Tax treatment on the Stock Market

In the Stock Market, trades by traders/ investors are classified into: 1) Intraday and 2) Delivery.

1) Intraday: Shares are bought and sold on the same day (trading session). Types of intraday trading:

• Equity Intraday: As per section 43(5) of the income-tax Act, 1961. Income earned by intraday trading in equity is considered Speculative Business Income.

  Taxation of Speculative Business Income

  Profit and loss of Speculative Business Income should be calculated separately from the Non- Speculative Business Income. Non- Speculative Business Income will be included with all other income after its calculation and taxed as per the standard income tax slab. However, in case of a loss from Speculative Business can be set off for only four subsequent years when carried forward. Loss of Speculative Business Income can be set off only against Speculative Business Income.

• Futures & Options trading: F&O is a Derivative. Derivatives obtain their value from the underlying value of an asset like Stocks/Securities/Currency/ Mutual funds/ Commodity.

  FNO Trading provides the trading facility with various products like Index Trading, Index Options (Call & Put), Stock Futures, and Stocks Options (Call & Put).

  In simple words:

  Future: It Is a agreement between two parties to buy or sell an asset on a specific date at a particular price. Future contracts are an obligation of both parties (buyer & seller) to be executed.

  Options: It is a contract between two parties. The option buyer (call option or put option) has a right to buy or sell an asset during a specific period at a particular date but is not obliged to execute the contract. The option buyer enjoys the right to buy or sell the asset for a consideration to be paid to the option seller called an option premium. The option seller is obliged to execute the contract if the option buyer exercises the option for a consideration he receives as an option premium.

  Income from trading F&O (both intraday and overnight) on all the exchanges is considered Non-Speculative Business Income because it is used for hedging generally.

  Taxation of Non-Speculative Business Income

  Profit and loss of Non-Speculative Business Income will be included with all other business income and taxed as per the regular income tax slab. However, in case of a loss, it can be set off for eight subsequent years when carried forward.

  Non-Speculative Business loss can be set off even against Speculative Business Income and all other income except salary.

  Illustration showing Taxation of speculative income and non-speculative income

  Illustration 1

  Mr. Ram has the following sources of income.

  Salary (net of standard deduction 50000) = Rs. 11,00,000

  Interest income = Rs. 2,50,000

  Non-speculative business loss = Rs. 4,00,000

  Speculative income (intraday) = Rs. 600,000

   

  Computation of Total Income:

  Salary = Rs. 11,00,000

  Income from other sources (Interest) = Rs. 2,50,000

  Speculative business income = Rs. 2,00,000 (4 lakhs set off)

  Total Income= Rs. 15,50,000.

  This Total income will now be taxed as per regular income slabs.

  Note: So here, a non-speculative business loss of Rs. 4,00,000 will be set off against speculative income.

   

  Illustration 2

  In the above example, if there was a Speculative loss of Rs. 600000 instead of speculative gain and all other income remaining the same. Compute total income.

  Computation of Total Income:

  Salary = Rs. 11,00,000

  Income from other sources (Interest) = Rs 0 (250000 set off)

  Non-Speculative business income = Rs. 150000

  Total Income = Rs. 12,50,000.

  This Total income will now be taxed as per standard income slabs.

   

  Note:

  1) Speculative loss is carried forward to next year as it could be set off only against the Speculative gain.

  2) Non-speculative loss is set off in the current year only to the extent of 250000 from income from other sources and will carry forward the balance of 150000.

  As stated above, the non-speculative loss is eligible to be set off from all other sources of income except salary.

2) Delivery-based trade – if the stock is held for more than a day, and if it is not squared off in one trading session, it is a delivery-based trade. In the case of delivery-based trade, the individual is considered an investor.

• Tax Treatment

  In the case of Delivery Based trade, if the Investor deals in listed shares irrespective of the holding period. The Investor has an option to show income taxable under capital gains or Business Income based on the circular released by the Central Board of Direct Taxes (CBDT) in 2016. (https://www.incometaxindia.gov.in/communications/circular/circular-no-6.pdf). However, the stance once taken cannot be altered in succeeding years and should be maintained consistently from year to year.

  Situation 1: Investor classifies income from delivery-based equity trade as business income.

  • The income tax will be charged after deducting all expenses paid on acquiring stock, such as Securities Transaction Tax (STT), Brokerage, Transaction taxes, GST, SEBI Turnover Charges, Stamp duty charges, Depository Participant Charges.

    The net income will be included with other income and taxed per the regular income tax slab.

