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📢 Are your Stock Market profits tax-compliant? Know the Income Tax implications before filing your ITR!
The surge in stock market participation in India has led to an exponential rise in Demat accounts, with investors ranging from salaried professionals to retirees and homemakers. While trading and investing offer lucrative returns, many taxpayers unknowingly misreport or fail to disclose stock market transactions in their Income Tax Returns (ITRs)—leading to legal non-compliance and potential tax penalties.
Under the Income Tax Act, 1961, stock market transactions—including equity investments, intraday trading, futures, and options (F&O)—are subject to specific tax treatment, ranging from capital gains taxation to business income classification. With recent Budget 2024 amendments, understanding updated tax rates, exemptions, set-off rules, and audit applicability is critical for accurate tax filing and compliance.
🔎 What You’ll Learn in This Guide:
✔️ Taxation of Stock Market Transactions – Investing vs. Trading Income
✔️ Short-Term vs. Long-Term Capital Gains (STCG & LTCG) – New Tax Rates & Thresholds
✔️ Intraday & Derivatives Trading (F&O) – Speculative vs. Non-Speculative Income
✔️ Tax Audit Applicability & Compliance Rules – When is an Audit Required?
✔️ Budget 2024 Amendments & Their Impact – Latest Changes for Traders & Investors
✅ Stay tax-smart! This expert guide simplifies complex tax rules, ensuring you file your Income Tax Returns (ITRs) accurately while maximizing compliance and minimizing tax liabilities.
🚀 Let’s dive into the details and decode the tax treatment of your stock market earnings!
Further trading Activities are categorized in two Parts:
PART A
Understanding of Tax Treatment on Delivery Based Transactions (Taxability of purchase and sale of Equity Shares and other Securities)
Investing in the stock market has become a significant source of wealth creation for many individuals. Delivery-based transactions, a common form of investing and trading, involve the purchase and sale of shares and other securities through Demat accounts registered with brokers on recognized stock exchanges. In India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two primary recognized stock exchanges.
To ensure accurate reporting of income and compliance with tax laws, it is essential to understand the taxation of these transactions under the Income Tax Act, 1961, particularly the provisions related to Capital Gains.
1. Taxation of Delivery-Based Transactions
What Are Delivery-Based Transactions?
Delivery-based transactions refer to buying and selling securities where the ownership of shares is transferred to or from the investor’s Demat account. Securities covered include:
- Listed equity shares
- Bonds and debentures
- Units of UTI (Unit Trust of India)
- Zero-coupon bonds
Classification Under the Head ‘Capital Gains’
The profit or loss arising from delivery-based transactions is classified under the head “Capital Gains.” Further, Capital Gains are divided into:
- Short-Term Capital Gains (STCG)
- Long-Term Capital Gains (LTCG)
The classification depends on the holding period, which is the duration between the acquisition date and the sale date of the securities.
2. Tax Treatment of Short-Term Capital Gains (STCG)
Definition of STCG
If equity shares or other specified securities are sold within 12 months of acquisition, the gain or loss arising is termed as Short-Term Capital Gain (STCG) or Short-Term Capital Loss (STCL).
Tax Rates for STCG
- Before Budget 2024: Short-term capital gains on listed equity shares and units of equity-oriented mutual funds were taxed at 15% under Section 111A, irrespective of the taxpayer’s slab rate.
- After Budget 2024: The tax rate on short-term capital gains from listed equity shares, units of business trusts, and equity-oriented mutual funds has been increased to 20%.
Deductions for Expenses
When calculating STCG, the following can be deducted:
- Expenses on purchase (added to the acquisition cost).
- Expenses on sale (deducted from the sale value).
Treatment of STCL
- Set-Off: Short-term capital losses can be set off against both short-term and long-term capital gains.
- Carry Forward: Unutilized STCL can be carried forward for 8 assessment years, provided the Income Tax Return (ITR) is filed within the due date.
