Introduction: Hello Tax Guru Readers, Welcome to our latest exploration on a crucial topic for taxpayers navigating the complex landscape of income tax, especially in the context of the stock market. The surge in demat accounts since the onset of the COVID-19 pandemic has brought many new investors into the fold, including retirees and homemakers. However, the enthusiasm for tapping into the stock market’s potential often comes with a lack of awareness about the tax implications of such transactions. This article aims to shed light on the tax treatment of stock market transactions, helping taxpayers to make informed decisions and manage their taxes effectively.
Stock Market Transactions are divided into two Parts:-
(1) Investing Activities (Buy and Sale of Equity)
(2) Trading Activities (Transactions other then Equity)
Tax Treatment of Delivery Based Transactions (Taxability of purchase and sale of Equity Shares and other securities
Delivery-based transactions include buying and selling the shares and other securities through demat accounts registered with brokers on the Recognised Stock Exchange. In India 2 stock exchanges are recognized i.e. National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
In Delivery Based Transactions profit or losses are reported under the head of Capital Gain. Further under the head ‘Capital Gains’, income is further classified into : (i) Long term capital gains, or (ii) Short term capital gains.
This classification is made according to the holding period of the shares. The holding period means the duration for which the investment is held starting from the date of acquisition till the date of sale or transfer.
In this article, we will cover the tax treatment on the listed securities like listed equity shares, bonds, bonds and debentures listed on a recognized Indian stock exchange, units of UTI and Zero-coupon bonds.
A. Short Term Capital Gains (STCG)
If the Equity Shares are sold within 12 months from the acquisition, then gain or loss arising is called Short Term Capital Gains or Loss (STCG or STCL). If the Seller sell at a higher price than the purchase price it’s called or Short Term Capital Gain (STCG) and if the seller sell at a lower price than purchase price it’s called Short Term Capital Loss (STCL).
While calculating the gain any expense incurred on sale then it can be deducted from the sale value or it’s shown under the expense on selling. Further, if any expenses are incurred at the time of purchase then it can be added to the Purchase or it’s can be shown under the expense on purchase.
Short-term capital gains are taxable at special rate i.e. 15% u/s 111A of the Income Tax Act, 1961. A special rate of tax of 15% is applicable to short-term capital gains, irrespective of your tax slab. It means that the slab rate is not applicable to STCG Transactions.
Short Term Capital Losses (STCL)
Any short-term capital loss arise from the sale of equity shares can be set off against short-term or long-term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for eight (8) years and adjusted against any short term or long-term capital gains arise during these eight (8) years.
It is to be noted that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income in a year is less than the minimum taxable income, filing an income tax return is compulsory for carrying forward the losses.
B. Long Term Capital Gains (LTCG)
If the Equity Shares are sold after 12 months from the acquisition, then gain or loss arising is called Long Term Capital Gains or Loss (LTCG or LTCL). If the Seller sell at a higher price than the purchase price it’s called or Long-Term Capital Gain (LTCG) and if the seller sell at a lower price than purchase price it’s called Long Term Capital Loss (STCL).
While calculating the gain any expense incurred on sale then it can be deducted from the sale value or it’s shown under the expense on selling. Further, if any expenses are incurred at the time of purchase then it can be added to the Purchase or it’s can be shown under the expense on purchase.
Before the introduction of Budget 2018, the long-term capital gain arising on the sale of equity shares or equity-oriented units of mutual funds was fully exempt from tax, i.e. no tax was payable on gains from the sale of long-term equity investments.
In Budget 2018, the Government had taken the big initiative and put the longterm capital gain into the tax bracket. If the long-term capital exceeding Rs. 1 Lakh on the sale of equity shares or equity-oriented units of a mutual fund, the gain made will attract a long term capital gains tax of 10% (plus applicable cess). Also, the benefit of indexation will not be available to the seller. The said provisions will apply to sell or transfers made on or after 1st April 2018.
Onwards, the Long-term capital gains (LTCG) over Rs 1 lakh on listed equity shares per financial year is taxable at the rate of 10% without the benefit of indexation.
Let’s understand it by the Example.
