Importance of Filing Tax
Being responsible citizens of our country, it’s our responsibility to abide by the laws and regulations of the country and help in our nation-building. For the welfare of a nation, the Government has the responsibility to fulfill the increasing development needs of the country and its people by way of public expenditure, and one of the primary sources of revenue of the Government for the same is the tax collected. By paying tax, we are contributing to the development of our nation and our beloved citizens.
If you incur net revenue loss during your business or profession in a year, you are not obliged to pay tax, but you should make sure that you file your returns with the Income-tax department to record the loss you incur so that the same can be set off in subsequent years and reduce your tax liability in the subsequent years. The Income Tax laws of our country offer multiple options to reduce a person’s tax liability and support them in their journey to success in business or profession, the exemptions allowed on Health and Life Insurance, Investments to Pension schemes and Provident Fund, Deduction on Housing loan interests, Investments on Machinery, etc are aimed to reduce the tax liability of a person or business.
Developing a good tax culture in the country is important for the welfare of a nation and its citizens. Proper awareness of the taxation in our country and especially those relevant to one’s business or profession will definitely help for the success of the business. This article is aimed to give our readers a basic idea about taxation in the Stock Market and to support them in their Investing and Trading Journey.
Let’s begin our new journey to enrich our knowledge ….!!!
A Glimpse of Taxation in India
The Government of a nation requires money for the development of the country, and one of the major sources of revenue for the Government is Taxes. Besides the taxes, a Govt does have other sources of income like Rents received on Properties held by Govt, Dividends from company shares owned by Govt, Fees collected for services provided by the Govt, etc. The Annual Union Budget, in a broader sense, is equivalent to the Financial Statement of the country in which all the Receipts and Expenses of the Govt are detailed.
The Constitution of India, In Article 265 lays down that “No tax shall be levied or collected except by authority of law”. Accordingly, to levy tax law needs to be framed by the Govt. and the constitution gives the power to levy and collect Taxes to the Central and State governments. Parliament and State Legislature are empowered to make laws on the matters enumerated to each respecting the Seventh Schedule of Article 246 of the Constitution of India.
The Income Tax law in India comprises the Following Components,
The Income Tax Act 1961 came into force on April 1, 1962, which contains sections 1 to 298 and schedule I to XIV detailing Provisions and Explanations of Sections, subsections, and clauses therein. The Income-tax act 1961 undergoes changes every year with changes brought in by the Annual Finance Act Passed by the Parliament.
Every Year the Finance Minister of Govt of India introduces the Finance Bill in the Parliament’s Budget Session, when the Finance Bill is passed by both houses of the Parliament and gets assent of the President, it becomes the Finance Act. Amendments are made to the Income Tax Act 1961 and other tax laws by the Finance Act.
The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). CBDT is empowered to make rules for carrying out the purpose of the Income Tax Act. For Proper administration of the Income Tax Act 1961, CBDT frames rules from time to time and these rules are collectively called as Income Tax rules 1962.
Circulars or Notifications are issued by the Central Government or CBDT from time to time to Clarify the scope of any provisions or to deal with any specific problems which also form part of the Income Tax Law.
Legal decisions of the Court are an important and unavoidable part of the Income Tax law. During the implementation of the Income Tax Act, disputes can arise and the judiciary will give the final decision on the disputes. The decisions given by the High Courts will be applicable to its respective jurisdiction, and the law laid by the Supreme Court is the law of the land.
Tax can be broadly classified into two categories,
- Direct Tax
- Indirect Tax
Income Tax is the Most significant Direct Tax. Income Tax is levied on an Assessee’s Total Income and such total income has to be computed as per provisions of Income Tax Act 1961. For Computation of the Total Income, the Income of a Taxpayer is classified into Four Heads and are,
- Salaries
- Income From House Property
- Profits and Gains from Business or Profession
- Capital Gains
- Income from Other Sources
GST and Customs Duty are the significant Indirect Tax at present. Earlier several Indirect Taxes were levied in India, namely, Excise Duty, Customs Duty, service tax, VAT, Central Sales Tax, Entry Tax, Purchase Tax, Entertainment Tax, Luxury Tax, Advertisement Tax, etc. But on July 01, 2017, the Indirect Taxation in India witnessed a major shift with the introduction of a unified indirect tax regime wherein a large number of Central and State Indirect Taxes were amalgamated into a single tax – Goods and Services Tax (GST). Customs duty continues to be there even after the GST Regime.
