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Know tax treatment of gains/losses from stock trading
July, 31st 2020

Retail trading volume in India has surged ever since the Covid-19 induced lockdown was announced as many retail investors shifted from mutual fund to direct trading in order to capitalise on the volatility shown by stock markets. Many brokerages have seen a surge in new demat account opening as people wanted to use their free time during the lockdown for stock trading. If you have traded in stocks during the previous financial year you should know that you have to show your trading gains/losses to the Income Tax Department while filing Income Tax Return (ITR). 

Many taxpayers do not report trading gains, losses to the I-T department. But tax experts say it is advisable not to conceal your trading gains/losses to the I-T department as each and every transaction is reported to the authority through your broker. In such a situation you should know the tax rules on intraday losses/gains and the tax treatment of short term and long term gains from stocks.

How trading is different from investing

Buying and selling a stock on the same day is known as intraday trading. But if you buy a stock and hold it for at least a day then it is called investing. The loss/profit derived from intraday trading is termed as speculative loss or speculative gain and comes under the head of business income. On a net basis, if you make profit in intraday trading then it gets added to your total income and is taxed as per your tax slab.

However, if you make loss in intraday trading than that loss is allowed to be set off against profit from other speculative businesses. But if you don't have gains from any other speculative business then that loss can be carried forward to the next four years for set off against future speculative income, say tax experts.

But in case of investing, you either make capital loss or capital gains. Again the capital gain and losses are classified as either short term or long term depending upon the holding period of the stock. If a stock is held for more than a year, then the gain or loss derived from the stock is termed as long-term capital loss or gain. And long term gains above Rs 1 lakh in a particular financial year is taxed at the rate of 10%.

However, if a stock is held for less than a year, then the gain or loss derived from the stock is termed as short term capital loss or gain. Short-term gains are taxed at the rate of 15%.

What if you have long-, short-term loss

Tax rules in India allow carrying forward of both short-term and long-term capital loss for eight assessment years immediately following the assessment year in which the loss was first reported. This loss can be set off against future capital gains.

Expense deduction

While arriving at the income or loss from trading of stocks, taxpayers are allowed to deduct the expenses related to trading such as internet charges, telephone charges, broker's commission, demat account maintenance charges, advisory fees paid to broker as business expenses before calculating gains/losses from speculative business (intraday stock trading).

Which ITR form to use

For individuals having salary income along with income from business or profession are required to use ITR-3 form for filing ITR.

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