The common and intuitive approach is to consider a person with a long term perspective as an investor and a person with a shorter term perspective as a trader. But from a taxation standpoint, there is a deeper significance to this distinction. Taxes on intraday share trading are very different from delivery trading. Similarly, intraday trading taxation classifies it as speculative business income while a BTST is classified as non-speculative business income. Taxation for investors in equities is quite straightforward and has been well documented although we will also look at that for understanding purposes. This is more a tax guide for traders, who need to understand a plethora of nuances pertaining to taxation of equities.
It is a commonly known fact that any income that is earned
out of a salary, an income from rent, and a business is due to be taxed. The
question is, is the selling or the buying of shares taxed too? Several retirees
and homemakers buy and sell shares, but they seem confused about how the
transactions are taxed. In this sense, it is important for any investor to know
that any loss or income from the sale of stocks is viewed within the taxation
header of “Capital Gains”. If you happen to come across an investment or day
trading guide, you will discover that taxation will be linked to the header of
“Capital Gains”, classified further into two kinds - long-term and short-term
capital gains. The main categorisation is done on the basis of how long an
investor holds equity for. This duration is measured as the date of the start
of holding until the transfer or sale date.
It is important to note that the period of holding of stocks and securities matter. These periods of holding have different and distinctive implications for various classes of assets. For the purpose of the levying of income tax, the periods of holding of equity shares (listed shares) and mutual funds of equity are different from those concerning mutual funds of debt. Taxability, hence, changes too. Equity investments are fairly straightforward. All profits made within a period of 1 year will be treated as short term capital gains and will be taxed at the rate of 15% of the profit. However, if the stock is held for a period beyond 1 year then it is classified as long term capital gains. In that case the profits are entirely tax-free. Since long term gains are tax free, there is no question of carry forward of long-term capital losses. However, short term capital gains are taxable and hence short-term capital losses can be carried forward for a period of 8 years from the financial year in which the losses arise. This is the simplest form of treating profits / losses on shares. When you file your income tax returns every year, these profits or losses under LTCG and STCG can be shown under the capital gains section and the tax will be paid on the appropriate amount.
In case you are an investor in stock, you should
additionally know about the STT, the Securities Transaction Tax. This may be
applicable to both traders (who essentially carry out a transaction, even for
the short term) and investors in the share market for the long haul. The STT
stands applicable to any equity stocks which are purchased or sold by way of a
stock exchange. These are listed stocks. This tax is something that no investor
or trader can avoid. So, tax on intraday trading and on investing for the long
term has some commonality with respect to STT.
Lastly, the principle of materiality is applied. If the income from share market activity accounts for a significant chunk of your overall income, then you will have to show your share market activity as business income rather than as capital gains.
We come to the all-important subject of trading in F&O. While F&O does not result in delivery, they are intended to hedge the risk of your underlying. Hence it has been specified that income from F&O shall be classified as non-speculative business income.
The Central Board of Direct Taxation has offered taxpayers the facility of choosing how to treat any income that is earned by them. However, once the investor selects how their income is to be treated, then the taxes that are applicable have to be mandatorily paid by the investor. Additionally, the same process of taxation has to continue for subsequent years in which the investor is taxed, unless it can be shown that there is a predominant change in case circumstances. This choice is made and is applicable to securities and shares that are listed shares on stock exchanges.