Taxability In Case of Shares & Derivatives Trading

Taxability In Case of Shares & Derivatives Trading

Taxability In Case of Shares & Derivatives Trading: As per the income tax regulations of India, the purchase of shares made with the intent of earning profit is deemed a business activity, whereas the purchase of shares made with the purpose of earning income through capital appreciation is regarded as an activity of investment. Hence, if an individual derives income from Intraday trading, shares held with an investment objective, and Futures & Options (F&O), he shall have two portfolios.

Business Income is the income generated from intraday trading and F&O. In contrast, gains from the sale of shares held to earn capital appreciation would be classified as ‘Capital Gains’. Suppose a person is engaged in shares dealing. In that case, it can result either in Business Income or Loss (liable under section 28 as Profits & Gains of Profession or Business) or Capital Gain or Loss (liable under section 45 as Capital Gain).

Income Classification

It depends on the facts and circumstances of each case as no standard guideline is available, which helps determine the nature of income for taxability purposes. However, as a comprehensive guideline, as held in many cases, ordinary purchase and sales of shares to earn profit would result in business income. Still, where the investment objective is to earn income through dividends, the profit from sales of shares will yield capital gains.

Trading Types in Share and Derivatives

When the income is treated as Business Income, trading in shares and derivatives can be of two types: Intraday trading and Delivery based trading.

Intraday Trading: Intraday trading is the type of trade that is executed within a single day in the stock market, i.e., A person buys and sells shares on the same day. In this course of action, supplies are purchased with the intention of earning profits and not with any objective of investment. This is done by harnessing the movement of stock, which means that the stocks’ varied prices are harnessed to earn profits from the trading of stocks. Intraday trading means a trading system where the trader will square-off their trade/position on the same day. Also, the buyer of the shares does not need to pay the full consideration for the trading; instead, he will pay or get the difference margin arising on account of such buy/sell transaction.

Advantages Disadvantages
  • As the amounts are small, the nature of investment is only capital
  • Maximum profits can be made by leveraging the invested capital
  • There is no risk related to the overnight fluctuation of shares
  • The earnings are very short term
  • The possibility of loss is very high
  • A constant minute by minute observation is required in order to avert loss

Delivery Trading: The most popular trading method in the stock market is Delivery Trading. Unlike intraday trading, delivery trading includes a more definite purpose of investment than just trading opportunities. This is because the investors have it in mind to hold on to their stock holdings for a more extended time. In this method, there is no time confinement in the selling of stocks. As long as the stocks are delivered to the associated Demat accounts, they are considered a delivery trade. One cannot perform delivery trades without a Demat account – since a Demat account is where the stocks are stored.

Advantages  Disadvantages
  • There is no time limit to sell stocks.
  • It gives easy bonus earnings as to dividend, rights issues, bonus issues, etc.
  • It significantly increases the investor’s profits as higher returns are furnished to the owner through the company’s dividends and bonuses.
  • There is no risk of short selling.
Delivery Trading cannot occur if the investor cannot pay the entire transaction upfront.

Taxation on Long-term and Short Term Capital Gains

The taxation structures for both long-term and short-term capital gains are different. Long-term capital gain is taxed at 10% when the income exceeds that of 1 Lakh. As this tax structure was new, and to ensure a tax calculation from 1st of February 2018, a new clause was added, which said that stocks bought before the 1st of February would have a higher acquisition cost than the stock price or max price on 31st of January.

For Short-term capital gains, the tax rate is at 15% on the gains made by selling shares or equity-based mutual funds.

Taxation on Business Income

  • Speculative Business Income: The speculative transaction as per section 43(5) of the Income Tax Act 1961, indicates a transaction in which a deal for the purchase or sale of any assets, including stocks and shares, is annually or conclusively resolved otherwise than by transfer of the commodity or actual delivery or scripts subject to a specific exemption. Therefore, intraday trading of shares is regarded as speculation income.
  • Non-speculative Business Income:  Non-speculative business income is delivery based trading of shares is non-speculative business income. Income from trading in Futures & Options (both intraday or overnight) on all the approved exchanges (such as BSE, MCX, NSE,) is also recognised as non-speculative business income.

There is no fixed tax rate in business income; one is required to add the non-speculative or speculative business income to all their other income and pay taxes according to the slab applicable to them.

FAQ’s on Taxability In Case of Shares & Derivatives Trading

What is the need for a Tax Audit?

If the turnover, gross or total sales receipts surpass Rs 1 Crore in the relevant financial year, then a tax audit is required under section 44AB of the Income Tax Act. A person can additionally opt for a theoretical scheme up to a turnover of Rs 2 Crore.

Question 2.
What are the types of Capital Gains?

Capital gains are the gains in the value of capital assets owned by a person, and it is materialised when the sale of purchases take place. The types of capital gain are Short Term and Long Term Capital Gain.

Question 3.
Define Short Term Capital Gain?

Short-term capital gains occur from selling capital assets earned within one year. This capital gain is taxable at 15%.

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