3. Tax Treatment of Long-Term Capital Gains (LTCG)
Definition of LTCG
If equity shares or other specified securities are sold after 12 months of acquisition, the gain or loss arising is termed as Long-Term Capital Gain (LTCG) or Long-Term Capital Loss (LTCL).
Tax Rates for LTCG
- Before Budget 2024: LTCG exceeding INR 1,00,000 on listed equity shares and equity-oriented mutual funds was taxed at 10% without indexation benefits.
- After Budget 2024:
- LTCG exceeding INR 1,25,000 on listed equity shares and equity-oriented mutual funds is now taxed at a flat rate of 12.5%.
Key Amendments in Budget 2024
- The holding period for long-term classification has been standardized:
- 12 months for listed equity shares and equity-oriented mutual funds (irrespective of whether listed or unlisted).
- 24 months for other assets, including shares listed outside India.
- The indexation benefit for LTCG is no longer available, aligning with the flat tax rate of 12.5%.
Exemptions and Deductions
- LTCG up to INR 1,25,000 on listed equity shares and equity-oriented mutual funds remains exempt.
Treatment of LTCL
- Set-Off: Long-term capital losses can be set off against LTCG.
- Carry Forward: Unutilized LTCL can be carried forward for 8 assessment years.
4. Important Considerations for Taxpayers
- File Returns on Time:
Filing your ITR before the due date is crucial for availing the carry-forward benefit for both short-term and long-term losses. - Special Provisions for Mutual Funds and Market-Linked Debentures (MLDs):
- For specified mutual funds acquired on or after 1st April 2023 and market-linked debentures (under Section 50AA), taxation rules differ.
- Taxpayers should refer to specific provisions for accurate compliance.
- Impact of Budget 2024 Changes:
The changes introduced in Budget 2024 simplify the holding period classification and provide a uniform tax structure for all categories of assets, except for land and buildings. These changes aim to streamline compliance while ensuring higher revenue collection.
Here’s the updated example with two scenarios where the capital gains exceed Rs. 1,00,000 but upto Rs. 1,25,000 for capital gains of Rs. 1,35,000 for Example 2, reflecting the Budget 2024 changes:
Example 1: Capital Gains Exceeding Rs. 1,00,000 (But Below Rs. 1,25,000)
- Purchase Date: 15th May 2017
- Actual Purchase Price: Rs. 200 per share
- FMV on 31st January 2018: Rs. 250 per share
- Sale Date: 15th October 2024
- Sale Price: Rs. 460 per share
- Number of Shares: 500
- Total Sale Value = Rs. 500 × 460 = 2,30,000
- Deemed Cost of Acquisition FMV on 31st January 2018 or Actual Purchase Price (whichever is higher): = Rs. 250 × 500 = 1,25,000
- Taxable Capital Gains Taxable Capital Gains = Total Sale Value – Deemed Cost of Acquisition = Rs. 2,30,000 – Rs. 1,25,000 = 1,05,000
- Tax Treatment
- The taxable capital gains of 1,05,000 are below Rs. 1,25,000, so no tax is payable as per the Budget 2024 exemption threshold.
Example 2: Capital Gains Exceeding Rs. 1,25,000
Details:
- Purchase Date: 15th May 2017
- Actual Purchase Price: Rs. 200 per share
- FMV on 31st January 2018: Rs. 250 per share
- Sale Date: 15th October 2024
- Sale Price: Rs. 520 per share
- Number of Shares: 500
Step-by-Step Calculation:
- Total Sale Value
= Rs. 520 × 500 = 2,60,000 - Deemed Cost of Acquisition
FMV on 31st January 2018 or Actual Purchase Price (whichever is higher):
= Rs. 250 × 500 = 1,25,000 - Taxable Capital Gains
Taxable Capital Gains = Total Sale Value – Deemed Cost of Acquisition
= Rs. 2,60,000 – Rs. 1,25,000 = 1,35,000 - Tax Treatment
- Capital Gains Tax: As taxable gains exceed the 1,25,000 threshold, the amount above Rs. 1,25,000 is taxed.
