Many Individual investors have started investing in the equity and derivative market due to lot of exciting opportunities that the share market offers. However, most are unaware of taxability of such transactions made by them.
Here are tax implications of share transactions based on various provisions of Direct Tax Laws
Capital Gains Tax on Equity Shares Sale
Short-term capital gains and losses
If listed equity shares are sold before 12 months from date of purchase, the seller makes short term capital gain/loss.
Calculation of Short-term capital gain = Sale price - (Expenses on Sale + Purchase price)
If this figure is negative, then there is short term capital loss
Short term capital gains are taxable at 15%. Irrespective of tax slab of your other income
Any short term capital loss from sale of equity shares can be set off against short term or long term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for a period of 8 years and adjusted against any short term or long term capital gains made during these 8 years.
Long-term capital gains and losses
If listed equity shares are sold after 12 months of purchase, the seller makes long-term capital gain or long-term capital loss.
As per the provisions of the Union Budget of 2018, if a seller makes long term capital gain of more than Rs. 1 lakh on sale of equity shares or equity-oriented units of mutual fund, the gain made (above Rs.1 Lakh) will chargeable to capital gains tax @10%. Also, the benefit of indexation will not be available to the seller. These provisions apply to transfers made on or after 1 April 2018. Before the introduction of these provisions long term capital gains on listed equity shares were exempt from tax
Long Term Capital Loss can be set off only against Long Term Capital Gains (LTCG) and unabsorbed loss can be carried forward to subsequent 8 years to set off against LTCG
Taxation of Derivatives Trading (Futures & Options)
Income from trading futures & options on recognized exchanges is categorized under non-speculative business income. Profit / Loss resulted from trading in futures & options must be reported as a business income in Income Tax Return. It should be noted that this also applies to individuals. You don't have to be formally incorporated as some legal entity to earn business income
The another important point in reporting business income is that you can claim expenses incurred to earn that income. Expenses that can be claimed against F & O profits are brokerage, internet charges, professional fees, subscription to related journals, salary of assistants if any, etc. If the turnover is less than 2 crores the profit can be calculated @ 6% of turnover irrespective of actual expenses incurred
How to calculate Turnover in case of Derivatives
The turnover in case of Futures and Options transactions is calculated as follows
1. The sum of favourable and unfavourable differences shall be taken as turnover.
Aggregate of both positive as well as negative differences will be taken together to calculate turnover in case of derivatives, futures & Options transactions. Or in other words both profits and losses will be added to calculate the turnover.
2. Premium received on sale of options is also to be included in turnover.
3. In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Profit made from intraday trading is treated as Speculative Business Income under Tax Laws. Tax treatment is similar to other business income tax. It is taxed as per the tax slab you fall in while losses can be offset only against speculative profits. You can claim expenses against profit earned from intraday trading as in the case of derivatives trading.
All individuals including salary earners are advised to show their share trading income in income tax returns to avoid further notices and litigation.Reporting all your sources of income is mandatory. Even if there is loss, it can't be carried forward unless you file Income Tax Return.