Types Of Taxes Applicable To Traders In India
Yes, stock traders in India are liable to pay taxes. Depending on the type of income realised, the tax rate can vary from applicable slab rate to 30%. Further, the type of tax can be classified into Capital Gains Tax, Income Tax, Securities Transaction Tax, Dividend Distribution Tax, Goods and Services Tax, and other taxes.
Investing in the stock market is a popular way for individuals to grow their wealth. However, along with the potential for profits, stock market investors in India must also navigate the complex landscape of taxation. In this article, the experts at TU will delve into the various taxes that stock traders and investors may encounter in India, including capital gains tax, securities transaction tax, and more. By understanding these tax regulations, investors can make informed decisions and ensure compliance with the law.
How is stock trading taxed in India?
Share trading generates various types of income, each with its own tax treatment. Let's explore these types in detail:
Long-term capital gains
Long-term capital gains or losses result from selling shares or equity-oriented mutual funds with a holding period of more than a year. Such gains attract a tax rate of 10%, along with applicable surcharges and cess, if they exceed Rs. 1 lakh in a financial year. However, it's important to note that securities other than those specified in Section 112A are subject to different taxation rules. The table below outlines the taxation of long-term capital gains on shares in India and other types of securities.
| Particulars | Applicable Tax Clause |
|---|---|
Sale of listed shares and Mutual Funds |
10% tax on gains exceeding Rs. 1 Lakh |
Sale of listed securities without STT payment |
10% |
Sale of debt-oriented Mutual Funds |
With indexation - 20% Without indexation - 10% |
Example
A trader purchased 1000 shares of XYZ Ltd. on January 1, 2022, for Rs 500 each. He sold them on January 15, 2023, for Rs 700 each. Since his period of holding is more than 12 months, his gains would be classified under LTCG. His LTCG would be: [(700 - 500) * 1000] = Rs 200,000, subject to the 10% LTCG tax considering that STT has been paid.
Short-Term Capital Gains (STCG)
Short-term capital gains or losses arise when shares or equity-oriented mutual funds are sold within one year of acquisition. Such gains attract a tax rate of 15%. The calculation for short-term capital gain involves subtracting the expenses incurred during the sale from the selling price and then deducting the purchase price.
Example
In July 2023, a trader bought 500 shares at Rs. 180 each, spending Rs. 90,000. She sold them for Rs. 220 each in September 2023, with a total sales value of Rs. 1,10,000. After deducting brokerage expenses of Rs. 440, his short-term capital gain was Rs. 19,560. Since the shares were sold within 12 months of their purchase, the gain is considered as short-term capital gain, and will attract a tax rate of 15%.
Speculative Income
Speculative income is income generated through speculative business transactions. These transactions involve a high level of uncertainty, and their main objective is to make profits from price fluctuations, rather than the actual delivery of goods or securities. In India, speculative income primarily pertains to income derived from intraday trading in stocks, commodities, or derivatives. This includes intraday trading and F&O trading where positions are not held for delivery but squared off during the trading session. As per Indian tax laws, speculative income is categorized as business income, allowing taxpayers to avail deductions for associated expenses, including brokerage fees, internet charges, and other costs associated with their trading activities. This means it will be taxed in line with your total income slab.
Example
A trader purchased 100 shares of ABC Ltd. at Rs. 150 each in the morning and sold them at Rs. 160 each later the same trading day, making a profit of Rs. 980 (1000 – 20) after deducting brokerage fees. Since their main objective is to make profits from price fluctuations, rather than the actual delivery of goods or securities it is considered as speculative income.
Non-speculative Income
Non-speculative income, also known as non-speculative business income, includes income generated from trading activities that involve the actual delivery of goods or securities. F&O transactions meant for hedging are considered as “non-speculative” as they have a definitive purpose and because they often result in actual taking of/giving delivery of the underlying contract. According to Indian tax laws, non-speculative business income is added to your total income, and taxes are applicable based on the tax bracket you fall under.
Example
A trader bought 10 Nifty futures contracts at Rs 15,000 each and cash settled them at expiry at Rs 16,000 each, making a profit of Rs 10,000. This Rs. 10,000 is considered non-speculative income since the income is generated from trading activities that involve the actual delivery (cash settlement) of goods or securities it is considered as non-speculative income.