- Taxable Gains: Rs. 10,000
- Tax Rate: 12.5% (flat)
- Tax Payable: 10,000 × 12.5% = Rs. 1,250
- Total Sale Value
- Fair Market Value (FMV): Gains are calculated by considering the higher of the FMV on 31st January 2018 or the actual purchase price.
- Exemption Threshold: Gains up to Rs. 1,25,000 are exempt from tax as per Budget 2024 changes.
- Flat Tax Rate: Gains exceeding Rs. 1,25,000 are taxed at 12.5% without indexation.
Understanding of Tax Treatment on Delivery Based Transactions (Taxability of purchase and sale of Equity Shares and other Securities)
When it comes to the purchase and sale of equity shares and other securities, the tax treatment depends on whether the transactions are classified as “business income” or “capital gains.” For delivery-based transactions, the classification can significantly impact the tax liability of the taxpayer. Let’s dive deeper into when these transactions may be treated as business income.
Key Factors in Determining Whether It’s Business Income or Capital Gains:
For delivery-based transactions to be considered business income under the Income Tax Act, 1961, certain conditions must be met:
- Volume of Transactions:
- If the taxpayer is buying and selling shares or securities in high volumes, both in terms of quantity and value, these transactions may be considered as part of the taxpayer’s regular business activities.
- Routine Trading:
- If the taxpayer regularly buys and sells equity shares or securities (i.e., significant and frequent transactions), it suggests that the transactions are carried out with the intention of earning profits akin to a business venture.
In such cases, these transactions are likely to be classified as business income, and not as capital gains.
CBDT Clarification on the Matter:
To bring clarity and reduce litigation, the Central Board of Direct Taxes (CBDT) has issued a circular (CBDT Circular No. 6/2016, dated 29th February 2016). This circular allows taxpayers the flexibility to choose how they want to treat income from listed shares or securities. The important points from this circular are as follows:
- Taxpayer’s Choice: If the taxpayer chooses to treat their listed shares or securities as stock-in-trade, the income will be considered business income, regardless of the holding period.
- Consistency in Treatment: Once the taxpayer opts for this treatment in a particular assessment year, they are required to continue applying the same method in subsequent years, unless there is a significant change in their circumstances.
- Assessment by the Assessing Officer (AO): The Assessing Officer cannot impose restrictions on taxpayers regarding their choice. Taxpayers have the right to decide whether the income from delivery-based transactions will be treated as business income, even if the shares are held for the long term.
What Happens If the Taxpayer Chooses Business Income?
If a taxpayer chooses to treat the income from delivery-based transactions as business income, they will be subject to the regular tax provisions applicable to business profits, including:
- Business Expenses: Any expenses incurred in the course of trading (brokerage fees, demat account charges, etc.) can be deducted from the business income.
- Stock-in-Trade: The shares or securities will be considered as “stock-in-trade” and will be subject to the provisions related to business income, not capital gains tax.
Important Considerations for Taxpayers:
- Consistency is Key: Once a taxpayer has opted to treat their delivery-based transactions as business income, this choice will bind them for future assessments. The taxpayer cannot switch between business income and capital gains treatment from year to year unless their circumstances change.
- Impact on Tax Filing: If the taxpayer opts for the business income classification, they must file their tax returns under the appropriate section of the Income Tax Act, such as Income from Business or Profession. This could potentially affect the overall tax liabilities and deductions available to the taxpayer.
- Flexibility for Small Investors: For smaller investors who engage in occasional trading or invest in shares for long-term capital appreciation, such transactions may still be treated as capital gains, even if they involve delivery-based transactions.