Income Tax Slab Rates Applicable for Individual / HUF for Financial Year 2021-2022 are as follows,
- For Individual / HUF
| Total Income (In Rs.) | Tax Slab Rate |
| <= 250,000 | NIL |
| >250,000/- & <=500,000/- | 5% of the amount Exceeding Rs.250,000/- |
| >500,000/- & <=100,000/- | 12,500/- + 20% of amount Exceeding Rs.500,000/- |
| > 1,000,000/- | 112,500/- + 30% of amount Exceeding Rs. 1,000,000/- |
- For Senior Citizens (Age Between 60 and 80)
| Total Income (In Rs.) | Tax Slab Rate |
| <= 300,000 | NIL |
| >300,000/- & <=500,000/- | 5% of the amount Exceeding Rs.300,000/- |
| >500,000/- & <=100,000/- | 10,000/- + 20% of amount Exceeding Rs.500,000/- |
| > 1,000,000/- | 110,000/- + 30% of amount Exceeding Rs. 1,000,000/- |
- For Resident Individuals of Age 80 and Above
| Total Income (In Rs.) | Tax Slab Rate |
| <= 500,000 | NIL |
| >500,000/- & <=100,0000/- | 20% of amount Exceeding Rs.500,000/- |
| > 1,000,000/- | 100,000/- + 30% of amount Exceeding Rs. 1,000,000/- |
- As per Section 115, BAC Individuals and HUF also have an Option to File Taxes at concessional rates as below,
| Total Income (In Rs.) | Tax Slab Rate |
| <= 250,000 | NIL |
| >250,000/- & <=500,000/- | 5% |
| >500,000/- & <=750,000/- | 10% |
| >750,000/- & <=100,0000/- | 15% |
| >100,0000/- & <=125,0000/- | 20% |
| >125,0000/- & <=150,0000/- | 25% |
| > 150,0000/- | 30% |
The Total Tax liability computed as per the above rates can be increased by 4% for Health and Educational Cess and Surcharge rates as applicable.
Income Tax Act 1961 specifies certain fixed tax rates for specific types of Income, and those relevant to the stock market participants are of LTCG and STCG.
- Long Term Capital Gains on Transfer of Equity Shares are exempt upto Rs. 100,000/- and LTCG amount Exceeding 100,000/- is taxed at 10%, if STT is Paid. (Holding Period of shares greater than 12 months)
- Short Term Capital Gains on Equity Shares of a company or Equity Oriented Funds are taxed at Flat 15%. (Holding Period of shares less than 12 months)
The aforementioned is a glimpse of a few basics of taxation in our country, having basic knowledge on the Taxation of a country is really important in one’s journey towards financial freedom. Taxation is a complex topic and proper tax planning can help you to save a decent amount of money, which you would have otherwise paid if the right guidance is not provided. The Income Tax Act 1691 has multiple sections and provisions which help us to save Taxes like Investments in PPF, Life Insurance, ELSS Funds, etc as well as deductions allowable under various sections. Since the Tax Laws get continuously updated from time to time, keeping track of them and having in-depth knowledge on all provisions and clauses of the Income Tax Act is an intimidating task for a common man, so it’s always advised to consult a Chartered Accountant or Tax Specialists to Plan your Taxes Properly, lower your tax liabilities and filing them on time.
Taxation in Stock Market
There are mainly two categories of stock market participants, Investors and Traders. While discussing Taxation we have to distinguish them separately as computation of the Total Income as per the Income Tax Act 1961 is different for them. Investors are mainly taxed on Long term Capital Gains and Short term Capital Gains which have a fixed slab rate defined as we saw in the introduction section. Whereas Trading in both Equity and Derivatives market is considered as a business income and falls under the Head of Income from Business or Profession.
Let’s get to know a furthermore about the taxation for Investors and Traders in Stock Market
Taxation for Investors
The Investors category represents the stock market participants whose motive is to make benefits of the future growth potential of a company, they invest in stocks, take delivery of it, hold the same for a period and sell them when the stock price reaches their target price or targeted return on investment. Here the Holding period of the Equity Shares of a company is the deciding factor of an Investors taxation.
How are Long Term Capital Gains Calculated?
If an investor buys a stock, holds it for a period of more than 12 months, and sells it afterward, then the capital gains the investor received will be called Long Term Capital Gains (LTCG).
For Equity shares LTCG up to 1 Lakh is exempted from Tax, you will have to pay tax only on the amount exceeding 1 Lakh at the rate of 10% if Securities Transaction Tax (STT) is Paid.
Suppose Mr. A Purchases 1000 shares of Reliance at 1800/- on 15th Feb 2019 and sells the same at a price of 2000/- on 15th March 2020, then the capital gain he receives will be 1000 x (2000 -1800) = 200,000/-. Here the holding period of the stock is more than 12 months and hence the Capital Gains will be classified as LTCG. The Tax liability of Mr.A for the Financial Year 2019-2020 for the above trade will be 1000 x (200,000 – 100,000) x 10% = 10,000/- Rs. Since LTCG has a base exemption of Rs.100,000/- Mr. A has to pay tax at a 10% rate only on the LTCG exceeding the base exemption value.
