In India, it is very difficult for all those who trade in shares to calculate the income tax on the profits from trading in the stock market.Today, a lot of individuals are trading in shares. Some of these profits are made, while some are lost.But, you should be aware of income tax on share trading, whether you are benefiting from the stock market or loss. Because you may have to undergo an income tax audit even if there are many losses, which we will discuss further.
In this article (income tax on share trading profit in India) we will discuss some points, such as –
- What is the concept of trader and investor in the stock market?
- How is the income of the stock market differentiated by taxation?
- The income earned from the shares will be reported in the income tax return in which head and which ITR FORM will be filled.
- How is taxation done on the income of the stock market?
- What are the audit rules when trading shares?
- What are the rules of income tax in case of loss due to trading in share market?
What is the concept of trader and investor in share market?
If you trade in the stock market, then you are seen in 2 ways-
- Are you a trader, or
- You are investor
For taxation of a person’s share trading income, it is important to know whether the person is a trader or an investor. Because the income tax has different heads of income for both of them and the rate of tax is also different.
If the reason for trading / investing in your shares is that you want to keep them with you for a long time and earn dividend income on them or want to earn some profit by selling them later, then you are an investor. Investor means that when you buy a shares, your intention is to keep them with you for a long period. If you are an investor, then you have to report the income or loss from those shares to the capital gains head. After that you have to divide those shares into long term capital gains and short term capital gains. You will be considered a trader when you trade more in the stock market or trade for a shorter period of time. In this case, your income will be reported to the business head. Also, if the income from shares is very high or materiality in your total income, then it will be considered as business income, not the income of capital gains.
How is the income of the stock market differentiated by taxation?
Income from the share market is either considered capital gains or business income. It will be considered as capital gains or business income, it depends on your being a trader or investor.
A person invests in the stock market with 2 types –
- Delivery based – Shares are delivered to your demat account.
- Non delivery based – in this you are not given delivery of shares.
If you make a non-delivery based investment in shares, it will always be considered your business income and it will have to show business income in the income tax return. A delivery based investment can be anything from your income business or capital gains, depending on whether you are a trader or an investor.
What kind of trading comes in delivery based or non delivery based shares?
It consists of 2 types –
- non -delivery based – This includes intraday trading.
- delivery based – This includes trading done in the future or option.
What is intraday trading?
Buying and selling stocks on any one day is called intraday trading. If you buy a stock in the morning and sell it in the evening or sell it in the morning and buy it back in the evening then it is considered intraday trading.
Shares are not delivered to you in intraday trading. The person doing intraday trading does not have to keep the stock with him for a long time. He only wants to earn from the movements of the shares on a particular day.
If a stock is bought on a particular day but is not sold on the same day, it will not be called intraday trading. When a person buys a share, he has to tell at the same time whether he will invest in intraday or delivery in a share based.
Income or loss from intraday trading will always be reported in your income from business or profession head.
Income / loss from intraday trading will be reflected in your business head in speculation business activity. If you have any loss in intraday trading, then you can also set-off it only from speculation business income. Apart from this, you are a salaried person and do intra day trading, then you will also have to fill the ITR form second, about which we will discuss further. Income from intraday trading will be added to your total income and there it will be taxed according to the slab rate.
In the calculation of income from intraday trading, you can take the rebate of the security transaction tax paid. Apart from this, other expenses that you have incurred in making income from this intraday trading can also be discounted, such as – brokerage, internet & phone bills, depreciation, salary, office rent etc. If your total income is not more than the basic exemption limit by adding the income from intraday trading, then you will not have to pay anything tax.
Trading in future or option – delivery based
Trading in the future or option is considered trading in delivery-based shares, because in this you are given the delivery of shares. It takes T + 2 working day for shares to come to your demat account. Just like if you buy shares on Tuesday, Just like if you buy shares on Tuesday, you will come to your demat account on Thursday. The income of trading in the future or option can be considered as income from capital gains or business. If it is considered as income of capital gain, then it is further divided into income of short term capital gain or long term capital gain. And, if it is considered business income, then it will be considered as non speculation business. If business income is considered, then this income will be included in your total income and tax will be levied according to the slab rate.
Founder & CEO| Fox Investor & A.V.A. Taxway Associates- Corporate & Tax Law Firm
Viibhor Agarwal is a Business & Brand Consultant as well as he is a Financial Expert his area of specialization is to guide Entrepreneur, Start-up’s and SME’s to build the brand value of business financially & legally. He has 8 year extensive experience in this sector