PART B
Understanding of Tax Treatment of Trading Activities
Taxability of Intraday Trading Transactions: A Detailed Overview
A. Taxability and Applicable Head for Intraday Trading Income
B. Treatment of Speculation Loss from Intraday Trading
C. How to Calculate Turnover for Intraday Trading?
Example:
Let’s consider the following scenario:
- Ramesh buys 3000 shares of ABC Ltd. at Rs. 250 each and sells them at Rs. 240 by the end of the day. The loss from this transaction is:
Loss = (250−240) × 3000 = Rs. 30,000
- The next day, Mr. Ramesh sells 4000 shares of XYZ Ltd. at Rs. 200 each and buys them back at Rs. 210. The profit from this transaction is:
Profit = (200−210) × 4000 = Rs. 40,000
- Now, the Absolute Turnover is the sum of the positive and negative differences from all trades:
Absolute Turnover = 30,000 + 40,000 = Rs. 70,000
D. Audit Requirements for Intraday Trading
- If the Trading Turnover is Below Rs. 3 Crores (Revised Limit from 1st April 2023):
- If the trader’s profit from intraday trading is less than 6% of the turnover, the taxpayer is required to undergo a tax audit under Section 44AD of the Income Tax Act, 1961.
- If the profit exceeds 6%, the trader is not required to undergo a tax audit, provided the turnover is below 3 Crores.
Note: In some cases, intraday trading may not fall under the scope of Section 44AD, depending on the nature of the transactions.
- If the Turnover Exceeds Rs. 10 Crores:
- Regardless of the profit or loss, a tax audit is mandatory if the turnover exceeds 10 Crores.
E. Other Tax Considerations for Intraday Traders
- Option Between Old and New Tax Regimes: Intraday traders have the option to choose between the Old Regime and the New Regime while filing their income tax returns. The provisions under both regimes are applicable to intraday trading income, similar to other business income.
- Advance Tax Liability: Intraday traders whose total taxable income exceeds 10,000 in a financial year must pay advance tax. Since the income from intraday trading is classified as speculative business income, it is subject to taxation at applicable slab rates. Thus, intraday traders must comply with advance tax requirements like any other business taxpayer.
Taxability of Future and Options (F&O) Transactions: A Complete Guide
A. Taxability of Income from F&O Transactions
B. How to Calculate Turnover for F&O Transactions?
The turnover for F&O trading is the total of favorable and unfavorable differences (i.e., profits or losses) and any premiums received from the sale of options. If reverse trades are entered (e.g., closing a position by making an opposite trade), the difference arising from those trades is also included in the turnover calculation.
Let’s take an example to understand how the turnover is calculated:
Example 1:
- Rajesh buys 200 units of XYZ Ltd. Futures at Rs. 100 each and sells them at Rs. 110. The profit from the Futures transaction is:
Profit from Futures = (110−100) × 200 = Rs.2,000
- He also buys 150 units of ABC Ltd. Options at Rs. 250 each and sells them at Rs. 240, resulting in a loss of:
Loss from Options = (250−240) × 150 = Rs. (-1,500)
- Additionally, Mr. Rajesh sells 100 units of Options at a premium of Rs. 300:
Premium from Options = 300 × 100 = Rs.30,000
Now, the total turnover for Mr. Rajesh would be:
Total Turnover = 2,000 + (−1,500) + 30,000 = Rs.30,500
Example 2:
Mr. Rohit earned a salary of Rs. Rs. 15,00,000 in FY 2021-22. He opened a trading account with a brokerage firm and paid Rs. 4,000 as enrollment charges. Mr. Rohit had to pay a brokerage charge of 0.04% for each F&O trade and ended up paying a total of Rs. 70,000 in brokerage charges throughout the year.
His telephone expenses for the year amounted to Rs. 18,000, and after reviewing the bills, it was determined that 40% of the telephone bill was related to F&O trading. Mr. Rohit also spends a significant amount of time researching on the internet to improve his trading skills. His total internet bill for the year was Rs. 10,000, and he determined that the bill was for trading purposes.
