Tax on stock trading can be a crucial factor to consider if you are looking at your stock market returns. Taxes on trading stocks might eat into your returns. They might even turn seemingly profitable trades into loss-making ones. What’s worse? You might not see the taxes on stock trading right away while trading on your trading console.
You see some taxes on your contract note at the end of the day. At times, you may only realise you are obligated to pay while preparing to file your income tax returns. And that generally happens near or after the end of the financial year.
So, for the case of stock trading, the remedy is to study and understand what the taxes on trading stocks are in detail. Once you know them, you can devise a strategy to pay less taxes and maximise your gains from trading stocks. Before we learn how to maximise gains, let’s brush up on our knowledge of a few financial concepts next.
Your income from salary, rental income and business income is taxable. So is your income selling or purchasing of shares and other financial assets. Nowadays, many students, retired people and homemakers spend their time profitably buying and selling shares. However, they are not sure if this income is taxable. And if it is, how much tax should they pay on this income?
Let’s find out.
Gains or losses from the sale of equity shares are covered under the income tax head called capital gains.
Capital gains are further classified into two:
This classification is made as per the holding period. The holding period is the duration for which you hold the investment, starting from the purchase date till the sell date.
If you sell equity shares listed on a stock exchange within 12 months of purchase, you may make a short-term capital gain (STCG) or incur a short-term capital loss (STCL). You make a short-term capital gain when you sell shares higher than your purchase price.
STCG = Sale price − Expenses on Sale − Purchase price
A flat tax rate of 15% is applicable on your short-term capital gains irrespective of your income tax slab.
If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make a long-term capital gain (LTCG) or incur a long-term capital loss (LTCL).
If you make a long-term capital gain of more than ₹1 lakh in a financial year on the sale of equity shares or equity-oriented units of a mutual fund, the gain will attract a long-term capital gains tax of 10% along with applicable cess.
Securities Transaction Tax or STT of 0.100% applies to all equity shares bought on a stock exchange.
Assume that you, unfortunately, made a loss of ₹ 1 lakh while trading shares in the last financial year. However, this financial year was better, and you made a profit of ₹2 lakh. You can deduct the previous year’s losses from this year’s gains to pay tax only on your net gains made over two years.
Thus, if we calculate the tax for this year, subject to certain terms and conditions, you may pay taxes only on ₹2 lakh (this financial year’s gains) − ₹1 lakh (last financial year's losses) = ₹1 lakh. This is called offsetting losses.
In our example, we considered consecutive years. However, losses may be offset over multiple years subject to specific terms and conditions.
Let’s now see what the key conditions are.
Any short-term capital loss from the sale of equity shares can be offset against short-term or long-term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for eight years and adjusted against any short-term or long-term capital gains made during these eight years.
It is essential to consider that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an income tax return is a must for carrying forward these losses.
Are you planning to save taxes? Do you want to invest in mutual funds for the same?
The Fi Money app helps you choose from various tax-saving mutual fund schemes. All you have to do is complete your mandate and instruct the app to deduct a fixed amount, say, ₹12,000, on the first of every month and invest in an Equity Linked Savings Scheme of your choice. Investing in mutual funds with Fi Money is smart, simple and secure.
Long-term capital loss can be set off against any other long-term capital gain. Note that you cannot set off long-term capital loss against short-term capital gains.
Also, any unabsorbed long-term capital loss can be carried forward to the subsequent eight years for set-off against long-term gains. To set off and carry forward these losses, a person has to file the return within the due date.
You can plan to reduce your expenses on food and beverages at the movie hall once you are aware of the expenses.
Similarly, you can plan your trading strategy to be more tax effective only when you know what the taxes applicable on trading are.You can plan your trades, taking into account the taxes payable. You may offset your gains in this financial year with losses, if any, from the last financial year. You may also plan to hold shares over longer terms as long-term capital gains tax is less than short-term capital gains tax.
If you sell a share within a year of buying it, you must pay 15% Short Term Capital Gain or STCG tax.
If you sell a share after one year of buying, it is called a Long Term Capital Gain or LTCG. If you make a long-term capital gain of more than ₹1 lakh in a financial year on the sale of equity shares or equity-oriented units of a mutual fund, the gain will attract a long-term capital gains tax of 10% along with applicable cess.
Securities Transaction Tax or STT of 0.100% applies to all equity shares bought on a stock exchange.
You can avoid paying taxes when you sell a stock by offsetting it with losses you may have made in the previous financial year. You can only do this if you have filed the income tax returns for the previous financial year on time.
You can also pay less taxes by holding shares over long periods. This is because the long-term capital gains tax is less than the short-term capital gains tax.
Yes. Depending on your holding period, you may pay a 15% Short Term Capital Gains tax or 10% Long Term Capital Gains tax along with cess. Securities Transaction Tax or STT of 0.1% is applicable on the purchase of stocks.
