Economic growth is directly related to the growth and expansion in corporate sector, financial institutions and government sectors. Well if we talk about growth then we cannot neglect the fact that for expansion or acquiring new opportunities, these sector would require huge amount of capital. On the other hand, it is also a fact that there are investors (Retail and Institutional) who want to invest their funds in order to earn interest on their income. Now to fulfil their financial needs they often look towards financial market.
The classification of financial market can be done on many basis such as on source, instruments which are being offered etc. But in simple form, it can be classified into 3 types of market and they are
- Stock Market
- Bonds Market
- Money Market
Stock Market is the place where the shares are being issued, bought and sold on a large basis. Bond Markets is the place where government securities, corporate bonds etc. are being issued and traded between the buyers and sellers. Money Market carries the financial instruments which are meant for the shorter period of time and often serves the demand of liquidity of the investors and fulfil short term financial requirement of companies. Examples are T-Bills, Commercial Paper etc.
Stock market not only deals with direct equity or trading of shares of the companies but also involves derivatives. Derivatives are the products which derive their value from the underlying assets and often used as a product for hedging against the volatility of the markets as well as economy. Examples of derivatives are Equity and Currency Futures & Options.
Taxation for Investors & Traders
Till now it was an overview of the various components of the financial market and the mechanism through which it operates. Now the most confusing part of stock market is taxation. Taxation is the main concern of every individual participating in the stock market. Investors or traders always invest their money into this market to gain profits and if losses are incurred then often seek to set it off against the profits made. Well, this complete concept is explained in this article so let’s take it one by one.
To know about the taxability in details, it is very important to know the major difference between trader and investor.
- Trader is a person who trades in equity (shares), derivatives on frequent basis and it can be classified as a business activity.
- Whereas, an investor is a person who invest in the shares of the companies and derivatives for the long term basis with a motive to earn profit and hedge himself against the volatility of the market respectively.
According to Income Tax Act of India 1961, an individual’s income is charged under 5 different heads such as:
- Income from Salaries
- Income from house property
- Income from Capital Gains
- Income from profit from Business and Profession
- Income from other sources
When we talk about taxability in stock market, then it mainly comes under two heads of income tax and they are:
- Income from Capital Gains and
- Income from Profits from Business and Profession.
Well if you are a trader then, your income from your trading will come under income from business and profession and your losses are treated accordingly, whereas, if an investor the income and losses made from stock market comes under the purview of Income from Capital Gains.
In stock market the trading activities takes place in two ways, firstly, intra-day trading and secondly delivery based trading. In intra-day trading, the shares are being bought and sold in the same day whereas in delivery based trading the shares investor holds share for a few days and sells it at a best price. Now taxability also differs from traders to investor and intra-day to delivery based trading.
- Taxation for traders
For traders, their income is taxed under head Income from Business and Profession. In this, their income is further classified as speculative business income or non-speculative business income.
1.a. Speculative Business Income:
If the income is generated through intraday trading of shares, then, the income is considered as speculative business income. It is also to be noted that if derivatives are being traded on over the counter basis i.e. not through recognized stock exchange, then the income arises would be charged as speculative business income.
Tax calculation for Speculative Business:
Speculative business income for traders is chargeable as per the prevailing tax slab rates. All the expenses occurred on the business should be adjusted from the profits earned and will be taxed accordingly (including income in other heads like income from salary, income from house property etc.)
For example, if Mr A, age 30 years, a trader, has following income during a financial year:
Rental income – Rs 240000
Profit from Intra-day trading – 100000
Profit from F/O trading(intraday) – 50000
Office rent – Rs 30000
Internet charges – Rs 4000.
