Taxation on a stock market trading income will depend on the nature of trading and frequency of the trading activity. On the basis of your activity in equity market, you may fall into one or both of below mentioned categories:
Investor: If you purchase the stocks and hold it for some duration of time and do not trade/buy or sell everyday, you can consider yourself an investor.
Trader: If you are buying/selling everyday or a number of times in a day and are also trading in Futures & Options (F&O), you should consider yourself a trader. Here, there is no-delivery based trading.
Whether you are a trader or investor, your trading income will fall under the following categories:
Long Term Capital Gain
Short Term Capital Gain
Speculative Income
Non-speculative Income
Long Term Capital Gain (LTCG): If you have purchased an stock or equity mutual fund and hold it for one year, the total gain on such investment will be considered ‘Long Term Capital Gain’. Under the current rule, the LTCG is exempt from tax up to Rs. 1 lakh and any gain above that will be taxed at a flat rate of 10%. For example, you purchased stocks/equity mutual funds for Rs. 1 lakh on 31.03.2020 and sold the same on 01.04.2021 for Rs. 2.2 lakh. The long term capital gain is Rs. 1.2 lakh, out of which, Rs. 1 lakh is tax exempt and remaining Rs. 20,000 will be taxed at 10%. Thus, the total LTCG tax will be Rs. 2,000.
However, the purchase/sale should be through a recognized stock exchange such as BSE or NSE. In case, the investment and subsequent selling were done through off-market mode, the following tax rule will be applicable:
Listed Stocks: In case of listed stocks, the same rule will be applicable. Gain upto Rs. 1 lakh will be tax exempt and for the gain above that, a 10% LTCG Tax will be applicable.
Unlisted Stocks: The Long term capital gain tax on the unlisted stocks will be 20%.
Short Term Capital Gain (STCG): If a stock or equity mutual fund is sold within one year of purchase, the profit earned will be categorized as STCG. Here, the purchase/sell should not be in day trading category, i.e. the stock/mutual fund should be held for more than one day. There is a flat 15% tax applicable on such gains. For example, you have purchased a stock for Rs. 1 lakh and sold the same after 20 days for Rs. 1.10 lakh. The STCG tax on total gain of Rs. 10,000 at 15% rate will be Rs. 1,500.
Speculative Business Income: The income generated from trading the stocks on intraday and non-delivery basis is considered as a Speculative Business income. Such income is added to your regular income such as salary or other business income and it is taxed on the basis of your tax bracket.
For example, if you are a salaried person drawing a yearly salary of Rs. 10 lakh and you are also a daytrader. You have earned a profit of Rs. 4 lakh out of your intraday trading activity. Thus, for tax purposes, your total income will be considered Rs. 14 lakh and you are supposed to pay your tax on your incremental intraday trading income at 30%(at your marginal tax rate).
So, the trading income is counted as part of total income and applicable tax is to be paid as per the tax bracket.
Non-Speculative Business Income: If you are trading future & options and you have got gains out of it, such gains will be categorized as non-speculative business income. Like speculative business income, this income will also form part of your total income and it will be taxed based on your marginal tax rate.
For example, a retail business owner having an annual income of Rs. 12 lakh and who also trades in F&O, out of which he earned a profit of Rs. 5 lakh. For tax purpose, his total income will include this business income and trading income, totalling Rs. 17 lakh. He will pay tax at 30% for his trading income.
Carry forward of Short term & Long Term Capital losses
If you have any short-term or long-term capital losses and losses from Future & Option trading, you can carry forward such losses for the next 8 years. Also, any loss in intraday trading can be carried forward to the next 4 years. Any future gain can be set off against such losses and reduce the tax payment on those gains.
Requirement for a trader showing trading income as business income
When you show your trading income as a business income (in case of intra-day and F&O traders), you have to meet the following requirements:
Maintenance of books of accounts and financial statements
Tax Audits
1. Maintenance of books of accounts and financial statements
When your trading income is from intra-day trading or F&O or both and you declare your trading income as business income, you need to maintain books of accounts and balance sheets and income statements of your business.
Books of Accounts: It is the maintenance of record of your day-to-day trading transactions and bank account transactions.
