Taxation for Traders/Investors

As we approach March, there is suddenly a tension in everybody’s mind, it is related to Tax. Especially for people who are involved with the stock market in some way or other. It can be Capital Gains, Intraday Trading, F&O trading, Dividend Income, etc. 

First of all, people who are tense about taxes don’t be afraid, you will only be taxed if you have income/profit. When there is no profit, there will be no tax.

Different categories of Traders/Investors :

  • Intraday traders (Equity)
  • F&O traders (Intraday & delivery basis)
  • Short Term Capital Gains (Investment with holding period < 1 year)
  • Long Term Capital Gains (Investment with holding period > 1 year)
  • Dividend income
  • Digital assets (Crypto currencies)

Before we continue, first understand that, as per rule, Income tax filing is mandatory if you are indulged in trading and investing activity. You have to file ITR even if you have made losses.

So, let’s discuss each category one by one.

Intraday traders (Equity)

  • When you buy & sell within a day itself (between 9.15am – 3.30pm) market hours, then such transactions are called Intraday equity trades.
  • As per rule, Intraday equity is Speculative business income. So here, there is no fixed taxation rate.
  • Speculative losses can be carried forward for 4 years and can be set-off only against any speculative gains you make in that period.
  •  Speculative income has to be added to all your other income (salary, other business income, bank interest, rental income, and others), and taxes paid according to the tax slab you fall in.

F&O traders (Intraday & Delivery Basis)

  • Income from trading F&O (both intraday and overnight) on all the exchanges are considered as non-speculative business income as per Income Tax Department. 
  • Similar to Speculative income, non-speculative business income has to be added to all your other income and taxes paid according to the tax slab you fall in.
  • Non-speculative losses can be set-off against any other business income except salary income 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.

Short Term Capital Gains (STCG)

  • Any gains/losses in shares where the holding period is less than a year is considered as STCG. Fix tax of  15% on the gain. This is irrespective of any tax slab applicable.
  • Any gain in investment in equity-oriented mutual funds held for less than 1 year is considered as STCG and taxed at 15% of the gain. Do note a fund is considered Equity based if 65% of the funds are invested in domestic companies.
  • Short term capital losses if filed within time can be carried forward for 8 consecutive years and set off against any gains made in those years.

Long Term Capital Gains (LTCG)

  • If you sell any holding after one year, it can be 13 months, 2yrs, 5yrs, etc. is considered to be long term.
  • We have 0% tax if gains are less than 1 lakh and then Fix tax of  10% on the gain. This is irrespective of any tax slab applicable.

Important Note: For both STCG & LTCG, no deductions of STT (Securities Transaction Tax). STT is payable to the Govt. of India and cannot be claimed as an expense when investing. Whereas if you have given brokerage, turnover charges, SEBI charges, stamp duty, etc can be claimed as deductions.

Dividend income

  • There is no separate tax slab for income through dividend. The dividend income is the taxable income which is taxed as per the slab rates applicable
  • If your dividend income is greater than 5000 from any individual company, than 10% TDS will be deducted by that company,  which will be claimed back when filing ITR.

Digital assets (Cryptocurrencies)

  • The Budget 2022 has proposed that gains from virtual digital assets or crypto assets would attract a tax of flat 30% plus cess.
  • Further, the government has introduced tax deducted at source (TDS) at the rate of 1% to trace the transaction trail and widen the tax base.
  • Be very careful , 1% TDS means 1% of every trade value is blocked by the platform. So in 50 trades, 50% of the account value can be blocked for TDS regardless of the P&L. Volumes are bound to drop and spreads can widen significantly.

Disclaimer – Do consult a Chartered Accountant (CA) before filing your returns.

Final words,

First learn to make profits. If you are making consistent profits, trading is a field where you can recover tax in a short time. You will only be taxed if you make profits. When there is no profit, there will be no tax.

So, if you are taxable be happy at least you have made some money out of the markets, where generally the mass people lose.

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