Example:-
Mr. A purchased shares for Rs.150 on 30th September 2017 and sold them for Rs.180 on 31st December 2018. The stock value was Rs.158 as of 31st January 2018. Out of the capital gains of Rs.30 (i.e. 180-150), Rs.8 (i.e. 158-150) is not taxable. Rest Rs.22 (30-8) is taxable as capital gains at 10% without indexation.
In another way, department give the benefit of fair market value available on 31/01/2018.
Actual Purchase price or Fair market value on 31/01/2018 whichever is more to be considered as a purchase value and which is deductible from the sale value.
In the Above example Fair market value of 31st January 2018 is more than the actual purchase value. Hence the capital gain is Rs. 22 (180-158) is taxed at the 10% without any indexation.
Note:- It is to be noted that the Capital Gains up to Rs. 1,00,000 is fully exempt. Only the capital gains above Rs. 1,00,000 is subject to the income tax.
Long Term Capital Losses (LTCL)
The benefit of Long Term Capital Losses (LTCL) on Equity Shares before Budget 2018 was not available. As there is common rule under Income tax is if there is income is not taxable on any particular transactions then loss on such particular transactions can not be used for the set off or can not be used for the carry forward.
As there is no any income or gain then there is no any loss or profit on that transactions.
In Budget 2018 government has amended the Income tax law to tax such gains made more than Rs 1 lakh at 10%, the government has also notified that any losses arising from such listed equity shares, mutual funds, etc., would be allow to set-off or carry forward.
Any long-term capital losses that arise on or after 1st April 2018 will be allowed as per the existing provisions of income tax i.e. To set-off against any Capital gain from any capital asset. Please note that taxpayer cannot set off long term capital loss against short term capital gains.
It is to be noted that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income in a year is less than the minimum taxable income, filing an income tax return is compulsory for carrying forward the losses.
Whether Delivery Based Transactions (purchase and sale of Equity Shares and other securities) are treated as Business Income?
It is to be noted that a taxpayer will be considered delivery based transactions as a business Income only if:-
> If the taxpayer buys the shares with high volume (Both in Quantity and Value).
> The taxpayers on a routine basis purchase and sell the Equity shares and other securities i.e. taxpayers engage in to the significant buying and selling transactions.
CBDT clarified that the taxpayers have the choice of how they want to treat such income. Once the selection is made, they must continue the same method in subsequent years, too, unless there is a major change in the circumstances of the case. Note that the choice has been made applicable only to listed shares or securities.
To reduce litigation in such matters, CBDT has issued the following instructions (CBDT circular no 6/2016 dated 29th February 2016)– If the taxpayer himself opts to treat his listed shares as stock-in-trade, the income shall be treated as business income. Irrespective of the period of holding of listed shares. The Assessing Officer (AO) shall accept the selection made by the taxpayer.
The Assessing Officer (AO) cannot put restrictions on taxpayers regarding the selection. Taxpayers may select the option of treating business income irrespective of the holding period.
However, stand once taken by a taxpayer in a particular assessment year, shall also be applicable in subsequent assessment years. And the taxpayer will not be allowed to take a different stand in subsequent years.
Taxability of Intraday Trading Transactions
Intraday Transactions means single day trading of buying and selling or selling and buying of shares and other securities otherwise than actual delivery of shares and other securities. It is not delivery-based Transactions. In layman’s language intraday means within day Trading.
It is required to be squared off/settled before or end of the day. If the Traders does not get desired price till the end of the day still, they need to settle the transactions.
A. Taxability Under Which Head?
These intraday transactions are in the nature of speculation. Therefore profit/Gains or Loss from these types of transactions are to be reported under the head of Business and profession. The reason is that it is not investing and actual delivery-based transactions hence it will not fall under the head Capital Gain.
It is purely considered a speculation business. Therefore, taxable under the Head of Business and Professions.
Form ITR-3 or ITR-4 is required to be filled by the taxpayers in case of intraday trading.
B. How to treat the Speculation Loss from Intraday Transactions?
If there is a loss from the intraday transactions then it is called speculation loss and it is only set off against the Speculation Income. Speculation Loss cannot set off against the Normal Business Income and any other head of income.
If any particular year there is no speculative income or speculative income is less than the speculation loss then such speculation losses can be carried forward for the period of 4 years only.
