Clarity of Income Tax on Stock Market transactions - YouTube

Income Tax! This word gives us jitters whenever we hear it

No one likes paying Income Tax. Everyone wants to keep earning income without paying tax

But Income tax is a very important source of revenue for our country

Which ultimately plays an important role for our country’s progress

Well done to you if you’re paying income tax that you’re providing for India’s development

In this video, from the stock market perspective or from financial market perspective

I will discuss the income tax provisions that you should be aware of

I will discuss the income tax provisions that you should be aware of

I’m a Chartered Accountant and I will discuss the income provisions around the financial market

I have made a document and show it to you as a reference and tell you the different types of tax that need to be paid in the financial market

When I say tax, I mean Income Tax here. I will not discuss the indirect tax in this video

Focus on this document. Here, I have clearly categorized the different types of tax in an excel sheet

If any investor trading in the cash market

Cash market is when you trade on delivery basis in the cash segment

Cash segment can be BSE, NSE, or any other exchange

If you incur profit working in this segment

If you trade today and square it up within 12 months or if you picked up delivery and returned it within 12 months

It means that it’s your Short Term Capital Gain. It’s Capital Gain since you’ve earned it and it’s short term since it’s before 12 months

You need to pay a tax of 15%

If you incur a loss, that you bought today and sold it at a loss and at the end of the year cumulatively

If we add up all the trades and if I incur a short term capital loss at the end of the year

Then govt allows you to carry forward the loss for the next 8 years

If you incur a short term capital gain next year, you can set it off with last year’s loss

And you don’t need to pay tax on it the next year

Secondly, if I am incurring profits after 12 months, if I buy it today and sell it after 12 months

And incur profits after 12 months, then you need to pay 10% tax if you incur a profit more than 1 lac

Long term capital gain was introduced last year. It was free before but the govt decided that

If you’re earning in the long term, then you shouldn’t have any problem paying 10% tax

But if you’re earning upto 1 lac, then you don’t need to pay any tax on it

If you incur a loss then it can be carried forward till the next 8 years

But remember that your loss can only be set off with the long term capital gains

But you can’t set off long term capital gain with the short term capital gain

It’s very logical that if the tax rate of long term is 10% then the govt. Wouldn’t want

That the loss of 10% be adjusted with the tax of 15%.

Any long term capital loss can be set off with long term capital gain in future

Thirdly, if you’re in intraday trading in the cash market, then it’s not capital gain

If you’re not taking delivery and buying and selling the same day

Then it’s your speculative business income. According to govt. if you’re trading the same day then you’re speculating

It’s not your business to trade. This is a speculative business income and your normal tax slab

The individual tax slabs for individuals and normal corporate tax for corporates

This speculative business income will be added to your normal tax slab

If you incur a loss it can be carried forward for the next 4 years as it is speculative income

Or a speculative loss which will be allowed to carry forward for the next 4 years

And do remember that speculative loss can be setoff with speculative income

If you’re an individual and in intraday trading, then you need to consider it a business

And pay speculative tax accordingly. Speculative tax is not very different

It will be added as income from business in your existing tax slab

If you’re investing in mutual funds or debt funds or you hold a debenture or bond other than zero coupon

There are many zero coupon bonds that get principal redemption when they expire

If you invest on one of debenture, bonds, mutual funds or debt funds

And if you sell within 36 months then your profit will be as per your tax slab

If you’re an individual then your normal tax slab decided by the government

You need to bear tax accordingly. If you incur a loss then you can carry forward it for the next 8 years

And adjust it with any type of income as your tax slab is adjusting with any type of income

So you can adjust the loss with any type of income

If you hold it for long term. Here the definition of long term is different with respect to these funds

And then with respect to equity. If you hold on to these funds for more than 36 months

Then it’s considered as long term and you need to pay a tax of 20%

If you incur a loss them you need to carry it forward till next 8 years

And if you want to adjust it then you can only adjust it with long term capital gain

Another important concept is indexation. When you sell anything after 36 months, you get a long term benefit

Then govt provides an indexation benefit that if you sell after 36 years

The cost of inflation is high. Income Tax department computes an index every year

Known as inflation index. They ask you to pay 20% tax on the profit that can adjusted with indexation

You can understand this concept in detail from your Chartered Accountant as it’s very critical

If you are able to reap the benefits of indexation, then you should take advantage of it.

