Ask Us March 21

Q. My spouse, a homemaker, plans to trade in the stock market with an investment of less than ₹1 lakh. Kindly advise on the tax implications of trading in equities (intraday trade and others).

Brokers informed us they collect various statutory charges apart from their brokerage. I also want to know whether one should pay tax on the profit earned per annum or on the basis of turnover. If so, what is the rate and how should she file I-T returns? Kindly advise.

V. Sarath

A. Stock market trading is a risky activity with a high possibility of capital losses.

We hope your spouse has studied companies and markets carefully and has a risk-management strategy in place before undertaking this.

The profit you make on stock trading can be subject to income tax as long and short-term capital gains or taxed as business income, which can be speculative or non- speculative.

Capital gains taxation usually applies to investors in stocks — those who take delivery of their positions and hold their stocks for one day or more. Whether your profits from trading get treated as long-term or short-term capital gains depends on how long you held the stock before selling them.

If you hold a stock for 12 months or more, the profit you make on selling (over and above your purchase price) get treated as long-term capital gains. All long-term capital gains you make during a year will be taxed at a flat 10% (without indexation benefits) after exempting ₹1 lakh of such gains each year.

If you hold a stock that you bought for between 1 day and 12 months, the profit you make on the sale will be treated as short-term capital gains and taxed at a flat 15%.

Business income

The profit you make through intraday trading in the cash markets (where you don’t take delivery but close out the position within a session) is usually treated as business income.

Business income is clubbed with your other sources of income (say salary, interest, rent etc) and taxed at the income tax slab rate applicable to you. When your trading profit is classified as business income, you are allowed to deduct all the costs you incurred towards this activity (securities transaction tax, brokerage, Internet and phone bills) from your total income before calculating the tax on it.

For traders with no other source of income apart from trading, the income tax rate could work out to be quite low in this route, because they would get taxed at the lower slab rates (zero tax on up to ₹2.5 lakh a year and 5% on the excess up to ₹5 lakh). Losses on speculative business income can be carried forward but only set off against profit from similar income in future years.

Apart from income tax, all transactions through the stock exchanges in listed securities in India attract the securities transaction tax (STT) which will be automatically charged by your broker on the trade.

STT is levied at 0.1% of the transaction value on delivery-based purchases or sales of shares and at 0.025% on the sale transaction on intraday trades or non-delivery trades.

Besides the brokerage payable to the broker on your turnover, States levy stamp duty at different rates on the total turnover, exchanges levy transaction charges, SEBI levies a flat turnover fee and you need to pay GST at 18% on the brokerage and transaction costs. The depository you are with may levy charges too.

As the classification of your profit from stock market trades as capital gains or business income can be subject to interpretation, it would be best to use a qualified accountant to file your returns if you engage in stock trading.

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Printable version | May 29, 2020 4:49:19 PM |

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