Understanding the Stock Market has always been a pain for the new comers who seek their future in the Stock Market as an investor. Investor requires basic understanding of Stock Market and related Tax issues when it comes to investing in the Market. The basics of Stock Market and Income Tax implications have been discussed in this article.
Basic Terms used in this article:
Stock Exchange: It is mandatory for the companies issuing securities to the public to get their securities listed on the Stock Exchange. Stock Exchange provides the investors a platform to buy and sell their securities as and when they like.
Stock Market: This term in general denotes the place where securities are traded.
Square off: It means to settle the transaction by taking the reverse position. Buying is settled against selling and Selling is settled against buying.
Stock Broker: Stock Broker is a regulated professional individual, usually associated with a brokerage firm, who buys and sells securities for investor through a stock exchange for some consideration.
Now we will discuss each segment of stock market and its tax treatment.
There are two segments in stock market:
I. Cash SegmentOnline GST Certification Course by TaxGuru & MSME- Click here to Join
II. Future Segment
Cash Segment: In this segment the securities are traded in two manners
a. Delivery Based Transactions (DBT): This transaction includes buying and selling the securities by physically delivering the securities. Though with the advancement of technology the securities are delivered in Dematerialized Form i.e. D-Mat Form. There are no such restrictions on person buying the securities by effecting deliveries to sell such securities on the same day. It means investor buying securities through such transactions can sell them any time they choose.
b. Intra Day Transactions (IDT): This transaction includes buying and selling the securities without actually transferring the same. The investor investing through this mode needs to square off the transaction the same day. In case the investor fails to square off the transaction on the same day, it will be squared off automatically by the Stock Broker.
This was the basic idea about the Cash Segment. Now we will discuss about the tax treatment given under Income Tax Act, 1961 for all the transactions associated with Cash Segment.
When it comes to Delivery Based Transactions, Income Tax Act treats the assessee either as carrying on such transactions as a business transaction or as an investment transaction. Whether the above transaction was carried as a business transaction or as an investment transaction depends upon the fact and circumstances. Given below some assistance from the lawmakers that helps in the differentiation between the two:-
Sale & Purchase of Securities will be treated as an investment transaction, if the following facts are present:
a. Assessee invests without using the borrowed money.
b. Assessee intention is not to trade the securities frequently and holding them for a longer period of time.
c. Assessee wants to earn Dividend or Interest.etc.
The lawmakers make above clarifications vide Circular No. 4/2007, dated 15-6-2007 for making the distinction and for reducing the litigations which arose due to treatment of the above transactions as business or investment transactions.But the above clarifications never resulted in resolving the litigations and a need was felt to provide such clarifications which can put an end to never ending litigation between assessee and the Income Tax Department. The lawmaker further provide clarifications through Circular No. 6/2016, dated 29-2-2016 and Letter F.No.225/12/2016/ITA.II, dated 2-5-2016, in a simpler manner and thus reducing litigations as well.
The Income Tax provides for a different tax treatment for the above transaction. If the transaction was proved to be a business transaction then Securities will be classified as Stock in Trade and the tax treatment will be accordingly of Profit and Gains of Business or Profession (PGBP) and if it is proved to be an investing transaction then Securities will be classified as Capital Asset and the tax treatment will be as per the Chapter of Capital Gain.
An investor may choose the transaction to be in either way and accordingly the Tax Treatment will follow.
Now if an investor does not want to carry on the transaction delivery based then another option is open i.e. Intra Day Transaction. The Income Tax provides that the income from Intra Day will be considered as a speculative business transaction and accordingly will be taxed under the head PGBP. Though, the losses from speculative business are treated differently.
The treatment for the losses from the above transactions have already been dealt under my previous article “Set off or Carry forward and Set off of Losses”
In the next part of this article we will discuss about the Future Segment of the Stock Market in quite a simple language. Future Segment forms a substantial part of the Stock Market.
Disclaimer:This Article is just for information sharing. No Liability in case of any error.