How to Calculate Tax on Stock Trading

How to Calculate Tax on Stock Trading

Unlike capital gains, there is no fixed taxation rate when you have a business income. Speculative and non-speculative business income has to be added to all your other income (salary, other business income, bank interest, rental income, and others), and taxes paid according to the tax slab you fall in. You can refer to chapter 1 for tax slabs as applicable for FY 2020-21.

Let me explain this with an example:

  • My salary – Rs.1,000,000/-
Short term capital gains from delivery based equity – Rs.100,000/-
Profits from F&O trading – Rs.100,000/-
Intraday equity trading – Rs.100,000/-
Gives these incomes for the year, what is my tax liability?
In order to find out my tax liability, I need to calculate my total income by summing up salary, and all business income (speculative and non-speculative). The reason capital gains are not added is that capital gains have fixed taxation rates unlike a salary, or business income.
Total income (salary + business) = Rs.1,000,000 (salary income) + Rs.100,000 (Profits from F&O trading) + Rs.100,000 (Intraday equity trading)  = Rs 1,200,000/-
I now have to pay tax on Rs 12,00,000/- based on the tax slab –
0 – Rs.250,000 : 0% – Nil
250,000 – Rs.500,000 : 5% – Rs.12,500/-
500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,
1,000,000 – 1,200,000: 30% – Rs.60,000/-
Hence total tax : 12,500 + Rs.100,000 + Rs.60,000 = Rs.172,500/-
Now, I also have an additional income of Rs.100,000/- classified under short term capital gains from delivery based equity. The tax rate on this is flat 15%.
STCG: Rs 100,000/-, so at 15%, tax liability is Rs.15,000/-
Total tax = Rs.172,500 + Rs.15,000 = Rs.187,500/-

I hope this example gives you a basic orientation of how to treat your income and evaluate your tax liability.

We will now proceed to find a list of important factors that have to be kept in mind when declaring trading as a business income for taxation.


Carry forward business loss

If you file your income tax returns on time July 31st for non-audit case and Sept 30th for audit case, you can carry forward any business loss that is incurred.

Speculative losses can be carried forward for 4 years and can be set-off only against any speculative gains you make in that period.

Non-speculative losses can be set-off against any other business income except salary income the same year. So they can be set-off against bank interest income, rental income, capital gains, but only in the same year.

You carry forward non-speculative losses to the next 8 years; however, do remember carried forward non-speculative losses can be set-off only against any non-speculative gains made in that period.

For example, consider this – my hotel business income is Rs 1,500,000/-, my interest income for the year is Rs.200,000/-, and  I make a non-speculative loss of Rs 700,000. In such a case, my tax liability for the year would be –

My gain is Rs 1,500,000/ from business and Rs.200,000/- from interest, so total of Rs.1,700,000/-.

I have a non-speculative business loss of Rs.700,000/-, which I can use to offset my business gains, and therefore lower my tax liability. Hence

Tax liability = Rs.1,700,000 – 700,000 = Rs.1,000,000/-

So I pay tax on Rs.1,000,000/- as per the tax slab I belong to, which would be –

  • 0 – Rs.250,000 : 0% – Nil
  • 250,000 – Rs.500,000 : 5% – Rs.12,500/-
  • 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,

Hence, Rs.112,500/- goes out as tax.


Offsetting Speculative and non-speculative business income

Speculative (Intraday equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.

If you incur speculative (intraday equity) loss of Rs.100,000/- for a year, and a non-speculative profit of Rs 100,000/-, then you cannot net-off each other and say zero profits. You would still have to pay taxes on Rs 100,000/- from non-speculative profit and carry forward the speculative loss.

For example, consider this –

  • Income from Salary = Rs.500,000/-
  • Non Speculative profit = Rs.100,000/-
  • Speculative loss = Rs.100,000/-

I calculate my tax liability as –

Total income = Income from Salary + Gains from Non Speculative Business income

= Rs.500,000 + Rs.100,000 = Rs.600,000/-

I’m required to pay the tax on Rs.600,000 as per the slab rates –

  • 0 – Rs.250,000 : 0% – Nil
  • 250,000 – Rs.500,000 : 5% – Rs.12,500/-
  • 500,000 – Rs.600,000 : 20% – Rs.20,000/-,

Hence total tax = Rs.12,500 + Rs.20,000 = Rs.32,500/-

I can carry forward speculative loss of Rs.100,000/-, which I can set-off against any future (up to 4 years) speculative gains. Also to reiterate, speculative business losses can be set-off only against other speculative gains either the same year or when carried forward. Speculative losses can’t be set-off against other business gains.

But if I had a speculative gain of Rs 100,000/- and non-speculative loss of Rs 100,000/- they can offset each other, and hence tax in the above example would be only on the salary of Rs 500,000/-.


