Taxation of Stock Market Transactions

Discover the intricacies of taxation for stock market transactions, distinguishing between investors and traders, and learn about capital gains tax, turnover calculation, and ITR form usage.

Being in the festival of Income tax where we celebrate the filing of Income tax returns. The most common and the most complicated query being asked from a CA is related to taxation of Stock market Transactions.

Before learning about the taxation part, you will have to find out whether you are an investor or trader. It is essential to find out because there are different provisions for traders and investors.

Let’s Start the discussion, There was a lot of ambiguity regarding if the person is a trader or an investor before 2016 but the Income tax department removed lots of ambiguity by issuing a circular on 2^nd March 2016 on identifying a person as an investor or a trader.

Some Common points of the circular were as under: –

1. F&O trading is considered a non-speculative business income.

2. Intraday Equity is considered speculative business income.

3. Equity delivery-based investments are considered as LTCG if holding is more than 1 year otherwise STCG but if the sale/purchase of investments is frequent* then it is recommended to declare it as non-speculative income instead of STCG.

4. If trading is the only source of income then classify income as business income instead of capital gain.

5. This circular classifies that you can be a trader and investor both at the same time.

*Frequent is not defined, however in general parlance, we take it as 5 crores.

Now if you have identified yourself as a trader or investor, it is good to discuss the taxation part.

Taxation for Investor

If you are an investor, there can be only two types of taxation: LTCG or STCG.

Long-term capital gain (LTCG): equity delivery-based investments where the holding period is more than 1 year

Short-term capital gain (STCG): equity delivery-based investments where the holding period is lesser than 1 year.

Taxes on long-term capital gains for equity and mutual funds are discussed below –

For stocks/equity – Exempt for 1^st 1 lakh and 10% exceeding 1 lakh if STT is paid. If STT is not paid then LTCG is taxed at a flat rate of 20%

Generally, STT is not paid on only those transactions which are not from the recognized stock exchanges.

For mutual fund – Exempt for 1^st 1 lakh and 10% exceeding 1 lakh for the equity-oriented mutual fund if the fund is non-equity oriented then LTCG is taxed at a flat rate of 20%.

A mutual fund is considered equity-oriented if at least 65% of the investible funds are deployed into equity or shares of domestic companies.

You have to stay invested for 3 years for the investment to be considered as long-term capital gain in the case of non-equity-oriented mutual funds.

When calculating capital gains in the case of non-equity-oriented mutual funds, property, gold, and others where you are taxed on LTCG, you get the indexation benefit to determine your net capital gain

Taxes on short-term capital gains for equity and mutual funds are discussed below –

For stocks/equity – 15% if STT is paid. If STT is not paid then STCG is taxed as per the applicable slab rate.

For mutual funds – Similar to STCG for equity delivery-based trades, any gain in investment in equity-oriented mutual funds held for lesser than 1 year is considered STCG and taxed at 15% of the gain. However, if the fund is non-equity oriented then STCG is taxed as per applicable slab rates.

Long-term capital loss/Short term capital loss can be carried forward for 8 years. LTCL can only be set off from LTCG however STCL can only be set off from LTCG/STCG.

Which ITR form is to be used by the investor?

• ITR3 (ITR 4 until 2017): When you have business income and capital gains.
• ITR 2: When you have a salary and capital gains or just capital gains.

Taxation for Trader

Here we will discuss all aspects of taxation when trading is declared as a business income, which can be categorized as Speculative or Non-speculative business income.

1. Speculative business income– Income from intraday equity trading is considered speculative.

2. Non-speculative business income– Income from trading F&O (both intraday and overnight) on all the exchanges are considered non-speculative business income.

Speculative losses can be carried forward for 4 years and can be set off only against any speculative gains you make in that period.

Non-speculative losses can be set off against any other business income except salary income in the same year. So, they can be set off against bank interest income, rental income, and capital gains, but only in the same year. You carry forward non-speculative losses to the next 8 years.

As a trader has to show his income as Business Income so he has to prepare proper books of accounts as per section 44AA.

Calculation of Turnover

In the case of Equity – Buy Value + Sale Value is considered as Turnover.

Profit = 500, Buy of Reliance = 2000, Sale of Reliance = 2500. Turnover = 4500

Loss = 500, Buy of Reliance = 2000, Sale of Reliance = 1500. Turnover = 3500

In the case of Futures – Profit and Loss is considered as Turnover.

Profit = 500, Buy of Reliance future = 2000, Sale of Reliance Future = 2500. Turnover = 500

Loss = 500, Buy Reliance future = 2000, Sale Reliance Future = 1500. Turnover = 500

In the case of Options – Profit and Loss + Sales Value is considered as Turnover.

Profit = 500, Lot size = 25, Buy of Bank Nifty option = 300, Sale of Bank Nifty Option = 320. Turnover = 500 + (320 * 25) = 8500

Profit = 500, Lot size = 25, Buy of Bank Nifty option = 300, Sale of Bank Nifty Option = 280. Turnover = 500 + (280 * 25) = 7500

Audit of the Books of Accounts will be compulsory to be done if the turnover is more than 10 crores as per Section 44AB of the Income tax act 2016.

If a taxpayer is both trader and investor then all the above provisions of trader and investors will apply.

Which ITR form is to be used by the trader?

ITR3 (ITR 4 until 2017): Because you have only business income.

In the case of Crypto

Profit is taxed at 30% flat

Set off of loss – Set off can be from the same script

Example- Loss in Bitcoin can not be set off from Gain in Ethereum. Loss in bitcoin can only be set off by Gain in Bitcoin.

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Disclaimer: Do consult a chartered accountant (CA) before filing your returns. The content above is for your general knowledge only. Content meant for Individual retail investors/traders in India.