Now the taxable income of Mr A will be calculated as follows
|Heads of Income||Amount (INR)||Amount (INR)|
|Income from House Property||2,40,000|
|Income from business and profession
· Profit from Intra Day
· Profit from F/O trading
Less : Office Rent
|Less : Deduction 80C to 80 U||Nil|
|Total Taxable Income||356000|
As per the tax slab rate
Up to Rs 250000 – Nil
Rs 250000- Rs 500000 – 10%
Rs 500000- Rs 1000000 – 20%
Above Rs 1000000 – 30%
Education Cess, SHEC cess – 3%
Therefore here tax liability comes to Rs 10,918.
Treatment of losses and Carry forward criteria
If for the given financial year, there are losses incurred from the speculative business, then the same should be adjusted from other Income from Speculative business. Speculative business loss cannot be set off from other income heads.
Suppose in any financial year, a trader does not have adequate speculative gains to adjust his losses, then the same loss can be carried forward till 4 succeeding assessment years and must be set off against speculative business income only.
1.b. Non Speculative Business Income
The income generated from trading of derivatives i.e. futures and options contracts, through recognized stock exchange or for delivery based trading (non-intraday but less than a year) is known as income from non-speculative business. The derivatives trading is considered as non-speculative because it is done for the hedging purpose.
Mr A, aged 35 have following incomes
Rental Income – Rs 240000
Profit from F/O –Rs 200000
Savings Bank Account Interest – Rs 8000
Long term Capital Gain Tax Liability – Rs 15000
Office Rent – Rs 36000
His income tax will be calculated as per the income tax slab rate.
|Heads of Income||Amount (Rs)||Amount (Rs)|
|Income from House Property||240000|
|Income from Business and Profession
· Profit from F/O
Less : Office Rent
|Deduction u/s 80TTA||8000|
|Total Taxable Income||396000|
Therefore as per the slab rate
Up to Rs 250000 – Nil
Rs 250000 – Rs 500000 – 10%
Rs 500000 – Rs 1000000 – 20%
Above Rs 1000000 – 30%
Education and SHEC cess – 3%
Total tax liability will be 15038 and Rs 15000 for LTCG so total Rs 30038.
Treatment of Losses and Carry forward criteria
If any financial year there is a loss from Non- Speculative business then, it can be set off against Income from Speculative as well as other non-speculative business. However, non-speculative business loss can be set off against any other head of incomes except income from salary.
If in any year, due to inadequate income in other heads, the loss from non-speculative business is not fully adjusted, then, the same could be carried forward for 8 succeeding assessment years.
Once the losses are carried forward, it cannot be set off against any other heads of income and should be adjusted against income from same head.
The different expenses that can be deducted from the income form business from speculative as well as non-speculative income are as follows:
- Telephone bills
- Internet bills
- Newspaper/Magazines Charge
- Computer Charge
- Brokerage, etc.
For better understanding let’s take a full-fledged example
Tax slab rate for AY 2016-17 for an individual below 60 years of age is
|Income Tax Slab||Rate|
|Up to Rs 250000||Nil|
|Rs 250001 – Rs 500000||10%|
|Rs 500001 – Rs 1000000||20%|
|Above Rs 1000000||30%|
For example, If Mr X, a trader made following income in a year
Income from intra-day trading of shares – Rs 300000
Income from House Property – Rs 400000
Income from Future and Option through recognized stock exchange – Rs 500000
Expenses on brokerage, computer charge and telephone bills are Rs 100000, 50000, 10000 respectively.
Now the tax liability of Mr X for the AY 2016-17 will be
|Heads of Income||Amount||Amount|
|Income from House Property||400000|
|Income From Business and Profession
· Speculative business
· Non-Speculative Business
Less Expenses incurred
Tax Liability on income of Rs 1040000 will be Rs 129986 after cess of 3%.
- The calculation of turnover is essential to make sure whether the audit should be done or not. In case of traders, the balance sheet as well as profit and loss statement should be maintained to keep the record of the transactions made during a year.
- For Intra-day equity trading, turnover is calculated by taking into account absolute sum of settlement profits and losses per share.
