Tax on stock market income: Are you among those investing in stock market but remain worried about income tax on the share transaction? Amit Gupta, MD, SAG Infotech, says, "It is the universal fact that the mechanism of the Stock Market is synonymous with the Big Bang theory. What I intend to say is that the Stock market is like an umbrella. There are equity shares, preference shares, debenture, mutual funds, derivatives and so on that comes within the domain of the Stock Market. So the purview of the stock market is large.

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"Whether you are a small investor or you are a Stock market geek, you have to pay tax and carry forward loss while making tax payment. So the entire mechanism of tax on the stock market transaction has been capsuled in one article. So, we shall begin the journey from scratch. In other words, we shall simplify the entire mechanics," says Amit Gupta. 

"Basic criteria of Transaction

Categorisation of securities i.e. shares, debentures, mutual funds, derivatives is one of the parameters of taxation, but it is not the sole criteria. However, we shall start learning from the t-factor and J-factor i.e. time factor and job factor.

In essence, the yardstick/benchmark of taxing stock market transactions is the time factor and job factor.

So the income from the stock market transaction can be divided into

1. Short term gains
2. Long term gains
Job factor means whether
1. Your involvement in the stock market is a full-time job
2. Your involvement in the Stock market is on a part-time basis

Tax treatment on the basis of t-factor (Time Factor)

Short Term Capital Gains occurs when profits from the stock market are earned by the trades that are squared up within 12 months.

Here, in this case, the tax rate on profit is 15 percent. However, In the case of short-term capital loss, the loss could be carried forward for the forthcoming 8 years, i.e. the loss could be set off with the short term capital gains, if there is any, for the forthcoming 8 consecutive years.

Moving to Long Term Capital Gain, it occurs when someone earns profit through the trades squared up after 12 months. Here in this case the tax rate is lower i.e. it is 10%.

Tax on the basis of Job Factor

Here, in this methodology, If an individual is trading in the stock market on part-time ( i.e. along with another full-time business) then it shall be treated equivalent to investment. Consequently, income from stocks (shares) shall be treated as business income.

If the core business of an individual is trading in a partnership firm or in a company and it’s specified in the chartered document that stocks(shares) are used as stock-in-trade, then trading of stock (shares) is a full-time occupation of an individual and so the consequent income shall be treated as a speculative business income.

The other important criteria of stocks (shares) are as follows:

The regular income through trading of stocks is considered as speculative business income. Contrarily, low-frequency trading in shares is treated as an investment.

Moreover, If an individual holds the stock (shares) for a prolonged period of time, then it’ll be equivalent to investment, and so short holding periods of stocks (Shares) are treated as speculative business income.

Tax criteria for Other securities — 

Debentures, Bonds and Mutual Funds

Capital gain from debentures, bonds and mutual funds can be divided into 2 criteria:

1. Short term Capital Gains — It is earned when an individual earns profit via sale of aforesaid securities within 36 months of purchase. Consequently, normal tax slab rate is applicable on these types of trades and losses can be carried forward for the forthcoming 8 years.

2. Long Term Capital Gains— It is earned through investment in bonds, debentures and mutual funds, when an individual makes profit through the sale of aforesaid instruments post 36 months of purchase. 

Tax treatment for other securities — trades in derivatives, commodities and currency

It is worthwhile mentioning here that the Income through trading in derivatives, commodities and currency is categorised as Non-Speculative Business Income and so is taxed as per the normal slab rates.

By clearing out this concept, one must also assume that the practical knowledge of this subject would benefit far better than theories therefore one must indulge himself in a actual environment of stocks."