The deadline to file an Income Tax Return (ITR) for income earned in the fiscal year 2022-23 is July 31. Taxpayers, particularly traders and stock market participants, should calculate tax liabilities and submit returns as soon as possible to prevent a last-minute rush.
A stock market investor should be aware that equity share gains are taxed in different manners such as Short-Term Capital Gains (STCG), Long-Term Capital Gains (LTCG), taxation on dividend, Securities Transaction Tax (STT), intraday in cash segment and futures and options (F&O).
How are equity share gains taxed?
Income made from the purchase or sale of shares falls under the category of Capital Gains or business head. Gains from intraday trading are taxed under the head of “Business Income” whereas gains made from long or short term investing are taxed under the head of “Capital Gain”. Based on the period of holding of shares, your capital assets are classified either as short term or long term. If listed equity shares are sold within 12 months after buying, the buyer is reported to have either short term capital gains (STCG) or short term capital losses (STCL). Short-term capital gains are taxed at 15% under Section 111A, regardless of your tax bracket, plus any applicable surcharges and cess.
If listed stock shares are sold after 12 months of acquisition, the seller is said to have either made a long term capital gain (LTCG) or incurred a long term capital loss (LTCL). If a seller earns a long-term capital gain of more than Rs 1 lakh on the sale of equity shares or equity-oriented mutual fund units, the gain would be taxed at 10% plus any relevant cess but without the benefit of indexation.
If you made a profit through intraday trading, your income is classified as business income rather than a capital gain; earnings are added to your net income and taxed at the slab rate. As a result, income tax will be levied on speculative and non-speculative business income in accordance with the individual’s income tax slab rates.
Securities Transaction Tax (STT) is a taxable amount that is levied in India on the acquisition or sale of securities listed on Indian stock exchanges. STT can be claimed under income tax if the STT amount paid is recognised as a business expense and if share income has been classified under the heading “Profits/Gains from Business and Profession” as per Section 36 of the Income Tax Act, 1961.
How to calculate STCG and LTCG along with your salary?
Here, we will take an example on how salaried individuals can calculate income tax on Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).
You invested Rs 10 lakh in a stock today and made an LTCG of Rs 3 lakh in two years, resulting in a net gain of Rs 13 lakh after two years. Long-term capital gains (LTCG) of up to Rs 1 lakh are exempted from income tax in a fiscal year if equity shares and equity mutual funds (MFs) are sold after being held for one year or more. Your total LTCG after exemption is now Rs 2 lakh. You will now pay Rs 20,000 in tax on your long-term capital gain at a 10% tax rate.
But it’s not over yet, here we will take advantage of tax harvesting to lower the taxable amount. Let’s assume that in 1 year your total cost of shares have gone up to Rs 11 lakh and the cost at which you had bought the shares was Rs 10 lakh. Here the gain made is Rs 1 lakh, but after the exemption of Rs 1 lakh on LTCG, so the tax you will pay will be zero. But let’s assume that your target to achieve is Rs 13 lakh in 2 years. Now to achieve this target what you will have to do is sell your entire shares and buy immediately. The tax harvesting rule will be implemented in this case; you will receive the same total number of shares in your demat account, but your new cost price will be Rs 11 lakh.
Let’s assume you fulfilled your target of Rs 13 lakh after one year from this time frame. Your new cost price is Rs 11 lakh, and your net profit is Rs 2 lakh in the span of 2 years. Taking the exempt amount of Rs 1 lakh LTCG into account, your net gain is Rs 1 lakh. Hence, utilising the tax harvesting approach, you will have to pay a tax of Rs 10,000 at a rate of 10%. Resident individuals should be aware that they lower their taxes on capital gains through a basic exemption limit of Rs 2.5 lakh. Hence, if you made an LTCG of Rs 3 lakh, you may take advantage of adjusting income tax against the basic exemption ceiling of Rs 2.5 lakh. Your final LTCG would now be Rs 50,000, and you will only have to pay a tax of Rs 5000 at a rate of 10%.
If you invested Rs 10 lakh in a stock today and made an STCG of Rs 3 lakh within 1 year of holding, you would have a net gain of Rs 13 lakh. Your short-term capital gains will be taxed at Rs 45,000 at a rate of 15%. Nevertheless, after adjusting income tax against the basic exemption threshold of Rs 2.5 lakh, the net taxable STCG will be Rs 50,000, resulting in a taxable amount of Rs 7,500 at a rate of 15%. Salaried taxpayers should be aware that the ITR Forms used to declare income from capital gains include ITR-2 and ITR-3. The Income Tax Department has stated that income generated by the sale or transfer of unlisted shares would be taxed as ‘Capital Gains’ regardless of the holding period. In the case of dividend income, the tax rate is 10%, and the need to deduct TDS arises if the amount of dividend received or paid to the shareholder surpasses Rs 5,000.
Section 43(5) of the Income Tax Act specifies that any transactions that occur during Futures and Options trading are non-speculative and are treated as business income or loss. Section 44AB states that if a trader’s total turnover over the period of a fiscal year exceeds Rs 10 crore, the trader must undergo a tax audit in accordance with the provisions provided in this section of the Income Tax Act.