Tax on Stock Trading – Were you aware of these Charges??

Remember those college days when we lived on a strict budget. Everything, including birthday gifts to canteen bills, had to be taken into consideration, and all expenses had to be adjusted within the given pocket money.

All movies were seen on Tuesdays to take advantage of the buy-one-get-one-free deal. Even in McDonald’s and Subway, treats were limited to one burger because poor us paid GST as well. So the movie ticket and burger were both paid for within the budgets along with the payments of applicable tax on each of them. 

Now, let’s explore the tax implications of stock trading. As investors, we must be aware of the appropriate taxes on stock trading. This enables us to determine what our actual profit is after we’ve paid the government the applicable tax. We will help you comprehend every aspect of it. 

Content:

• Tax on Stock Trading
• Income tax on Stock Trading – Types
• Short Term Capital Gain Tax on shares
• Long Term Capital Gain Tax on Shares
• Stock Market Loss tax deduction
• Quick Summary

Tax on Stock Trading

Securities Transaction Tax (STT) is the tax imposed on all share trading transactions. Any transaction involving the purchase or sale of publicly traded securities is subject to the Securities Transaction Tax. Therefore, STT would apply to all transactions involving the purchase and/or sale of shares.

Income Tax on Stock Trading – Types

Tax is only imposed on profit gains or other monetary benefits derived from trading stocks. This only occurs when the selling price of shares is more than the amount paid to acquire those shares. In other words, tax on intraday trading is subject to profits and is charged in accordance with laws.

For Example, 

Shares that have been purchased for ₹ 450 per share are sold at the price of ₹ 490 per share. In this case, the difference between the Sale price (₹ 490) and Purchase price (₹ 450), i.e., ₹ 40, is the profit accrued per share.  Such profit is taxable.  The above-explained profit is called Capital Gain, and the tax applicable to it is called Capital Gain Tax.  There are mainly two types of Capital Gain Taxes in India named as follows:

1. Short-Term Capital Gain Tax (STCG)
2. Long-Term Capital Gain Tax ( LTCG)

Short Term Capital Gain Tax

Short-Term Capital Gain Tax on shares occurs when an investor sells off shares within 12 months of purchase (24 to 36 months for regular assets). Hence, when the holding period between Purchase and Sale of the Shares is less than or equal to 12 months, the profit so occurred is taxed as per the  Short Term Capital Gain Tax Rate, i.e., 15% excluding surcharge and cess.

For Example, 

An investor purchased shares of a company on 1^st January. If he sells these shares within 12 months, i.e., on or before 31^st December of the same year, he would have held the shares only for 12 months. In this case, the profit earned from this transaction would be liable to be taxed at 15%. The gain earned by him is called Short Term Capital Gain, and the tax so paid is called Short Term Capital Gain Tax (STCG).

Long Term Capital Gain Tax.

Long Term Capital Gain on shares is earned when the investor holds for more than 12 months and is sold for a profit. Also Long Term Capital gains up to ₹ 1 Lakh are not subject to tax. Gains above ₹ 1 Lakh are taxed as per applicable laws. 

Thus holding period of shares should be more than 12 months for making a long-term capital gain which is taxable at 10%.  Here the holding period of shares is the actual test of whether the profit earned is a Long term Capital Gain or a Short Term Capital Gain. 

Current surcharges on long-term capital gains for an individual assessee on assets are 10% if their income exceeds ₹ 50 Lakh but does not exceed ₹ 1 Crores. It is 15% if the revenue is between ₹ 1 Crores and ₹ 2 Crores, and 25% if it is between ₹ 2 Crores and ₹ 5 Crores. If the revenue is greater than ₹ 5 Crores, the surcharge is 37%.

Consequently, this capping will primarily benefit individuals with incomes exceeding ₹ 2 crores.

Now all sorts of long-term capital gains will be capped to a 15% surcharge.

For Example: 

When an investor purchases shares of a Company on 1^st January. He decides to hold those shares for a long period of 20 months, sells those shares in the next year, and earns a profit of ₹ 1.5 Lakh.  Here the holding period exceeds the limit of 12 months (i.e., 20 months).  Profit incurred on selling these shares after holding them for a long period of more than 12 months is called as Long Term Capital Gain (LTCG).

If the said gain is within the limit of ₹ 1 Lakh, no tax is required to be paid on it. Any amount above the limit of ₹ 1 Lakh will be taxable as applicable Income Tax laws at 10 %. Therefore, here out of a total Long Term capital gain of ₹ 1.5 Lakh, only Rupees Fifty Thousand would be subjected to tax at 10%. 

Stock Market Loss Reduction

Any losses incurred while trading in stocks may be carried forward and offset against profits gained in the same category for up to eight years. Short Term Capital Losses can therefore be carried forward for up to eight years and offset against Short Term Capital Gains. Long-term capital losses can be carried forward for up to eight years and offset against long-term capital profits.

Quick Summary

• Securities Transaction Tax (STT) is the tax imposed on all share trading transactions. Any transaction involving the purchase or sale of publicly traded securities is subject to the Securities Transaction Tax.
• Tax is only imposed on profit gains or other monetary benefits derived from trading stocks. This only occurs when the selling price of shares is more than the amount paid to acquire those shares.
• There are mainly two types of Capital Gain Taxes in India named as follows:

1. Short-Term Capital Gain Tax (STCG)
2. Long-Term Capital Gain Tax ( LTCG)

• Short-Term Capital Gain Tax on shares occurs when an investor sells off shares within 12 months of purchase (24 to 36 months for regular assets). Hence, when the holding period between Purchase and Sale of the Shares is less than or equal to 12 months, the profit that occurred is taxed as per the  Short Term Capital Gain Tax Rate, i.e., 15% excluding surcharge and cess.
• Long Term Capital Gain on shares is earned when the investor holds for more than 12 months and is sold for a profit. Also Long Term Capital gains up to ₹ 1 Lakh are not subject to tax. Gains above ₹ 1 Lakh are taxed as per applicable laws. Thus holding period of shares should be more than 12 months for making a long-term capital gain which is taxable at 10%. 
• Any losses incurred while trading in stocks may be carried forward and offset against profits gained in the same category for up to eight years.