TRADING IN STOCK MARKETS -TAXABILITY OF PROFIT/LOSS

Trading is essentially the exchange of goods and services between two entities. It is the basic principle which forms the core of all economic societies and financial activities.

Trade governs the wheels of progress in any society and allows for wealth creation. A place where any form of trade takes shape is called a market. Depending on the kind of products, the market is defined. For instance, a place where stock trading takes place is called the stock market.

Stock trading came into existence with the formation of joint-stock companies in Europe and played an instrumental role in European imperialism. Informal stock markets started mushrooming in various European cities. The first joint-stock company to publicly trade its shares was the Dutch East India Company who released its shares through the Amsterdam Stock Exchange.

After the success of joint-stock companies in fostering economic development along with geographical expansion, those were made a mainstay of the financial world. The first exchange for online trading in India and Asia was the Bombay Stock Exchange which was established in 1875.

BSE, along with the National Stock Exchange in India are the two main houses where stock market trading takes place.

WHAT ARE THE TYPES of STOCK MARKET TRADING & THEIR TAXABILITY?

Stock Market is a vast subject. Moreover, there are various types of trading styles to choose from. You can choose the trading style that suits you the most. It majorly depends on the financials goals that you want to achieve.

Here are the different types of stock market trading that takes place in India.

A. Trading in Equity & Equity Oriented Mutual Funds (MF)

1. Intraday Trading

In this type of trading, the person buys and sells the stock on the same day. The person must have to square off the position on the same day.

e.g., Mr. A purchased 100 shares of XYZ Ltd on 1.1.2023 @ Rs. 50 and sold on the same date @ Rs. 55. Since, Mr. A squared off the position on the same day. So, profit earned Rs. 500 will be considered as profit from intraday trade.

Taxability of profit/loss under the Income Tax Act

Trading in intraday is treated as speculative business. So, profit/loss derives from it is treated as speculative business income/loss.

According to section 43(5) of the Income Tax Act, profit gained from intraday trading are added to taxable business income as taxed according to total income slab.

In the example given above, assuming that person is already in highest tax slab i.e., 30% plus cess plus surcharge (if applicable). So, the tax liability on Rs. 500 will be @ 30% i.e., Rs 150 plus cess and surcharge (if applicable).

2. Short Term Trading

In this type of trading, the person buys the stock and hold it for less than a year. In short, if the investment period is less than one year, then such type of trading is classified as short-term trading.

e.g., Mr A purchased 100 shares of XYZ Ltd on 1.1.2023 @ Rs. 50 and sold the same on 30.06.2023 @ Rs. 55. In this case the period of holding is less than a year. So, profit earned Rs. 500 will be considered as Short-Term Capital Gain (STCG).

Taxability of profit/loss under the Income Tax Act

STCG covered under section 111A is charged to tax @ 15% plus cess and surcharge (if applicable).

In the example given above, assuming than person has total income more the maximum exemption limit then, So the tax liability on Rs. 500 will be @ 15% i.e., Rs 75 plus cess and surcharge (if applicable).

3. Long Term Trading

In this type of trading, the person buys the stock and hold it for a year or more. In short, if the investment period is one year or more, then such type of trading is classified as long-term trading.

e.g., Mr A purchased 100 shares of XYZ Ltd on 1.1.2023 @ Rs. 50 and sold the same on 15.01.2024 @ Rs. 55. In this case the period of holding is more than a year. So, profit earned from this will be considered as Long-Term Capital Gain (LTCG).

Before the Union Budget 2018 was amended, the LTCG earned on the sale of equity shares was tax-free in the hands of investors. Such equity shares had already been subject to Securities Transaction Tax (STT). 

However, in the present scenario long term capital gains are taxable.

LTCG is taxable @ 10% plus cess and surcharge (if applicable). Further there in no tax for LTCG up to Rs. 1,00,000.

In the example given above, assuming than person has total income more the maximum exemption limit and LTCG is more than 1 lakh then, the tax liability on LTCG Rs. 500 will be @ 10% i.e., Rs 50 plus cess and surcharge (if applicable).

 

B. Trading in Derivatives – Future & Options (F & O)

What are Derivatives?

To understand Futures and Options, it is important to understand Derivatives. In the financial markets, a Derivatives is a contract that derives it value from underlying assets. These assets can be stocks, bonds, gold, currencies, market indices, commodities etc. When you buy a derivatives contract, you earn profits by estimating the future price of the asset(s). We will discuss following two types of derivatives contracts.

1. Options

Options are the derivative contract that offer the buyer the right (but not the obligation) to buy/sell the underlying assets at a predetermined price. The buyer can also choose to allow the Option to expire. The seller has an obligation to execute the contract. They are traded on exchanges just like stocks.

2. Futures

Futures are Derivatives contact in which both buyers and sellers have the obligation to buy/sell the underlying assets at a predetermined price respectively. A Futures contract is an agreement between the buyer and seller to buy or sell a specified quantity of the underlying asset at a future date at a price agreed upon between them. They are traded on exchanges just like stocks.

Taxability of profit/loss under the Income Tax Act (F & O)

Trading in F & O is treated as normal business. So, profit/loss derives from it is treated as normal business income/loss.

The profit gained from F & O trading are added to taxable business income as taxed according to total income slab.

e.g., if there is profit from F & O business is Rs. 500 and assuming that person is already in highest tax slab i.e., 30% plus cess plus surcharge (if applicable). So, the tax liability on Rs. 500 will be @ 30% i.e., Rs 150 plus cess and surcharge (if applicable).

Further it is worth noting that since F & O trading is considered as a normal business income/loss and if there is loss in F & O business then this loss can be set-off with the other business income or with other incomes under any other heads except salary.

e.g., Mr. A earnings in the FY 2023-24 are as follows:

Taxable Salary Income – Rs 20 Lakhs

Taxable Rental Income – Rs. 5 Lakhs

Interest Income – 1 Lakhs

Loss form F & O Business – Rs. 3 Lakhs

Then the total taxable will be Rs. 20 +5+1 -3 = 23 Lakhs.

Compiled by:

CA Pooja Gupta

Amit S K Gupta & Co.

729, 7th Floor, JMD Megapolis Sector -48,

Gurugram -122018, Haryana

Mob. 7838968100, 9654346350 Web: www.askgca.com

E-mail – [email protected], [email protected]

 

 Disclaimer: The information provided in this document is for educational purposes only. It is not intended to be legal, accounting, or tax advice. This publication does not address the circumstances of any particular individual or entity. No one should act on the information provided without appropriate professional advice and a thorough examination of the specific situation. This publication is not a substitute for detailed research and professional opinions. Before taking any action based on the information contained herein, individuals should consult subject matter experts and exercise professional judgment. Amit S K Gupta & Co. is not responsible for any loss incurred by individuals acting or refraining from acting based on the information in this publication.