C. How to Calculate the Turnover for Intraday Trading?
“Absolute turnover” is considered in the case of Intraday Trading.
Absolute Turnover is the sum total of both Positive and Negative differences from trades.
Let’s understand it from the Below Example :-
Mr. Hitesh buys 5000 shares of XYZ Ltd at Rs. 200. He sells the shares at the end of the day at Rs.185. Loss = Rs.15 * 5000 shares = Rs. 75,000/-
On the next day, he sells 3000 shares of DEF Ltd at Rs.300. At the end of the day, he buys the shares at Rs.280. Profit = Rs. 20 * 3000 shares = Rs. 60,000/-
Absolute Turnover = Rs. 75,000+ Rs. 60,000 =Rs.1,35,000/-
D. When to carry out the Audit in case of intraday trading?
1. If the Trading Turnover is up to 2 crores
If the taxpayers offer profit from the intraday trading is less than 6% then they have required to carry out the Audit as per Section 44AD of Income Tax Act, 1961.
If taxpayers offer profit of more than or equal to 6% of Trading Turnover then tax audit is not applicable to them.
2. If the Trading Turnover exceeds 2 crores but up to 10 crores
If the taxpayers’ offer profit is less than 6% of Trading Turnover, the Tax Audit is applicable.
If the taxpayers offer a profit of more than or equal to 6% of Trading Turnover and have not opted for the Presumptive Taxation Scheme under Section 44AD, Tax Audit is applicable.
When the taxpayers offer a profit of more than or equal to 6% of Trading Turnover and have opted for the Presumptive Taxation Scheme under Sec 44AD, Tax Audit is not applicable.
3. If the Trading Turnover exceeds 10 crores
Tax Audit is applicable irrespective of the profit or loss offer by the taxpayers.
Note:-
(1) If the taxpayer opts for the tax audit or not but they have the option of choosing between the Old Regime and New Regime. The provisions of the old and new tax regimes are applicable to intraday traders same as applicable to traders having normal business.
(2) A intraday trader whose tax liability on the total taxable income from all the sources during the financial year exceeds INR 10,000 is liable to pay Advance Tax. Income for Intraday Trading is a speculative business income taxable at slab rates. Thus, an Intraday Trader is liable to pay Advance Tax as like others.
Taxability of Future and Options (F&O) Transactions
Future and Options Transactions are also known as Derivative Transactions. During the corona period, this topic become hot and in the limelight among the salaried and retired persons. As everyone wants an extra source of income and in corona period most people lose the job or mostly get the very less salary. To compensate for salary and business earnings and get the extra income many people go for the trading in future and options. The reason for the attraction is that the investment requires less and get the profit or loss within the day or week or month. Sometimes even in minutes.
As taxpayers are in the belief that there is no any requirement to show these transactions in the Income tax Return. Actually all the transactions are required to be reported under income tax return irrespective of losses. Even if the losses all this transactions are required to be reported under income tax.
Any Income from the Future and options transactions are to be considered as a Non-speculative business as per Section 43(5) of the Income Tax Act, 1961.
It is treated as normal business income so all the provisions apply like other normal business income.
All the expenses incurred by the traders in relation to Future and Options transactions are claimed as business expenses like other business.
A. How to Calculate the Turnover for Future and Options (F&O)?
Turnover is total of Favourable and Unfavourable differences and Premium received on sale of options (if any). If any reverse trades entered then the difference thereon also consider for the calculation of Turnover.
Let’s understand it from the Below Examples :-
Example 1
Mahesh buys 300 units of Futures @ Rs 150 and sells at RS 162. Also buys 200 units of options @ Rs 250 and sells at Rs 235. He also sells 100 units of options at premium of Rs. 205
Profit on sale of Futures Rs. 3,600 (300*12)
Loss on sale of Options Rs. -3,000 (200*15)
Premium on sale of Options 20,500 (100*205)
Total Turnover Rs. 27,100/- (3600+3000+20500)
Example 2
Nupur has earned a salary of Rs 17.50 lakh in FY 2021-22.
Nupur opened a trading account with a brokerage firm and paid Rs 3,000 as enrolment charges.
He has to pay 0.05% as brokerage charges for each F&O trade and paid a total of Rs 85,000 as brokerage charges during the year.
