Tax Treatment for Equity Traders
Trading in equity shares and stocks have become very easy due to the availability of online trading platforms. Trading in equity shares and Mutual Funds (MFs) can be categorized in two types:
- Delivery based /Non-Speculative trading,
- Non-delivery based / Speculative trading.
Tax treatment is different in both types. In this article, we will discuss the tax treatment of delivery based / Non-Speculative trading transactions. All the delivery based transactions are covered under the Capital Gains Income Head.
Types of Capital Gains
Under the IT Act, capital gain income is taxed at different rates based on its type. There are two types of Capital Gains:
- Long Term Capital Gain (LTCG): Any gain arising on the sale of Long Term Capital Asset is considered as Long Term Capital Gain. Any shares/ stocks held for more than 12 months is considered as Long Term Capital Assets.
- Short Term Capital Gain (STCG): Any gain arising on the sale of Short Term Capital Asset is considered as Short Term Capital Gain. Any shares/ stocks held for 12 months or less is considered as Short Term Capital Assets.
Capital Gains are taxed at a special rate under the income tax act. Following are the tax rates applicable for FY 2018-19:
|Type of Security||Long Term Capital Gain||Short Term Capital Gain|
|Listed Equity Shares (STT is applicable)||10% (Upto 1,00,000 Exempt u/s 112A)||15%|
|Equity Shares (STT is not applicable)||20%||Normal Slab Rate|
|Equity Mutual Funds||10%||15%|
|Debt Mutual Funds||20%||Normal Slab Rate|
Note: Surcharge is liable on the total income as per the prescribed surcharge slab rates. Health & Education Cess is liable at 4% on (basic tax + surcharge)
ITR Form, Due Date and Tax Audit Applicability
- ITR Form: Trader needs to file ITR-2 for FY 2018-19.
- Due Date: The due date to file ITR will be 31st July of the next financial year. For FY 2018-19 the due date is 31st August 2019.
- Tax Audit: It is not applicable. Since income is considered as Capital Gains income no need for a tax audit.
Treatment of Losses
Short Term Capital Losses:
- Treatment in Same Year: Short Term Capital Losses(STCL) can be set off against other STCG and LTCG. It can not be set off against other incomes.
- Treatment in Next Year: Short Term Capital Losses(STCL) can be carried forward for 8 years and set off against Capital Gains only.
Long Term Capital Losses:
- Treatment in Same Year: Long Term Capital Losses(LTCL) can be set off against other LTCG. It can not be set off against STCG and any other incomes.
- Treatment in Next Year: Long Term Capital Losses(LTCL) can be carried forward for 8 years and set off against Capital Gains only.
Let’s take an example to understand it better:
Mr Ajay is a salaried individual and has done some share trading in the FY 2018-19. His total salary income for a year is Rs. 8,70,000. And has Short Term Capital Loss of Rs. 30000 and Long Term Capital Gain of Rs. 2,50,000.
Now in the above case, Ajay needs to file ITR-2 for FY 2018-19. And his total income and tax liability will be as follows:
|Short Term Capital Loss||30000|
|Long Term Capital Gain||250000|
|Less: Exemption u/s 112A||(100000)|
|Taxable Long Term Capital Gain||150000|
|Total Capital Gains after set off of losses (taxed @10%)||120000|
|Total Taxable Income||990000|
|Tax at slab rate||86500|
|Tax at special rate||12000|
|Total Income Tax||98500|
|Health & Education Cess @4%||3940|
|Total Tax Liability||102440|