How are Short Term Capital Gains Calculated?
If the Holding Period of Equity shares by an Investor is less than 12 months, then the capital gains arising from such a transaction are called Short Term Capital Gains (STCG). STCG on Equity shares are taxed at a flat 15% rate.
Taking the same above example of Mr. A buying 1000 shares of Reliance at 1800/- Rs on 15th Feb 2019, holding it for a period of 360 days and selling it at a price of Rs. 2000/- on 10th Feb 2020. The Capital gains Mr.A receives during this trade will be classified as Short Term Capital Gains as the Holding Period of the Equity shares is less than 12 months in this case. The Tax liability of Mr. A for the above trade will be 1000 x (2000 – 1800) x 15% = 200,000 x 15% = 30,000/- Rs.
Benefits Of LTCG
You might have noticed the significant difference in the tax liability of an Investor Mr. A in the case of LTCG and STCG. An investor should always keep the LTCG and STCG tax liability when selling the shares so as to make intelligent trading decisions. In the above case if Mr.A has kept the stock for 365 days and then his tax liability would have been 10,000/- only instead of 30,000/-. If your hold period is quite less, like swing trading for a short-term period of 1 to 3 months, 6 months, etc then you should not worry that much about STCG, as you could free up your capital from trade and find better opportunities again and again.
What if an Investor Makes a Loss in the Stock Market?
In the stock market sometimes our views about the growth potential of a company can go wrong when we do not do a thorough study on the fundamentals and businesses of the company. Even Though we have invested in a Fundamentally strong company with strong future potential, seeing some minor correction in the market we might sell the stock within a short period due to fear of further fall in prices. In these cases, the investor incurs a loss, where it Short Term Capital Loss or Long Term Capital Loss.
If the Investor sells the stocks with a holding period of fewer than 12 months and books losses, then such a loss incurred to the investor is called Short Term Capital Loss. If the Holding Period of the Equity shares were more than 12 months, and afterward the investor sells it and book losses on the trade, then such capital losses are classified as Long Term Capital Loss.
If you have booked losses on a trade, then such an action is irreversible and you have to bear that loss. But the Income Tax department offers you a significant option to carry forward your losses to consequent years if you file your losses. Since the Investor has incurred losses in the trade, whether its the short term or long term, he is not liable to pay any Income tax on it as no income or capital gain is generated in the trade, rather the investor faces capital loss.
Benefits of Filing Income Tax When You Incur A Loss
When you incur losses in Stock Market, that year you must mandatorily file your Income Tax Returns in Consultation with a Tax specialist, so as to officially record your losses with the Tax department and carry forward the losses to subsequent financial years. If you carry forward your losses, then you can set off the losses against the profit made in the subsequent years and you will eventually have to pay tax only on the net profit, thereby reducing your tax liability.
Suppose if you Incur a long-term capital loss of Rs.100,000/- during the FY 2019-2020, and you have filed your ITR stating the loss and carrying forward them. In FY 2020-2021 you have generated a Long Term Capital Gain of Rs.250,000/-. Since you have carried forward the Long term Capital Loss from Previous Year, in FY 2020-2021 you have to pay LTCG tax at 10% on (250,000 – 100,000 -100,000) = 50,000 x 10% = 5,000/- Rs. Your loss of Rs. 100,000/- from PY and Base Exemption of Rs.100,000/- on LTCG are exempted from taxation. But If you have not filed your losses during FY 2019-2021 you would be liable to pay a tax of (250,000-100,000) x 10% = 15,000/- Rs during FY 2020-2021.
So it’s really important to File your Income Tax Returns every year properly in consultation with a Tax specialist when you make a profit or loss in a Financial Year. It’s worth noting that certain losses can be carried forward up to 8 years, which is a significant period of time, and if you are serious about your trading and investing journey you know that period is more than enough to make you profitable, you would have set off all your losses incurred in the initial years of trading or investing and you will be generating conservative profits by then already.
Let’s learn more about the set-off and Carry forwarding losses,
Set-off and Carry Forward Losses in Investment
The Income Tax Act allows the facility to set off losses incurred in one business with the profit gained on another business and eventually enabling the taxpayer to pay tax on the net business income generated. In the introduction part of this article, we have mentioned the various heads of income as per the Act. For an Investor in the stock market, the revenue or profit he generates will be classified under the Head of Capital Gains, the Net Loss incurred and included in the Head Capital Gains cannot be set off against any other Heads of Income, but can be set-off within the same head based on the provisions of the Act.
As per the Income Tax Act 1961, the Long Term Capital loss incurred by an Investor can be Set-off only against Long Term Capital Gains generated in that year. If during a Financial Year if an investor is facing net Long Term Capital loss, he can carry forward the loss to the consequent 8 Years and Set-off it with the Long Term Capital Gains generated then.