  • Suppose an individual has borrowed money for delivery-based equity trade and is classifying income under business income. Then he can claim interest as a deduction in computing business income from delivery-based equity trade.

    Recommendation to treat it as Business Income as per CBDT.

  • When there is frequent buying or selling of stocks.

  • When the intention of holding stock is not for earning dividends.

  • When the scale of activity is substantially large.

  • When purchases are made out of borrowed funds.

  • If stocks are shown as stock in trade on the Balance Sheet.

  Situation 2: Investor classifies income from delivery-based equity trade as Capital Gain.

  • Equity Delivery can be classified into short-term or long-term based on the holding period.

  • Equity delivery-based trade is considered short-term if a trade is executed within 12 months and will be taxable under short-term capital gain.

  • Equity delivery-based trade is considered long-term if a trade is executed in more than 12 months and will be taxable under long-term capital gain.

• Taxation of Short-term capital gain

  When the stock is held for less than 365 days, income/loss from it is considered a short-term capital gain or short-term capital gain (STCG/ STCL) Short-term capital gain from equities is taxed at a special rate of 15%. However, when the income is below the basic exemption limit of Rs. 2,50,000, the unexhausted amount, can be adjusted from short-term capital gain.

  However, even though the individual is eligible for a rebate of Rs. 2500 or tax payable, whichever is lower, if his income exceeds the basic exemption limit but falls short of Rs. 500000. Still, the rebate will not be allowed on tax on the short-term capital gain, and Individuals should pay tax on short-term capital gain once the total income exceeds the basic exemption limit.

  Further, no chapter VI-A deduction is available under the income tax act from income from short-term capital gain.

  Illustration

  Mr. Lakshmana has Total Income = Rs. 200000 (below Rs. 2,50,000)

  STCG from equity = Rs. 1,00,000

  Unutilized Basic Exemption Limit = (2,50,000 – 200,000) = 50000

  Adjusted from STCG = 50,000

  Remaining STCG = (1,00,000 – 50,000) = 50,000

  Tax on STCG = 15% of 50,000 = Rs. 7500

• Carry Forward and Set Off of STCG

  Short-term capital gains can be carried forward for eight subsequent years and set off only against short-term and long-term capital gains.

  Illustration

  If the current year’s short-term capital loss is Rs. 100,000, there are no short-term & long-term capital gains in the current year.

  Then the short-term capital loss can be carried forward to next year.

  Suppose, in the next year; the STCG is Rs. 130,000.

  Tax on STCG @ 15% will have to be paid on Rs. 30,000 (130,000-100000).

• Tax Planning

  In most cases, if an individual has a short-term capital gain, then an individual will have some short-term capital loss, either unrealized or realized.

  So, if an investor has booked Short-term capital gain and if it is taxable (that is, if the total individual income exceeds Rs.250000), then the individual should also book any unrealized short-term capital loss, if any, by selling the shares just before the closing of the market and re-buying the same shares next trading day morning. In this way, the individual has booked short-term capital loss and even has reacquired those shares the next day.

  The benefit of this is that this delays the tax that an individual has to pay, and the individual could earn interest on the tax not paid till the payment of taxes.

• Mutual Funds

  The short-term capital gain tax on equity-oriented mutual funds is 15%.

  Short-term capital gain tax on debt -Mutual funds are taxed per slab rate.

  However, the holding period to be classified under short-term capital gain on debt-oriented mutual funds is less than 36 months.

• Taxation of Long-term capital gain

  When the stock is held for more than a year, income/loss is considered a long-term capital gain or long-term capital loss (LTCG/ LTCL).

  Long-term capital gains up to 100000 are exempt in a financial year. Long-term capital gain exceeding 100000 Rs. from equities in a financial year is taxed at a special rate of 10%. However, when the income is below the basic exemption limit of Rs. 2,50,000, the unexhausted amount can be adjusted from long-term capital gain exceeding Rs. 100000.

  However, even though the individual is eligible for a rebate of Rs. 2500 or tax payable, whichever is lower, if his income exceeds the basic exemption limit but falls short of Rs. 50000. Still, the rebate will not be allowed on tax on the long-term capital gain, and Individuals will have to pay tax on long-term capital gain exceeding Rs. 100000 in a financial year once the total income starts exceeding the basic exemption limit.

  Further, no chapter VI-A deduction is available under the income tax act from income from long-term capital gain.