She has telephone expenses for the whole year of Rs 20,000 and a review of his past bills indicates about 50% of his bill is towards his F&O trade. Aditya spends a significant amount of time researching on the internet which help him improve his trading skills.
Her internet bill is Rs 12,000. When she looked up her trading statement and she found that loss from F&O trading is aggregating Rs 2.5 lakhs.
Her total turnover being Rs. 27 lakhs (determined on the basis of the method discussed above). Nupur is unsure if she should report her trading activity from F&O or she can ignore it since there is a loss.
Nupur has other income Rs 3.17 lakhs in the form of Interest income. Nupur must report her F&O trading transactions as a business.
F&O expense detail is as follows
| Enrolment Charges | 3,000 |
| Brokerage Charges (Annually) | 85,000 |
| Telephone Exp | 20,000 |
| Internet Exp | 12,000 |
| Total | 1,20,000 |
Profit/(Loss) from F&O
| F&O Loss | 2,50,000 |
| Expenses in F&O Transactions | 1,20,000 |
| Total Loss from F&O | 3,70,000 |
Nupur’s Total Income
| Salary Income | 17,50,000 |
| Interest Income | 3,17,000 |
| F&O Loss | 3,70,000 |
In the given case, income from the business has been declared at Rs. -3,70,000. Which can be adjusted against the Income of Rs. 3,17,000 and Remaining Loss of Rs. 53,000 cannot be adjusted against the salary Income which is carried forward.
The presumptive income @ 6% of his turnover is Rs 1.65 lakhs which is more than Rs -53,000.
Further, the total taxable income is Rs. 17.50 lakhs which exceeds the basic exemption limit of Rs 2.5 lakhs.
Thus, tax audit and income tax return become compulsory and filing of balance sheet and profit and loss in the income tax return are mandatory in this case.
B. Income Tax Return and Audit
If the taxpayers’ income exceeds the basic income tax limit in the case of individuals and HUFs then they are required to file the income tax return and in the case of other persons (other than Individuals and HUFs) income tax return is required to file if any business activity carried out by them.
If the taxpayers offer profit from the F&O trading is less than 6% then they have required to carry out the Audit as per Section 44AD of Income Tax Act, 1961.
If taxpayers offer profit of more than or equal to 6% of F&O Trading Turnover then tax audit is not applicable to them.
Further if the turnover from F&O transactions exceeds Rs. 2 crore but up to Rs. 10 crore then audit is applicable only if the taxpayer’s cash receipts or cash payments exceeds 5% of the gross receipts or turnover.
if the turnover from F&O transactions exceeds Rs. 10 crore then audit is compulsory irrespective of Profit or Losses.
C. How to treat the Loss from Future and Options (F&O) Transactions?
F&O trading loss is considered a non-speculative loss (normal loss). It can be adjusted against any other business income and also any other head of income with some conditions as per the income tax rules.
If any particular year there is no F&O income or F&O trading income is less than the F&O loss then such losses can be carried forward for the maximum period of 8 years only.
Conclusion: Navigating the tax implications of stock market transactions can be a daunting task, but with the right knowledge and understanding, taxpayers can manage their investments more effectively. Whether dealing with short-term or long-term capital gains, intraday trading, or futures and options transactions, it is crucial to understand the tax treatment applicable to each category. Moreover, adhering to tax filing deadlines and understanding the conditions for tax audits are essential to avoid penalties and make the most out of your investments. By staying informed and compliant, investors can not only optimize their tax obligations but also contribute to a transparent and efficient tax system.
Author Bio
Thanks for sharing valuable article
Who said tax audit is applicable for the turnover between below10 crores if profit under 6% ? This wrong interpretation of law. Audit is required if you opted presumptive method in last year return and now you are reverting normal one and profit is below 6%.
I have declared loss last year and filed return without tax audit. My return was accepted and 1431a received without any objection.
Dear Sanjivji there are two views as directly not covered under 44AD but for safer side taxpayer may opt the option of audit irrespective profit or loss. Mostly taxpayers are opted audit if profit below the mention limit and turnover exceeding the prescribed limit even though below 10 CR. I herewith present only one view which is mostly adopted by all the taxpayers. your comments are most welcome. feel free to connect and comment on my articles.