 15% under section 111A.
In case there is long term or short term losses, the same can be carried forward for 8 years. The short term capital loss can be set-off either against short term or long term capital gains from any source but long term capital loss can only be set-off against long term capital gains from any sources at california dispensery peoplesorangecounty.com.
Also remember that long term capital losses occur for shares where STT is paid cannot be carried forward for future set-off.
Always keep in mind that an investor cannot claim any expenses such as internet charges, rent etc. All the gains earned is the net income of the investor and tax is to be paid on this net amount.
Income Tax in Case you are a Normal Trader
Normal Trader refers to a person who does trading in shares but not on a day to day basis as in the case of an intraday trader. Normal Traders buy shares, take delivery and then sell them to earn profit.
Normal Trader can also be called as an Investor but there is one major difference between a normal trader and an investor i.e. Normal Trader has a holding period of shares which is always short-term while holding period of shares in case of an investor could be long-term as well as short-term. If we ignore this difference, both normal trader and an investor are same in all the aspects.
Taxation of the Normal Trader is also same as an Investor i.e. gains shall be assessed as Short term capital gains which are taxed at the rate of 15% under section 111A.
Income Tax in Case you are an Intraday Trader
Taxation on the profits earned from an Intraday trade is the most asked question by any trader since income tax in this case is not clear as what tax rate should be considered to ascertain the tax liability.
Any profit or gain earned from the day trading is known as Speculative Income (either Speculative Profit or Speculative Loss). Any person, indulged in intraday trading is automatically treated as someone who is trading in shares as business, thus his income shall be assessed as Income earned from Business and Profession and tax rate shall be same as any other business activity.
Speculative losses can be carried forward for the next 4 years provided taxpayer has declared the same while filing the tax return and net off only against any speculative profits over the next 4 years.
Income Tax in Case of Derivative Trading
Derivative trading grasps Futures and Options trading on the various stock, commodity and currency exchanges in India.
All derivatives trading activities done through recognized exchange are not considered as speculative income like in the case of intraday trading. Hence any profit or loss arising from the derivative trading is considered as arising from business activity. In case of trader who trades in derivatives and also buy shares and receive delivery, can claim short-term capital gain for money made in shares for which he receives delivery in his DP and claim income/loss from derivatives trading as business income/loss.
Summary of Taxation on Share Trading
1. Purchase/sale of shares where deliveries have been affected
- The profit/loss is perceptible as Capital Gains if shares are held as capital assets i.e. investments.
- The profit/loss is perceptible as Business Income if shares are held as stock-in-trade.
2. Purchase/sale of shares where deliveries have not been affected i.e. Intra-day trading (cash segment of share market)
- The Profit/loss is perceptible as Speculation Income
3. Purchase/sale of Derivatives/ Futures and Options i.e. without delivery
- The Profit/loss is perceptible as Business Income.
4. Purchase/sale of commodities in Future Markets i.e. without delivery
- The Profit/loss is perceptible as Speculation income/loss.
5. Purchase/sale of commodities in Cash Market i.e. with delivery
- The Profit/loss is perceptible as Business Income if commodities are held as stock-in-trade.
- The Profit/loss is perceptible as Capital Gains if commodities are held as capital assets i.e. investments.