  Illustration 1

  Salary = Rs. 12,00,000

  Other income = Rs. 20,000

  LTCG on equity investing = Rs. 325,000

  Tax Computation:

  LTCG Tax on equity = 10% of 2,25,000 (3,25,000- 1,00,000) = Rs. 22500

  Total Income:

  Salary = Rs. 12,00,000

  Other Income = Rs. 20,000

  Total= Rs. 12,20,000 will be taxed as per normal tax slab rate.

  Illustration 2

  Salary = Rs. 1,00,000

  Other income = Rs. 20,000

  LTCG on equity investing = Rs. 325,000

  Tax Computation:

  Total Income:

  Salary = Rs. 1,00,000

  Other Income = Rs. 20,000

  Total income excluding long-term gain = Rs. 120000

  Basic exemption limit = Rs. 250000

  Unutilized Basic Exemption Limit = Rs 130000

  LTCG exceeding Rs. 100000 = Rs. 225000

  LTCG Tax on equity = 10% of 95,000 (225,000-1,30,000) = Rs. 9500

  Note:

  As per section 10(38) of the income tax act, Long-term capital gain was utterly exempt from the income tax act. However, with effect from 1st April 2019, section 10(38) was withdrawn, and long-term capital gain was charged to tax at 10 % for Long-term capital gain exceeding Rs.100000 as per section 112A.

  However, after introducing the Grandfathering provision, long-term capital gains from 31st January 2018 were exempted.

  Example

  Suppose Mr. Ram bought 100 shares of XYZ company in FY 2015 at Rs 1000 and sold them at Rs. 6000 in FY 2022. The price of a stock on 31 st Jan 2018 was 3000.

  Total Long-term capital gains 6000-1000* 100= 500000.

  In such a case, by applying the grandfathering provision, long-term capital accrued till 31st January 2018 will be exempt, which is 1000* (3000-1000) = 200000, which is Exempt. And remaining long term gain over 100000 Rs. which is (500000 – 200000- 100000) which is 200000 will be taxable at 10 %

  Carry Forward and Set Off of LTCG

  Long-term capital losses can be carried forward for subsequent eight years and can be set off only long-term capital gains.

  Tax Planning

  If an individual has an unrealized long-term capital gain, then an individual should book a profit of Rs. 100000 in a financial year and claim tax benefit as every year Rs. 100000 is exempt.

  Mutual Funds

  The long-term capital gain tax on equity-oriented mutual funds is 10%.

  Long-term capital gain on equity-oriented mutual funds up to Rs 100000 is exempt.

  The long-term capital gain tax on debt-oriented mutual funds is taxed at the slab rate after providing the benefit of Indexation.

  However, the holding period to be classified under long-term capital gain on debt-oriented mutual funds is more than 36 months.

  Recommendation to treat it as Capital as per CBDT.

  • When there is in-frequent buying or selling of stocks.p>

  • When the intention of holding stock is for earning dividends.

  • When the scale of activity is low.

  • When purchases are made out of own funds.

  • If stocks are shown as Investments on the Balance Sheet.

  Summary

  Type of Gain	Holding period	Rate of Tax	Set off of Loss
  STCG U/s 111A	< 12 months	15%	Can be C/f to 8 years
  LTCG U/s 112A	>12 months	10% on LTCG exceeding Rs 1,00,000	*Can be C/f to 8 years *LTCL can only be set off against LTCG
  Intra Day Trades	Where NO delivery takes place	Treated as Speculative Business Income & taxable at applicable slab rates	*Can be C/f to 4 years *Speculative Loss can only be set off against Speculative Income
  STCG on Debt Fund, Debentures & Bonds (other Than Zero Coupon)	<36 months	Applicable Slab Rate	Can be C/f to 8 years
  LTCG on Debt Fund, Debentures & Bonds (other than Zero Coupon)	>36 months	20%	Can be C/f to 8 years *Indexation on bonds & Debentures is NOT allowed

• If listed shares are shown as Business Income

  Suppose listed securities are held as Stock in trade by any retail Investor. Any income arising from the sale of such securities shall be taxable as Business Income at applicable slab rates.

  Taxability of Dividend

  Type of Income	Shares held as	Treatment
  Dividend	Capital Asset	Taxable at Slab Rate under Income from Other Sources
  Dividend	Stock In Trade	Taxable at Slab Rate as Business Income

   

  Note:

  1. Dividends are also subject to TDS @ 10 percent U/s 194 if such amount exceeds Rs 5,000 in an FY.

  2. Loss from business or long-term capital loss and short-term capital loss shall be eligible to be carried forward only if the return is filed within the due date.