When it comes to investing, the name of the stock market comes second to none as many investors or traders actively participate in trading and achieve profit from it.
Investors are of two types: first are those who hold equity investment for more than 1 year and show their income as LTCG or long term capital gains. The second type of investors is those who hold equity investments for more than 1 day or less than 1 year.
There are several types of investors in every financial market, each of them applies its strategy to achieve its financial goals. Hence, the ROI generated by each investor can vary from one to another.
Hence, taxation applied to people who depend on salaried income can be easily calculated. However, the taxation applied on trading income can be a bit complicated as compared to the former one.
Since the income generated from trading varies from trader to trader, taxation law cannot be applied uniformly to all the traders. Like income, the amount of tax applied can also be variable.
If you are new to the trading world, understanding taxation seems to be a difficult word for you.
Here, we will explore all the aspects of taxation that help you to understand tax on different trading styles.
Different Types of Taxation for Traders
Taxation in trading can be classified into four types: Long term capital gain, Short Term Capital Gain, Speculative Business Income, Non-Speculative Business Income.
All the types of taxation along with their features and benefits are mentioned below; read them carefully:
Long Term Capital Gains
Long term capital gains are a type of tax levied by the government of India if an investment is held by a trader for a specific period. For instance, if a trader is seeking long term investment and parks its investment for 1 year or longer than it, any purchase or sales profit from the investment comes under long term capital gain tax.
If we talk about equity investment, Long term capital gains are exempted under section 10 of the Income Tax Act. In such cases, the profits are entirely tax-free. However, this is only applicable under certain conditions.
For instance, if you make any transaction via a recognized exchange and sell your equities within the country, long term capital gain taxes are exempted.
As said above, the tax implications for long term investors can be applicable under certain conditions.
If your equity investments cross the threshold of over 1 lakh in a financial year, the tax will be charged at 10%.
Short Term Capital Gains
In short term capital gains, the duration of holding securities is less than 1 year. According to the norms, the duration of investment in short term capital gains can be held for longer than a day but shorter than a year.
The tax implications on trading income via equity, any capital gains generated by selling a stock leads to a tax deduction of a profit of 15%.
However, your short term capital gains will never be taxed at a standard 15% rate unless your total taxable income is below Rs 2.5 lakhs.
Are capital losses carry forward in long term capital gain and short term capital gains?
Since long term gains are tax-free, they do not carry forward long term capital losses.
Short term capital gains are taxable and therefore they can be carried forward for a year of 8 years from the financial year during which the losses occur.
Business Income Vs Capital Gains
One of the simplest ways of filing your capital gain returns is to show them as a part of your income statement. However, there are cases where your profits/losses from share trading cant come under income tax returns.
This happens to the individuals, who are traders by profession or most of their equities are held as a stock in trade; in such cases, the profits or losses from the stock trading can be counted as business income and the returns generated on it must be filed accordingly.
To distinguish between normal capital gains and capital gains as a business income, the Income Tax has set certain parameters that are explained below:
If the volume of share trading transaction of any individual exceeds Rs 2 Crore in any FY then the individuals are required to get an audit and then the audit may insist them to file this income as a business income.
Another way of differentiating capital gains and capital gains as business income is the profit threshold.
The income tax department has set a fixed profit percentage (6%) to identify income coming from equities.
If the profit percentage is below 6% of the total volume traded, then the income comes from stocks and shares can be considered as business income rather than normal capital gains.
Speculative Business Income
Business income that comes under intraday equity trading is considered speculative. It is defined as the income generated through trades in which securities are bought and sold within the same day.
As the capital gain tax is taxed at a specific percentage; there are no rates for speculative business income. Instead, your speculative business income is taxed alongside your tax income according to section 43 of the Income Tax Act.
This means, if you have salaried income along with speculative business income, the tax will apply to your combined income.
Non Speculative Business Income
Business income that comes from trading futures and options on the recognized exchanges are considered as non-speculative business income. Just like speculative business income, the income generated from F&O also added with your other income sources. As a result, the appropriate tax rate slab is applied to your overall income.
Traders are very well informed about the market condition, stock’s value, company performances, similarly they also need to be informed about the tax rate slab applied to the different trading styles.
This information is not only apt for traders as well as for newbies who are seeking investment in stocks for the very first time.