Tax planning and compliance are crucial aspects for individuals engaged in trading and stock market investments. With the deadline for filing Income Tax Returns (ITR) for the fiscal year 2022-23 approaching on July 31, it becomes imperative for taxpayers, especially traders and stock market participants, to understand and calculate their income tax liabilities accurately.
This article aims to shed light on the taxation of equity share gains in India, exploring concepts such as Short-Term Capital Gains (STCG), Long-Term Capital Gains (LTCG), dividend taxation, Securities Transaction Tax (STT), and the treatment of intraday trading in the cash segment as well as futures and options (F&O).
The Ultimate Guide: Calculating Income Tax on Stock Market Earnings with Your Salary.
Understanding Tax Implications: Short-Term vs. Long-Term Gains, Intraday Trading, and Business Income.
1. How Equity Share Gains Are Taxed
To comprehend the taxation of equity share gains, it is essential to classify the income derived from the purchase or sale of shares under the relevant categories of Capital Gains or business income. Intraday trading gains fall under the head of “Business Income,” while gains from long or short-term investing are taxed as “Capital Gains.” The classification as short-term or long-term depends on the holding period of the shares.
1.1 Taxation of Short-Term Capital Gains (STCG)
If listed equity shares are sold within 12 months of their acquisition, the resulting gains or losses fall under the purview of short-term capital gains (STCG) or short-term capital losses (STCL). Irrespective of the taxpayer’s tax bracket, short-term capital gains are taxed at 15% under Section 111A. It’s important to note that this tax rate is subject to any applicable surcharges and cess.
1.2 Taxation of Long-Term Capital Gains (LTCG)
When listed stock shares are sold after holding them for more than 12 months, it results in long-term capital gains (LTCG) or long-term capital losses (LTCL). If the seller earns a long-term capital gain exceeding Rs. 1 lakh from the sale of equity shares or equity-oriented mutual fund units, the gain is taxed at a rate of 10%, without the benefit of indexation. Additional cess or surcharges are not applicable in this case.
2. Tax Implications for Intraday Trading and Business Income
2.1 Taxation of Intraday Trading Income
Income generated through intraday trading is classified as business income rather than capital gains. In this scenario, the earnings from intraday trading are added to the individual’s net income and taxed according to the applicable slab rates.
2.2 Securities Transaction Tax (STT) and Business Expenses
Securities Transaction Tax (STT) is levied on the purchase or sale of securities listed on Indian stock exchanges. However, it is possible to claim STT as a business expense under income tax regulations. To do so, the STT amount paid should be recognized as a business expense, and the income from shares should be classified under the heading “Profits/Gains from Business and Profession” in accordance with Section 36 of the Income Tax Act, 1961.
3. Calculating STCG and LTCG Alongside Salary
3.1 Long-Term Capital Gains (LTCG) Calculation Example
Let’s consider an example where an individual invests Rs. 10 lakh in a stock and earns an LTCG of Rs. 3 lakh over a two-year period, resulting in a net gain of Rs. 13 lakh. According to the prevailing regulations, LTCG of up to Rs. 1 lakh is exempt from income tax in a fiscal year if equity shares or equity mutual funds are sold after being held for one year or more. Following the exemption, the remaining LTCG is Rs. 2 lakh, which will be taxed at a rate of 10%. Therefore, the tax liability on the long-term capital gain will amount to Rs. 20,000.
To further optimize the taxable amount, one can employ tax harvesting strategies. Assuming the total cost of shares has risen to Rs. 11 lakh within a year, with an initial purchase cost of Rs. 10 lakh, the net gain is Rs. 1 lakh.
Considering the exemption of Rs. 1 lakh on LTCG, the taxable amount becomes zero. To achieve a target of Rs. 13 lakh in two years, the investor can sell the entire shares and repurchase them immediately, effectively resetting the cost price to Rs. 11 lakh. Once the target is met, with a new cost price of Rs. 11 lakh and a net profit of Rs. 2 lakh over two years, the taxable gain becomes Rs. 1 lakh. Utilizing the tax harvesting approach, the tax liability at a 10% rate will amount to Rs. 10,000.
3.2 Short-Term Capital Gains (STCG) Calculation Example
Suppose an individual invests Rs. 10 lakh in a stock and earns an STCG of Rs. 3 lakh within one year of holding. The net gain in this case will be Rs. 13 lakh. Short-term capital gains are taxed at a rate of 15%. However, after adjusting the income tax against the basic exemption threshold of Rs. 2.5 lakh, the net taxable STCG becomes Rs. 50,000, resulting in a tax liability of Rs. 7,500 at a rate of 15%.
4. Additional Considerations and Conclusion
When filing their Income Tax Returns (ITR), salaried taxpayers should use ITR-2 or ITR-3 forms to declare income from capital gains. It’s important to note that the Income Tax Department treats income generated from the sale or transfer of unlisted shares as “Capital Gains” irrespective of the holding period. Dividend income is taxed at a rate of 10%, and Tax Deducted at Source (TDS) becomes applicable if the dividend amount exceeds Rs. 5,000.
Furthermore, according to Section 43(5) of the Income Tax Act, any transactions related to Futures and Options trading are considered non-speculative and are treated as business income or loss. Additionally, as per Section 44AB, if a trader’s total turnover exceeds Rs. 10 crore in a fiscal year, they must undergo a tax audit in accordance with the provisions specified under this section of the Income Tax Act.
Understanding the taxation of equity share gains is crucial for individuals engaged in trading and stock market investments. By comprehending the different tax implications for short-term and long-term gains, as well as the treatment of intraday trading and business income, taxpayers can effectively plan their tax liabilities and ensure compliance with the relevant regulations.
Read more about Finance!
Keep reading and supporting Banknomics!