The stock market in India is regulated by SEBI, and taxation on gains or losses is governed by the Income Tax Act, 1961. This article explores the types of transactions in the stock market, their tax implications, and the turnover calculations. Additionally, it covers tax audit requirements for investors and traders.
Page Contents
- Type of transactions in Stock Market
- Head of Income under which stock market transactions are taxable
- Calculation of Turnover For Futures and Options and Intraday Transactions
- Calculation of Turnover For For Equity shares held as investment
- Section – 44AA – Maintenance of Books of Account for Stock Market Transactions
- Tax Audit under section 44AB for Stock Market Transactions
Type of transactions in Stock Market
i. Intraday Transactions
ii. Delivery Transactions
Intraday transactions are those transactions in which no physical delivery has been taken and the transaction gets settled on the same day itself. The purpose of trading in Intraday transactions is to play with the volatility of the market and to obtain gain/loss immediately.
Delivery of Transactions means that the physical delivery of a particular stock obtained in the demat account after making the payment of such transaction. The objective of taking delivery is for investment purpose, may be for short term or for long term, and not for trading the volatility on a particular day.
Head of Income under which stock market transactions are taxable
According to Proviso (d) and (e) of Section 43(5) of the Income Tax Act, 1961 trading in derivatives of the Securities carried out in a recognised stock exchange and trading in commodity derivatives carried out in a recognised stock exchange, respectively are not speculative transactions. Therefore, trading in derivatives of the securities and commodity derivatives will be treated as normal business income or loss under the head Profits and Gains from Business or Profession. The gain/loss from such transactions shall always be Short term Capital Gain/Loss as such transactions gets squared off maximum in 3 months.
Also it is pertinent to note that the intraday transactions made in the equity shall be considered as Speculative Transactions. Therefore, all intraday transactions in any stock of the equity market on a recognized stock exchange shall be treated as Speculative Transactions under the head Profits and Gains from Business or Profession.
However, if any delivery of any equity share obtained and held for more than one year from the date of transaction, the gain or loss from such transaction shall be treated as Long Term Capital Gain/Loss otherwise it shall be treated as Short Term Capital Gain/Loss.
Also if the delivery of shares held as stock in Trade, being the business of assessee is Trading in Shares, then the gain/loss shall be treated as Business Income under the head of Profits and Gains from Business or Profession.
Summary :
| Type of Transaction | Trading In | Treatment |
| Intraday | Equity | Speculative Income / Loss |
| Intraday | F&O – Equity / MCX | Non Speculative Business Income / Loss |
| Delivery | F&O – Equity / MCX | Non Speculative Business Income / Loss |
| Delivery | Equity | Long Term Capital Gain/ Short Term Capital Gain / Business Income(Held as Stock) |
Calculation of Turnover For Futures and Options and Intraday Transactions
- The total of favourable and unfavourable differences (Profit/Loss) shall be taken as turnover. In other words, all the differences, whether positive or negative are aggregated for calculating the turnover is known as Absolute Gains.
- Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.
- In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Example – Profit from Index A is Rs 100 and Loss from Index B is Rs 65. Therefore, in present case, the total turnover for Intraday or F&O shall be Rs 165 and not Rs 35.
| Type of Transaction | Trading In | Treatment |
| Intraday | Equity | Speculative Income / Loss |
| Intraday | F&O – Equity / MCX | Non Speculative Business Income / Loss |
| Delivery | F&O – Equity / MCX | Non Speculative Business Income / Loss |
| Delivery | Equity | Long Term Capital Gain/ Short Term Capital Gain / Business Income(Held as Stock) |
- The total of actual value of sale price shall be considered as turnover.
Summary :
| Calculation of Turnover | |
| Intraday Equity | Absolute Profit |
| Intraday F&O (Equity/MCX) | Absolute Profit |
| Delivery F&O (Equity/MCX) | Absolute Profit |
| Delivery Equity | Actual Sale Value |
Section – 44AA – Maintenance of Books of Account for Stock Market Transactions
- Individual & HUF = if his income from business exceeds Rs 2.50 lakhs or his total turnover exceeds 25 Lakhs in any one of the three years immediately preceding the previous year
- Other Than Individual & HUF = if his income from business exceeds Rs 1.20 lakhs or his total turnover exceeds 10 Lakhs in any one of the three years immediately preceding the previous year
Tax Audit under section 44AB for Stock Market Transactions
Case -1 : If Normal Provisions are adopted by the assessee
Tax Audit is applicable if Turnover of business exceeds Rs 10 Crores provided cash expenses and cash income is restricted to 5% otherwise the limit of Rs 1 crores will apply.
Books of accounts are required to be maintained as per Sec 44 AA, if applicable.
Case -2 : The assessee opted Sec – 44 AD (Presumptive Taxation)
Tax Audit is applicable if assessee declares profit of less than 6% from Business. It is option to the assessee to opt Sec-44AD or not.
This section is applicable to Resident Individuals, Resident HUF and Resident Partnership Firms only and not LLP.
No books of accounts are required to be maintained in this section as per Sec 44 AA of the Income Tax Act, 1961.
(Disclaimer: Though full efforts have been made to state the interpretations correctly, yet the author is not responsible / liable for any loss or damage caused to anyone due to any mistake / error / omission)
Author Bio
Regards
Naman Gupta
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