Income Tax on Share Trading

Share trading has become popular and prevalent in India and many taxpayers hold some of their investments in shares. In this article, we discuss the applicability of income tax on share trading.

Nature of Trading

Income tax on share trading is levied based on the nature of activity pursued by the trader. The following is an overview of the various kinds of share trading activities:

Capital Gain

If a trader is involved in stock market transactions as an investor who is primarily engaged in delivery based training, the gains received can be classed into:

• Long-term capital gain
• Short-term capital gain

Long-term Capital Gain

Equity shares sold after 12 months is exempted from tax, provided that the security is traded in a stock exchange on which STT (Securities Transaction Tax) has been paid. Exemption on LTCG cannot be obtained if the shares are traded outside India. Long term capital loss from equity shares can only be foregone, as it can neither be adjusted nor carried forward.

Short-term Capital Gain

A capital gain tax of 15% is applicable if the equity shares are sold within 12 months from the date of purchase, disregarding the prescribed tax slab. If any other income of the investor other than the short-term capital gain is lesser than the basic exemption limit, then he/she could avail the benefit of such shortfalls. Unlike the case of LTCG, losses in equity trading can be set-off against any short-term capital gains.

Business Income

Traders of any registered stock market in India, who are primarily engaged in non-delivery trade, can earn the kind of returns specified below:

• Speculative business income
• Non-speculative business income

Speculative Business Income

Profits derived from intraday trading are classed under speculative business income. Taxes for such gains will be similar to the income tax earned through a business. Losses occurring from these transactions can be set off against business profit.

Non-Speculative Business Income

Income derived from trading futures in a recognized stock exchange is classed under non-speculative business income. Again, taxes imposed on share trading in this scenario are similar to the one imposed on business income.  Losses occurring from such trading can be set-off against business profit.