Mr. Rohit discovered that his loss from F&O trading was Rs. 3,00,000.
Total Turnover:
After calculating the turnover based on the methodology discussed earlier, his total turnover for F&O trading amounts to Rs. 35,00,000.
Income from Other Sources:
In addition to the F&O losses, Mr. Rohit has other income of Rs. 2,50,000 from Interest Income.
Despite incurring a loss from F&O trading, Mr. Rohit must report his F&O trading transactions as a business in his Income Tax Return.
F&O Expense Details:
| Enrolment Charges | 4,000 |
| Brokerage Charges (Annually) | 70,000 |
| Telephone Exp | 18,000 |
| Internet Exp | 10,000 |
| Total Expenses | 1,02,000 |
Profit/(Loss) from F&O Trading:
| Loss from F&O Trading | (3,00,000) |
| Expenses in F&O Transactions | (1,02,000) |
| Total Loss from F&O | (4,02,000) |
Mr. Rohit’s Total Income:
| Salary Income | 15,00,000 |
| Interest Income | 2,50,000 |
| F&O Loss | (4,02,000) |
Analysis of Mr. Rohit’s Taxation
- In this case, Mr. Rohit’s income from the business (F&O trading) is declared at -4,02,000. This loss can be adjusted against his other income of Rs. 2,50,000 from interest income. The remaining loss of Rs. 1,52,000 (4,02,000 – 2,50,000) cannot be set off against salary income, but it can be carried forward for future tax years.
- The presumptive income at 6% of the turnover (Rs. 35,00,000) amounts to 2,10,000, which is greater than the remaining loss of Rs. 1,52,000.
- Rohit’s total taxable income after considering the F&O loss and other income stands at Rs. 13,48,000, which exceeds the basic exemption limit of Rs. 2,50,000. As a result, filing an Income Tax Return becomes mandatory.
- Furthermore, since his total turnover exceeds 3 crore, and assuming he doesn’t meet the 6% profit condition, tax audit under Section 44AB becomes applicable.
- Balance Sheet and Profit and Loss account are also required to be filed along with the ITR.
C. Income Tax Return Filing and Audit Requirements for F&O Trading
- Filing Income Tax Return:
- If your total income exceeds the basic exemption limit, you must file an ITR. In the case of business entities, ITR must be filed even if the income is from a source other than salary or wages.
- F&O transactions, whether profitable or loss-making, must be reported under business income.
- Tax Audit Requirements:
- If your income from F&O trading is less than 6% of your turnover, you are required to undergo a tax audit under Section 44AD of the Income Tax Act, 1961.
- However, if your profit exceeds 6% of the turnover, you are not required to undergo an audit.
Further, the audit requirements vary with the turnover:
- If the turnover exceeds 3 crore but is less than Rs. 10 crore, a tax audit is applicable only if the taxpayer’s cash receipts or cash payments exceed 5% of the gross receipts or turnover.
- If the turnover exceeds 10 crore, a tax audit is mandatory, irrespective of the profit or loss.
D. How to Treat Loss from F&O Transactions?
Losses arising from F&O trading are considered non-speculative business losses, and these losses can be set off against other business income or any other heads of income, subject to certain conditions laid out in the Income Tax Act.
If there is no F&O income or if the F&O income is less than the F&O loss, the loss can be carried forward for up to 8 years and set off against future business income.
Final Thoughts
In conclusion, understanding the tax implications on stock market transactions is crucial for investors and traders in India. Whether you’re dealing with equity shares, futures and options, or intraday trading, staying informed about the latest tax provisions can help ensure compliance and optimize tax outcomes. As the stock market continues to attract more participants, it’s important to file accurate tax returns and seek professional advice when necessary.
At Taxgroww, we strive to simplify tax-related complexities and keep you updated on the latest developments, ensuring you make the most of your investments while staying tax-compliant. Stay tuned for more insights, and let us guide you through every step of your tax journey.