How Gains/Losses on Shares and Mutual Funds are getting taxed?
If you are a stock market trader/investor, this article is for you!!
We are going to discuss taxation on gains and losses you are going to make in the Indian stock market via listed shares, mutual funds, ETFs, small cases etc (hereby called securities in this article). Let me make it clear at the beginning itself. Tax on gains and losses on the above instruments is taxed in the same way. Let’s discuss this most required topic without wasting much time.
Types of Gains/Losses in Securities:
One can trade in the stock market as a day trader (refers to a person who purchases and sells securities on the same day, often called an intraday trader) or an investor (who holds securities even for a single day). Intraday transactions are speculative in nature and hence gains/losses from intraday trading are taxable as Speculative Business Income. We will discuss more this in the next parts of the article.
Gains or losses in securities for investors can be classified as short term/long term based on the period for which you own the security before selling. If securities are sold within 12 months of purchase, gains or losses you make will be termed as Short-term Capital Gains/Short-term Capital Loss. Else, gains/losses will be termed as Long-term Capital Gains/Long-term Capital Losses.
An important point to be noted here is in order to carry forward our losses (be it intraday or capital gains), IT Return for that year should be filed on or before the due date. Else, we can not carry forward the loss we made in that year.
Taxation of Gains/Losses from Intraday Trading:
As already discussed, these gains are taxable as speculative business income. Gains/Losses from this business can only be set off & carried forward against other speculative businesses only. Such loss can be carried forward for 4 years.
Suppose, a person owns a retail store & does intraday trading. He earned Rs. 5 Lakhs from retail store business and lost Rs. 2 Lakhs in intraday trading in the stock market. He cannot set off the loss from intraday trading with profit from the retail store business. In this case, his total income for that year will be Rs. 5 Lakhs and he will be able to carry forward Rs. 2 Lakhs loss to next year.
Let’s assume the reverse case scenario i.e He gained Rs. 5 Lakhs in intraday trading and lost Rs. 2 Lakhs in retail store business. Now, he can set off losses from retail store business with gains from intraday trading and pay tax only on balance Rs. 3 Lakhs.
Taxation of Short-term Capital Gains/Losses (STCG/STCL) :
As per Section 111A of the Income Tax Act, STCG is taxable at the rate of 15% (irrespective of the rate at which you are paying tax on other income) plus applicable surcharge & cess . If your income is less than Rs. 50 Lakhs, these gains are taxable at the rate of 15.60% (15% Income Tax + 4% Cess on Income Tax).
Suppose you have incurred Short-term Capital Loss, then you can use the loss to set it off against Short-term capital gains or Long-term capital gains from any asset. If the Short-term capital loss is not set off entirely in the year in which it was incurred, it can be carried forward for 8 Years and adjusted against the Short/Long-term Capital Gains we make in those years.
Taxation of Long-term Capital Gains/Losses (LTCG/LTCL) :
As per section 112 of the Income Tax Act, Long term capital gains up to Rs. 1 Lakh per year are exempt from Income Tax. Gains in excess of Rs. 1 Lakh are taxable at the rate of 10% (irrespective of the rate at which you are paying tax on other income) plus applicable surcharge & cess. If your income is less than Rs. 50 Lakhs, these gains are taxable at the rate of 10.40% (10% Income Tax + 4% Cess on Income Tax).
Suppose you have incurred Long-term Capital Loss, then you can use the loss to set it off against Long-term capital gains from any asset. If the Long-term capital loss is not set off entirely in the year in which it was incurred, it can be carried forward for 8 Years and adjusted against the Long-term Capital Gains we make in those years.
Summary:
The above content can be summarized as under:
| Type of Income | Tax on Gains | Loss can be Set-off against income from | Loss can be Carry Forward for |
| Day Trading | As per your Slab | Only Day Trading | 4 Years |
| Short term | 15% | STCG/LTCG | 8 Years |
| Long term | 10% | LTCG | 8 Years |
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Thank You,
CA Pavan Kalyan
Content Writer – Team TD