Tax-Loss Harvesting

Towards the end of a financial year, you might have realized profits and unrealized losses. If you let it be, you will pay taxes on realized profits and carry forward your unrealized losses to next year. This would mean a higher tax outgo immediately, and hence any interest that you could have earned on that capital goes away as taxes.

You can very easily postpone this tax outgo by booking the unrealized loss, and immediately getting back on the same trade. By booking the loss, the tax liability for the financial year would reduce.

While there is no explicit regulation in India that disallows tax loss harvesting. In the US, if stocks are sold and bought back within 30 days just to reduce taxes on realized gains, they are called wash sales, and taxes are disallowed to be offset. Given this, it is advisable for clients trading in India to consult a CA while filing income tax returns, as they could potentially be questioned by the income tax authorities during tax scrutiny if the same stock is sold and bought back just to save on the taxes.

BTST (ATST)

BTST (Buy today Sell tomorrow) or ATST (Acquire today sell tomorrow) is quite popular among equity traders. It is called BTST when you buy today and sell tomorrow without taking delivery of the stock.

There are both schools of thought, one which considers it to be speculative because no delivery was taken. However, I come from the second school, which is to consider it as non-speculative/STCG as the exchange itself charges the security transaction tax (STT) for BTST trades similar to regular delivery based trades. A factor to consider is if such BTST trades are done just a few times in the year show it as STCG, but if done frequently it is best to show it as speculative business income.


Advance Tax – Business Income

Paying advance tax is important when you have a business income. 

The % of the annual tax that you are likely to pay, yes! When you have a business income you have to pay most of your taxes before the year ends on March 31st. The issue with trading as a business is that you might have a great year until September, but you can’t extrapolate this to say that you will continue to earn at the same rate until the end of the financial year. It could be more or less.

But everything said and done, you are required to pay that advance tax, otherwise, the penalty is 12% annualized for the time period it was not paid for. The best way to pay advance tax is by paying tax for that particular time period, so Sept 15th pay for what was earned until then, and by March 15th close to the year-end, you can make all balance payments as you would have a fair idea on how you will close the year. You can claim a tax refund if you end up paying more tax than what was required to pay for the financial year. Tax refunds are processed in a quick time by the IT department.


Balance Sheet and P&L Statements

When you have declared trading as a business income, you are required to like any other business to create a balance sheet and P&L or income statement for the financial year. Both these financial statements might need an audit based on your turnover and profitability.

Turnover and Tax audit

An audit is required if you have a business income and if your business turnover is more than Rs 5 crore for a financial year (from FY 20-21). In the case of digital transactions (equity transactions are 100% digital), this turnover limit is Rs 5 crores. For equity traders, an audit is also required as per section 44AD in cases where turnover is less than Rs.5 Crores but profits are lesser than 6% of the turnover and total income is above the minimum exemption limit.
The dictionary meaning of the term “audit” is check, review, inspection, etc. There are various types of audits prescribed under different laws like company law requires a company audit; cost accounting law requires a cost audit, etc. Likewise, the Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law if he meets the above-mentioned turnover criteria.
An audit can also be defined as having an accountant verify if you have prepared all your accounts right. In this case, it is getting an accountant to check if you have created a correct balance sheet and P&L statement for the year. Ideally, this audit should be done by the IT department itself, but considering the number of balance sheets out there, it is surely impossible for the IT department to audit each one of them. Hence we need a Chartered accountant (CA), who is a qualified professional and authorized by the Income-tax department to perform audits on the balance sheet and P&L statements. You the taxpayer can use any CA of your choice.

Ideally, a CA is required to only audit and sign on the balance sheets and P&L statements. But a CA also typically ends up creating your balance sheets and P&L statements and will audit them only if required.  We will in the next chapter briefly explain how a CA typically creates these two statements.

The importance of the audit process by a CA cannot be understated, apart from all the reporting requirements an audit also helps traders/investors know their financial health, ensure it faithfully reflects the income, and claims for deduction are correctly made. It also helps lenders evaluate credibility, and act as a check for any fraudulent practices.

Advantage of showing trading as a business is that you can show all expenses incurred as a cost which can then be used to reduce your tax outgo and if a net loss for the year after all these costs, it can be carried forward as explained above.

Following are some of the expenses that can be shown as a cost when trading.

1. All charges when trading (STT, Brokerage, Exchange charges, and all other taxes). I hope you remember that STT can’t be shown as a cost when declaring income as capital gains, but it can be in case of business income
2. Internet/phone bills if used for trading (portion proportionate to your usage on the bill).
3. Depreciation of computer/other electronics (used for trading).
4. Rental expense (if the place used for trading if a room used – a portion of your rent).
5. Salary paid to anyone helping you trade.

Created & Posted By Suraj Kumar
Paid Assistant at TAXAJ

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