Computation of Income Tax on transactions done in the stock market


The tax on earnings through investment in bonds, mutual funds and debentures are treated in a different manner than the cash market, additionally, there is a separate tax treatment for trades in derivatives, currency, and commodities markets.

The tax on earnings through investment in bonds, mutual funds and debentures are treated in a different manner than the cash market. At the same time, there is a separate tax treatment for trades in derivatives, currency, and commodities markets.

There are two types of incomes through the stock market on which tax is levied:
1. Short term capital gains
2. Long term capital gains

Tax treatment on incomes through the stock market on Short term capital gains and Long term capital gains

Short Term Capital Gains is when profits are made through the trades squared up within 12 months which attracts a tax of 15 per cent. In case of short term capital loss, it can be carried forward for the next 8 years, i.e., it can be set off with short term capital gains if any for the next 8 consecutive years.

Long Term Capital Gain is when someone incurs profit through trades squared up after 12 months which attracts a tax of 10 per cent. Vivek Bajaj, Founder StockEdge, says, “Long term Capital Loss follows the same method of carrying forward the losses like Short Term Capital Losses. It can be carried forward and set off with Short Term Capital Gains for the next 8 consecutive years.”

How are regular traded transactions or investments treated?

According to experts, regular traded transactions or investments can be treated as an investment or speculative business income based on different scenarios;

If an individual is trading part-time along with a full-time business, then it’s treated as an investment. Having said so, Bajaj says, “if the trades are a part of the business, then it’s treated as stock-in-hand and treated as business income.”

If an individual is trading in a company or in a partnership firm and it’s mentioned in its chartered document that these stocks are used as stock-in-trade, then it’ll be treated as a speculative business income.

Regular income through trading is also treated as a speculative business income, whereas, low frequency of trade is treated as an investment.

If an individual holds the securities for a longer period of time, then it’ll be treated as an investment, and short holding periods of securities are treated as speculative business income.

Bajaj adds, “If the transactions are treated as speculative business income, then the normal tax slab rates are applicable and in case of loss, it can be carried forward and off-set with profits for the next 4 consecutive years.”

Tax on earnings through bonds, MFs, debentures – how are they treated?

Short term Capital Gains through investment in bonds, mutual funds, debentures are when an individual earns profit through the sale of these instruments within 36 months of purchase. These gains attract a normal tax slab rate and can be carried forward for the next 8 years in case of loss.

Long Term Capital Gains through investment in bonds, mutual funds, debentures are when an individual earns profit through the sale of these instruments post 36 months of purchase. Bajaj says, “There’s an indexation benefit available for such gains through bonds only. These gains are taxed at 20 per cent and any losses can be carried forward for 8 years.”

Tax treatment for trades in derivatives, currency, and commodities

Income through trading in derivatives, currency and commodities is treated as Non-Speculative Business Income and is taxed as per the normal slab rates.

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