Tax Treatment for Equity Traders

Author
By Hiral Vakil on August 14, 2019

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:

  1. Delivery based /Non-Speculative trading,
  2. 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:

  1. 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.
  2. 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.
ITR for Capital Gains from Trading in Stocks View Plan

Tax Rates

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)

Income Tax Rates for AY 2019-20

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:

Particluars Amount Total Amount
Salary Income   870000
Capital Gains    
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