- For F&O trading, turnover will be calculated by absolute sum of settlement (profits and losses for F&O) per share and the sell side value of the option contract.
- After calculating the amount per share, the profits and loss for the whole year should be consolidated for estimating the turnover for the year.
The audit of accounts would be required by Chartered Accountant in following cases:
If for the financial year, the turnover exceeds Rs 1 Crore.
If turnover for the year is less than 1 crore and profitability is less than 8% of turnover (Sec 44 AB)
However, no audit is required if the gross total income including trading and other heads of income does not exceed Rs 200000.
Taxation for Investors
After the taxation of traders comes the taxation part for investors. An investor’s income from shares markets are charged under head income from Capital Gains. For the taxability under the head capital gain the holding period of the shares is important.
If the investors holds the shares for less than a year, then that holding will be taken as short term capital asset and the income or loss generated from that asset would be treated as Short Term Capital Gain or Loss. However, if the period of holding exceeds than a year, then such asset will be treated as long term capital asset and the income/loss generated by such asset on sale will be considered as long term capital gain or loss.
If long term capital asset in this case shares are sold through recognized stock exchange and STT (Securities Transaction Tax) are being paid on such transaction then. According to Sec 10(38) of Income Tax Act 1961, such income will be exempt and hence no tax is needed to be paid.
The rates applicable for Income from Capital Gains are as follows
- Income from the sale of short term capital asset – 15%
- Income from the sale of long term capital asset (listed under stock exchange and STT is Paid) – Nil
- Income from the sale of long term capital asset (other than listed shares and no STT paid) – 20%
For example, Mr A purchased 200 shares of Rs 100 each on 6th May 2015. He sold one lot of 200 shares on 7th September 2015 for Rs 150 and second lot of 200 shares on 9th October 2016 for Rs 180. Then the tax liability will be
For 200 shares of Rs 100 sold on 7th September 2015
Period of holding is less than a year, therefore will be charged as short term capital gain which will be Rs 10000 and hence 15 % tax will be Rs 1500.
For 200 Shares sold on 9th October 2016 the long term capital gain will be exempt, if sold through recognized stock exchange and STT is paid.
However if not sold through recognized stock exchange then, the tax will be charged.
The long term capital gain will be Rs 16000. Tax will be 20% therefore it comes Rs 3200. In long term capital asset the benefit of cost indexation can be enjoyed.
Settlement of Losses and Carry Forward criteria
If the losses has been incurred by the investor by the sale proceeds of long term capital asset or short term capital asset then, such losses can be set off as follows:
Short term capital loss can be set off against long term as well as short term capital gains.
Long term capital Loss can be set off against long term capital gain.
It is also provided that if the losses are not been able to settle in the previous year due to inadequate profits then, the losses can be carried forward for 8 years.
The long term and short term capital gain is taxed excluding the income from other heads. If the investor does not have any other income apart from capital gains and the income is less than the Minimum Exemption Limit, then, the shortfall could be deducted from the gains form capital assets.
For the investor the trading will be done on delivery based. So the turnover will be calculated as the sell side value of the stock.
Filling of return
The date for filling of return for individuals according to Income Tax Act 1961 is 31st July and for companies it is 30th September. In case the turnover exceeds Rs 1 Crore in any financial year then, the books of accounts needs to be audited by the Chartered Accountant.
Penalty for failing in filing the return within the stipulated time is .05% of turnover or Rs 150000, whichever is lower.
ITR forms needed to be filled while filing returns are
- For investor
- ITR 1 (for individuals having income from salary and interest income)
- ITR 2 (for individuals having income from salary, interest and house property)
- For Traders
- ITR 4 (for individuals and HUF’s having income from a proprietary business or profession)
- For Companies
- ITR 6
Well, this is the manner in which income tax will be charged in the stock market and thus all the points should be taken into consideration while investing in the stock market. For further details you can always contact your financial planner.