There is a wide variety of traders in every financial market, each with their own trading objectives, strategies and financial goals. As a result, the earnings generated by each can differ greatly from one trader to the other.
Therefore, while taxation for individuals who depend on salaried income can be fairly straightforward, tax on trading income can be somewhat more complicated. Since incomes generated through trading can be variable, taxation laws cannot possibly apply uniformly to all traders.
If you are new to the world of trading, taxation for traders might seem somewhat of a challenge. However, if you keep the following points in mind during the upcoming tax season, you will find the process to be far simpler than you might have anticipated.
Types of Taxation for Traders
The first point of consideration is that trading taxation in India can be classified into four types, based on the form of trading activity as well as the type of income generated by the trade. Given below are each of these types of taxation for traders as well as their features, benefits and examples.
Long-Term Capital Gains
Long Term Capital Gains are the form of tax levied by the Government if an asset, such as investments, are held by an individual for a specific long period of time. In India, if an investment is held for a year or longer, the purchase or sale profits from it would be subject to Long Term Capital Gains taxes.
In the case of equity investments, Long Term Capital Gains are typically exempted from trading taxation under Section 10 of the Income Tax Act. However, this is only applicable when certain conditions are followed. These include making transactions via a recognised exchange and selling your equities within the country.
Note: In case the Long Term Capital Gains from your equity investments crosses the threshold of Rs. 1 lakh in a financial year, the applicable tax will be levied at 10%. Since short-term traders typically do not hold long-term positions with their investments, they are unlikely to be taxed under this category.
Short-Term Capital Gains
Short Term Capital Gains are similar to Long Term Capital Gains except that their duration of holding is shorter. As a trader in India, you should be informed that an investment held for longer than a day but shorter than a year is subject to Short Term Capital Gains tax. In terms of tax on trading income via equity, any gains generated by selling a stock within a year are subject to trading taxation of 15%.
You might have an income source other than your short-term trading income, and it might fall under the regular tax slabs of 10%, 20% etc. However, your short-term capital gains will nevertheless be taxed at the standard 15%, unless your total taxable income is below Rs. 2.5 lakhs (no taxes applied). In that case, this shortfall can be adjusted against your short term capital gains and the resulting amount will be taxed at 15%.
Speculative Business Income
Now, let us move on to specific taxation for traders, particularly intraday traders. Any income generated through intraday trading is recognised in trading taxation as speculative business income. It is defined as income generated through trades in which the security is bought and sold within the same trading day, without the expectation of its delivery.
While capital gains taxes, such as the ones mentioned earlier are taxed at specific percentages, there are no such rates for speculative business income. Instead, your speculative business income is taxed alongside your other income, as per Section 43 of Income Tax Act.
This means that if you also have salaried income, your speculative business income such as earned through intraday trading, will be combined with it. The total income will then be taxed as per the appropriate tax slab.
Non-Speculative Business Income
Tax on trading income generated by futures and options contracts has been specifically defined to fall under the umbrella of non-speculative business income. This includes earnings generated by trading in either or both futures and contracts in recognised exchanges. It also applies to other delivery-based trading transactions, even including stocks with high delivery percentage quantity.
Similar to speculative business income, non-speculative business income is also clubbed with your other forms of regular income. This means that your earnings from contacts trading are counted within your total income and the appropriate tax slab rate is applied.
As a trader, it is important to stay informed about the market and its various risks and rewards. However, it is just as important to know how to navigate the trading taxation challenge when it presents itself every financial year. Hopefully, this guide will help you determine the overall classification that your specific type of trading falls under. The key is to stay updated with the latest tax-related news as well as how it applies specifically to your trading style and strategies, present and future.