When you invest in the stock market, you may trade in more than just shares. You may invest in futures and options in the derivatives segment. This allows you to invest in multiple asset classes to earn higher profits.
However, when you trade in the stock markets, you need to report your income under the appropriate heading for taxation purposes. You may report the income from share trading either as capital gains or business income. In addition to these, you need to pay the Securities Transaction Tax (STT), service charges, brokerage, and exchange fees.
- Capital gains
If you invest as a trader, which means you take delivery of the shares in your demat account, the profits are classified as capital gains.
- Long-term capital gains
If you hold your investments for a period of one year or more, the profits are termed as Long-Term Capital Gains (LTCG). There was no tax on the LTCG until Budget 2018. You will now have to pay a 10% LTCG tax if the gains exceed INR 1 lakh per annum. However, if you sell your equity holdings (that have been held for one year or more) before March 31, 2018, the capital gains, if any are exempt from tax.
A long-term capital loss may neither be carried forward nor adjusted.
- Short-term capital gains
If you earn Short-Term Capital Gains (STCG) on shares held for less than one year and have not paid the STT, the profits are added to your income. These gains are taxed as per your income tax slab. However, if you have paid the STT, the STCG tax is levied at a flat rate of 15% plus the surcharge and education cess.
In case you incur a short-term capital loss, you may offset these against STCG.
- Business income
In case you trade on the stock market frequently and do not make deliver-based purchases, the gains are treated as business income.
- Speculative income
When you buy and sell shares on the same trading day, it is known as day trading. Profits or losses arise from day trading are considered as speculative. Any profits are added to your income and the tax on share trading is levied as per your income tax bracket.
- Non-speculative income
When you trade in the derivatives segment (futures and options), any income from such activity is classified as non-speculative income. The taxes on such profits are added to your business income and taxed at the applicable tax slab. However, losses, if any may be offset against business profits, which will reduce your tax liability.
Tax liability on dividend income
In addition to capital appreciation, you may earn income through dividends. As per the taxation laws, dividends in your hands as an investor are tax-free. However, the company pays the Dividend Distribution Tax (DDT) before disbursing the amount to you.
Before you understand the tax liability on your stock trading activities, it is important to understand whether you earn capital gains or business income. This is because as per the Income Tax laws, the tax treatment for business income differs from that on capital gains.
Generally, if you increasingly trade in delivery-based transactions with a few non-delivery-based trades, it is advisable to classify your profits as capital gains. However, to ensure there is no ambiguity or error, it is recommended you consult a qualified chartered account before filing your taxes.