In the case of Short Term Capital Loss, it can be set off against any gains under the Head of Capital Gains. That means Short Term Capital Loss can be set off against Short Term Capital Gain as well as Long Term Capital Gain. If during a Financial Year an Investor is having net Short Term Capital Loss, then he can carry forward this loss to the subsequent 8 Years and set off the same against any capital gains generated during these years.
We often hear that the Stock Market is a place where many people lose money, but if you are an informed and intelligent stock market participant who puts in some effort to continuously learn and improve your skills in the stock market and pursue your stock market journey in a disciplined manner, you could definitely win in the market. The Income Tax Act allows you to carry forward any loss you incur to nearly 8 years as in the case we saw above, that period is more than sufficient to make your Investment journey a success if you put in the efforts.
Taxation for Traders
Traders are those people in the Stock Market, who carry out Intraday Equity Trading or Intraday Derivatives Trading or Delivery based trading of Derivatives or those who perform a significant amount of short term trades in a year. The income generated from trading activities in the stock market is categorized under the head “Income from Business or Profession” as per the Income Tax Act 1961.
So Trading activities in the Stock market is considered a Business activity. The Income Tax Act 1961 based on the nature of the business classifies them into Speculative Business and Non-Speculative Business.
Intraday Equity Trading comes under the category of Speculative Business. Intraday Equity Traders do not take delivery of the stocks, they speculate the stock’s upward or downward movement and try to capitalize that move and make a profit within a day.
All Trading activities on the Derivatives market, Futures, and Options, whether it’s Intraday or Delivery based Trades are categorized as Non- Speculative Businesses under the Income Tax Act.
The Profit or income generated from trading activities will be taxed as per the Tax slab rates where you fit into. It varies based on the profits you generate. Since Trading Income is categorized as a business income, a major advantage Traders could make use is to claim the expenses he incurs for the Trading activities. He could mention expenses such as Brokerage Provided, Exchange Fees, Stamp Duty, Internet Charges, Payment for any Trading apps/tools, and much more. All these expenses can be deducted from the Profit generated from trading and will be liable to pay tax on the Net Profit of the Financial Year.
What if a Trader Makes Loss?
Trading in the Stock Market is an activity that requires thorough knowledge and great skills, and many traders lose money in the market. Trading is considered as a Business and mocking loss in a business in some period is an integral part of any business journey. When a trader incurs losses during a Financial year he must file the same during that year’s Income Tax Return and carry forward the loss to subsequent years.
Income Tax Act 1961 offers the facility for Traders who properly file their Income Tax Returns to Set-off and Carry Forward the losses to subsequent years. Since trading is considered as a business you will have to maintain proper books of account, balance sheet, P&L Statement, etc, so it’s better to consult with a tax specialist or Chartered Accountant to plan your tax and maintain or develop the books of account and help you to effectively file your returns.
Set-off and Carry Forward Business Loss
Income Tax Act specifies that Speculative Business Loss can only be set off against the gains generated from Speculative business carried out by the assessee. If an assessee cannot set off the Speculative business loss in the current year the same can be carried forward to a maximum of 4 years and can be set off against the speculative business gains generated then. That means Intraday Equity losses can be set off only against intraday equity gains and can be carried forward to a maximum of 4 years. It’s worth noting that Intraday Equity losses cannot be set off against profit from Swing Trade or F&O Trades.
Non-Speculative Business Loss can be Set-off against any other Non-speculative business gains and the Unabsorbed loss, if any, can be carried forward to subsequent 8 years. If an F&O Trader makes losses in a year he can set off the losses against any business he runs, like a restaurant, coffee shop, etc, and if there are any unabsorbed losses during a financial year, then he can carry forward the same to next 8 years and set-off against the Non-speculative business profits generated then.
Audit Requirement for Trading Income
It’s obligatory for a person carrying on business or profession to get his accounts audited by a chartered accountant before a specific date if the below conditions are met,
- If Turnover during the Year Exceeds 5 Crores
- As per Section 44AB, if the Turnover is less than 2 crores and profit is less than 6% and your Total Income Exceeds the basic threshold limit of 2.5 Lakhs.
The Finance Bill of 2021 increases the Turnover limit from 5 crores to 10 crores. Accordingly, a person carrying out business will not require his accounts to be audited by a CA if his total turnover does not exceed Rs.10 Crore and cash receipts and cash payments during the year do not exceed 5% of the total turnover.
Turnover calculation in Intraday trading and F&O Trading is different, we are not going to dig deep into the Turnover calculation in this article. Nowadays most Stock Brokers provide us the Turnover information in the Tax P&L Report, so do check the same to have an eye on your total trading turnover.
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