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What Is The Impact of Tax On Share Trading

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Publish Date: December 19th, 2019

The impact of tax on share trading depends on the type of trading that you want to do and the frequency with which you do these trades. Let us examine the impact of tax on share trading.

Tax on intraday trading

Intraday trades are trades which are squared off on the same day. Tax on intraday trading will be treated as speculative business income if the trades are in the equity cash segment. If intraday trades are made in futures and options segment, then it is treated as non speculative income. Any securities transaction tax or other expenses incurred is allowed as a deduction for the purpose of calculating the business income. This has to be disclosed as business income under the head speculative income.

Tax on intraday trading can be paid two ways:

  • Presumptive basis
  • Regular slab rates

In case of presumptive basis, the arithmetic total of profit and loss is treated as turnover for the purpose of Section 44AD. 6% of the total turnover is the tax that has to be paid. Losses are considered as a positive number and added to the profit for the purpose of the turnover. For example, if a person sells 1,000 shares of Company A and makes a profit of Rs. 5 per share, then his total gain is Rs. 5,000. On another day, if the same trade gives him a loss of Rs. 3 per share, the total loss is RS. 3,000. On a net basis, the trader has made a gain of Rs. 2,000. But for the purpose of turnover, the turnover is Rs. 8,000. Tax on presumptive basis will be 6% of Rs. 8,000 or Rs. 480.

In case of regular slab rate taxes, the net of profit and loss is considered. Other expenses like securities transaction tax, brokerage, exchange fees, any other expenses incurred to make trades can be set off. The net profit or loss will be disclosed in the income tax return. In case of a loss, it can be carried forward and set off in the future years. Speculative income losses can be carried forward for 4 years whereas non speculative income can be carried forward for 8 years.

Another important thing to consider is the tax audit implications. If the total turnover crosses Rs. 1 crore for non presumptive income or Rs. 2 crore for presumptive income, the share trader will have to get a tax audit done.

Tax on share trading

In case of delivery based trading, the tax will be capital gains. Whether the gains are short term or long term will depend on the holding period of the equity shares. In case of equity shares, if the equity share is held for a period of 12 months, the capital gain is long term in nature. If it is held for less than 12 months, it is short term in nature. The short term capital gain tax rate is 15% regardless of the tax slab of the person. Expenses like brokerage, Securities transaction tax paid to sell the equity share will be allowed as a deduction. The long term capital gain tax rate is 20% without the benefit of indexation.

This income tax on shares will have to be disclosed in the capital gains section. The income tax return requires extensive information on the quarter in which the capital gain is accrued, the cost and selling price of the shares, any carried forward losses of shares to be set off etc.

The capital gain tax on share trading has to be paid in advance. If this is not paid in advance, you may incur an interest cost. Before doing share trading, you can download an excel utility from the income tax website and have a look at the information they require.