Dividend Income
The Finance Act of 2020 brought significant changes to the taxation of dividends in India, abolishing the Dividend Distribution Tax (DDT) and transitioning to a classical taxation system. Under this new system, dividend income is now taxable in the hands of investors, regardless of the amount received, and is subject to applicable income tax slab rates.
In India, the taxability of dividends hinges on whether the recipient is engaged in securities trading or is an investor. Income derived from trading activities is categorized as business income, making dividend income taxable under the "income from business or profession" category if shares are held for trading purposes. On the other hand, if shares are held as investments, dividend income is taxed under the "Income from other sources".
Tax Rates on dividends vary based on the recipient's category and the type of dividend distribution instrument. This information is summarized in the following table:
| Assessee Category | Dividend Type | Tax Rate (%) |
|---|---|---|
Resident |
Dividend from a domestic company |
Assessee’s applicable standard tax rate |
Non-Resident (NRI) |
Dividend on Indian company /PSU GDRs (denominated in foreign currency) |
10% |
Non-Resident (NRI) |
Dividend on Indian co. shares (denominated in foreign currency) |
20% |
Non-Resident (NRI) |
Other Dividend income |
20% |
Foreign Portfolio Investor (FPI) |
Dividend on non-115AB securities |
20% |
Investment Division of Offshore Banking Unit |
Dividend on non-115AB securities |
10% |
Tax Deducted at Source (TDS)
Tax Deducted at Source (TDS) is a mechanism through which the government collects tax on various incomes, including interest income and capital gains. When you sell securities and make a profit, the broker may deduct TDS on your behalf. However, you can claim a refund or adjust this TDS against your overall tax liability when filing your income tax return.
How are unlisted share transactions taxed in India?
The taxation of capital gains on the transfer of unlisted shares in India depends on whether the shares are held as investments or as part of a business. Here's an overview of the same by TU’s experts:
1 Taxation of capital gains on unlisted shares held as investments
-
Short-Term Capital Gains (STCG) - If you sell unlisted shares within two years of acquisition, the gains are considered short-term capital gains. STCG on unlisted shares is taxed at your applicable income tax rate
-
Long-Term Capital Gains (LTCG) - If you sell unlisted shares after holding them for more than two years, the gains are considered long-term capital gains. LTCG on unlisted shares is taxed at a flat rate of 20% with indexation benefit. Indexation allows you to adjust the purchase price for inflation, reducing your taxable gain
2 Taxation of Capital Gains on Unlisted Shares Held as Business Assets
If you hold unlisted shares as part of your business, the gains from the sale of such shares are considered business income. These gains are added to your total income and taxed at your applicable income tax rate.
Best stock brokers 2024
Summary
Understanding and managing taxes in the Indian stock market is crucial for investors. It's a complex area and having a grasp of the different taxes and rules is vital. Proper tax planning and following the regulations can help you maximize your profits while fulfilling your tax obligations.
To make the most of your investments, it's advisable to consult with a qualified tax professional or financial advisor. They can create a tax-efficient investment plan tailored to your specific goals. Additionally, it's essential to stay updated with the latest tax laws because they can change over time. By staying informed and making informed investment decisions, you can confidently navigate the Indian stock market, ensuring both financial success and compliance with tax laws.
FAQs
Do traders have to pay tax in India?
Yes, traders in India are required to pay tax on their income generated from frequent buying and selling of stocks or securities. This income is considered business income, and traders must file their returns under the category "Profits and gains from business or profession".
How do traders save tax in India?
Traders in India can save tax by using capital losses to offset future profits, particularly long-term capital losses against long-term gains, and carrying forward any remaining losses for up to 8 years to reduce their tax liability.
How can I avoid tax on stocks in India?
In India, you can potentially avoid tax on stocks by selling your shares or mutual funds just before they reach a profit of Rs. 1 lakh to exempt them from long-term capital gains (LTCG) tax. After booking the profit, there are no restrictions on repurchasing the same shares and mutual funds.
How do traders file taxes?
Traders can file their taxes depending on whether their income from equity delivery trading is treated as capital gains or business income. If it's considered capital gains, they should file using ITR-2. If it's categorized as business income, they should use ITR-3 for filing their income tax returns.
Team that worked on the article
Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.
As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.