Trading Book: Trading book contains all your buy and sell transactions of various stocks, futures and options. It shows P&L, the purchase and sell price, quantity, brokerage charged, Security transaction tax (STT), Stamp charges, Exchange Transaction charges, GST and SEBI Charges. This statement is generally provided by your broker.
Bank Account Book: This shows all your day to day banking transactions related to your trading business. You can download the bank statement through your online banking or can ask for the statement from your bank and update the banking transaction in the Bank book. In this book, you have to maintain all the expenses related to your business such as telephone charges, internet charges, salary, electricity charges, stationery etc. along with the bill of such payment made.
Balance Sheet: Balance sheet shows all the assets you own and all the liabilities you owe at a particular moment of time such as at financial year end, quarter end or month end. The difference between the assets and liabilities shows your net worth. The elements of a typical balance sheets include the following:
Assets (Current & Non-current assets)
Liabilities (Current & Non-current liabilities)
Assets: Under assets, the following items may be included-
The value of all your fixed assets such as computer, laptop, printer, office premises, furniture & fixture, automobile, etc.
The value of your investments such as stocks, bonds, mutual funds, etc.
The value of your personal valuables such as gold, jewelleries, etc.
Cash and bank balances
Liabilities: Under liabilities, the following items may be included-
Any personal loan outstanding
Credit card outstanding
Housing loan, car loan and education loan outstanding
Any other liability
Income Statement or P&L: Profit and loss statement shows all your income/revenue received and expenses incurred during a financial year. The difference between the income and expenses shows the net profit from the business activity.
Income: The income may be received from the following sources-
Income received from speculative (such as Intra-day trading) and non-speculative businesses (such as Future & Option trade)
Short term and long term capital gains from stocks and bonds or mutual fund
Expenses: The expenses may include the following-
Trade-related expenses such as brokerages, GST, stamp duty, STT, Exchange transaction charges, etc.
Telephone expenses, internet expenses, office rent, etc.
Depreciation of fixed assets such as computer, printer, furniture & fixture
Any fees paid towards consultation, advisory, etc. related to business.
2. Tax Audit
Tax audit of a trading business arises due to the following factors-
Trading Turnover: If the total trading turnover crosses Rs. 5 crores in a financial year, a tax audit is required.
Presumptive Income Under Section 44AD: If the trader is filing the income tax return by showing her income as presumptive income under Section 44AD, an audit will be required if the following conditions are met:
The turnover is less than Rs. 5 crore, and profit less than 6% of turnover, and
Total income exceeds basic exemption limit (Rs. 2.5 lakh)
However, an audit is not required if the turnover is less than Rs. 5 crore, profit is more than 6% and the total income is within the basic tax exemption limit of Rs. 2.50 lakh.
Which ITR form to use to show losses/gains from Long Term, Short Term, Intra-day trading or F&O trading ?
Use of ITR form to show capital gain/losses will depend on the nature of your activity in the market. If you are a salaried person and do occasional buying or selling, you can use ITR-2. If you are a person in a job or business who is also doing intraday trading or F&O, you have to show such activity as business activity and use the ITR-3 form.
ITR-2: You can file ITR-2 if you meet the following conditions-
You have income from salary,
and
You have got some gain/loss from stocks, bonds or stock mutual funds, or bond mutual funds. Such gains/losses may be in the short term nature (STCG) or the long term nature (LTCG).
ITR-3: You can file ITR-3 if you meet the following conditions-
You are a businessman who draws the income from a business, and
You also have a capital gain.
Alternatively, if
You are in a job,
and
You are also doing intraday trading or F&O (Future & Options) trading in the market. Then you need to show the income/loss from such trading activities as your business income/loss.
ITR-4: ITR-4 can only be used if you have income from business only. This business may be intraday trading also. But you can not use ITR 4 to declare any capital gains or if losses are to be carried forward to the next 4/8 years. The advantage of ITR-4 is that you can use it to avoid the audit of your books of accounts or even if you are not maintaining such books. However, such an advantage is applicable only if your trading turnover is less than Rs. 5 crores in a financial year. To avail of the above benefit, you need to first calculate turnover and profit on a presumptive basis based on section 44AD.
