There is a difference between a trader and an investor. People do get confused between these two terms and the tax on share trading. The first thing to decide is whether you are a trader or an investor? To give a clear idea, refer the difference below:
A trader’s income (profit or loss) from equity trading will be treated as a business and taxed at 30%. This trading also includes derivatives. Expenses incurred such as brokerage, broadband charges etc. can be shown to lower the tax.
An investor is taxed in two ways when:
Short term capital gain (STCG)
When the holding period is less than a year, it is taxed at 15%. After selling of stock, it delivers to Demat account then it is considered as STCG. Otherwise, income is treated as Business Income.
Long-term capital gain (LTCG)
When the holding is more than a year and it is exempted from tax. LTCG is exempted if a transaction is making through a recognized stock exchange (equity, commodity, & currency) and *STT (Security Transaction Tax) is paid. If the stock is not trading on any recognized stock exchange then it is taxed at 20%.
*STT is applied on all equity shares that are sell or buy on a stock exchange. Every year, in union budget government, sets the rates for STT that ranges from 0.017 % to 0.125 %.
If a trader is trading in the stock market frequently (mostly non-delivery trade) then tax is also applied to trading. Business income is classified as follows:
Note: It is important to classify income under ‘capital gain’ or ‘business income’. Before finalizing the IT return, classified properly in order to get tax exemptions.
Taxation on Dividend
A company shares a part of its profit with the shareholders in the form of a dividend.
- Dividend in the hand of investor is tax-free because the company has already paid Dividend Distribution Tax. So, 15% tax has been already paid by the company on the investor’s behalf.
Tax on share trading on share trading can be reduced by following tax saving methods as follows:
Trading as business income
If the trading gain is under ‘business income’ then tax is paid as per the tax slab (you belong).
Benefit: Trading expenses like brokerage, broadband charges, internet bill, telephone bill, computer charge etc. can be deducted from the gains.
Example: Karan makes a profit of Rs. 1,00,000 from equity trading and falls under the 20% tax bracket. But, this tax of Rs. 20,000 can be reduced by showing the related expenses or by adjusting loss from share trading.
So, Karan will be a tax on Rs. 56,000.
Capital gain as investment income
There is an another option, if a taxpayer doesn’t want to classify the trading activity as ‘business’, then pay only short-term capital gain (STCG) tax at 15%.
- This gain can be offset against short-term capital loss.
- Long term capital loss is a dead loss as it cannot be adjusted or carried forward because it is exempted from Tax.
Example: Amrita has a Short-term capital gain of Rs. 10,000. She has to pay 15% as tax i.e. Rs.1, 500. At the same time, she is bearing a loss of Rs. 5,000 on a stock that she has purchased 1 year back. But she is confident that in a long run that stock will turn profitable. So, her net profit is (10,000 – 5,000) = Rs. 5,000. Therefore, Rs. 750 (15% of 5,000) is payable as tax not Rs. 1500.
Note: In this process, she continues holding the stock that has a good long-term perspective and this also saves tax.
For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.