Unfortunately you don’t get the indexation benefits of bonds and debentures

Lets go to the next point. If you trade in the cash market very regularly and if you consider these stocks as business

If this is a part of your business. There are two types of people

One whose work is separate and trades part-time in the stock market, it means that you’re an investor

But if you’re not into any business, and these stocks that you hold is a part of your business

Then you consider it as stock in hand. It means that it’s facilitating your business that’s why you’re holding on to these stocks

In that scenario, it will be considered as your business and will be treated as a business income

In which scenario will the government consider it as a business or as an asset

It’s important to understand it clearly as this is where dispute arises most of the time

You as an individual should be aware of what to do and not to do

So that the income generated by investing in stocks is not taxed in the normal slab

A tax of 15% is levied on short term capital gain and 10% on long term capital gain

But if you trade regularly, then the department may consider it as a business income and levy a high tax rate

I will give you important pointers that you should remember if you want to be saved from what not to do

So that your stock is not treated as a business income.

There are a lot of circulars of the department and they have tried to clarify it

I have tried to summarize the key pointers which should be noted

1st, if you’re showing it as an investment in your individual book of accounts then it will be treated as a capital gain

If you’re showing it as a stock-in-trade, then it’ll be treated as a business

It’s very important for all individuals to make their books of accounts where they show the stocks as an investment under assets

And not show stock as a current asset but show it as an investment

Second, if you’re trading in a company or in a partnership firm then its chartered document

Like for a company it’s Memorandum of Association

It shouldn’t be mentioned anywhere in it that these stocks will be used as stock in trade

Or they will consider it as a business income

3rd point, if you’ve put in x amount of money in the capital market

If you’ve put in Rs.10 lac and you get a turnover of Rs. 1 crore, it means that you’re main job is to trade

Then it will be your business income. So the amount of shares traded, quantum of trade

Quantity bought and sold is also a deciding factor

The lesser you purchase and sell, the higher chances you can show it as an asset and reduce your tax liability

If you trade a lot then this income can be taxed as regular income.

4th, holding period of securities. You bought today and sold it after 3 days

It shows your intent of using it as regular trading

It shows your intent of using it as regular trading

Your duration of open trade decides whether it’s a stock in trade or an investment

5th, which is a bit subjective is your intention

Was your intention to trade regularly, or hold it for long and create long term wealth as investment

This is also a deciding factor. It’s important to understand that we all want to earn

But we don’t understand tax treatment, and if we keep earning and have to pay tax as business income

Then the net savings will be very limited

So if you pre-plan a bit, that if you’ve put in 10 lac capital, then you won’t earn a turnover of more than 20 lac to 25 lac

If you’re buying a share, then you won’t buy and sell every week

You’ll probably sell the share in a month or two

So that the income tax department doesn’t consider it to be your core business and pay tax as per your business

Let’s move ahead. There are more things that you should know. Dividend

If you’re receiving dividend and if you have a share as an investment

Then the income generated will attract a normal tax.

Previously there was a dividend distribution tax which is not there anymore

If you’re receiving dividends from stocks which are your stock in trade

In your balance sheet, either you show it as an investment or a stock in trade

If you’re showing it as a stock in trade, then the income from dividend will be taxed as business income

If dividend is through investment, then it will be income from other sources

Or if dividend is through stock in trade, then it will be treated as a business income

It will not be very different for an individual, as finally all the income is clubbed to compute final income on which tax is paid

But there is an impact on segregation in a company’s case

If you form a company over a period of time, you will understand the impact

Let’s talk about derivatives as even those are actively traded instruments

And you should know the type of tax on derivatives

If you’re trading in equity derivatives, or currency, or commodities

Then it will be treated as non-speculative income. It’s a funny thing

That if you trade intraday in cash market, then it is speculative but it’s non-speculative if you trade intraday on derivatives

This is a law. This is non-speculative income and you need to pay money as per normal tax slab

There’s no question of capital gain

If you’re trading in derivatives, it means that you consider it as your business and you need to pay tax as per the normal tax slab

The normal tax slab is very easy and you can take an opinion from any Chartered Accountant

You will get a lot of resources. Normal tax slab just doesn’t mean tax. There is surcharge and an education cess post tax

You’re smart enough to know your own tax slab

But the important agenda of the video was to make you aware

That if you’re actively trading in the cash market then you need to pay as per business on which the rate is high

As normal tax slab can give you the burden of high tax after some point

But if you design your number of trades and strategies such that it can be shown as investment

Then you will pay the capital gain tax the rate on which is relatively lesser

And you will get the opportunity to generate optimum returns

I hope you like the video, this was a small try to provide clarity on the tax law

I will share the link to the document in the description

You can download it if you want and definitely consult your Chartered Accountant

So that you get 100% clarity on this

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