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What is Taxation of Income in Stock Market July 12 2017Taxation

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What is Taxation of Income in Stock Market

Are you confused about the treatment of taxation on income arising from the stock market? As the July 31st deadline for filing tax returns for individuals approaching near, we like to share with you a complete guide on taxation details of income arising from the stock market.

We all know that income from salary, business income and rental income are taxable. But what about income generated from purchase and sale of shares? People generally think that it is exempt from tax but this is not true. The fact is, income arising from sale and purchase of shares attracts tax. Let us understand the tax implications on income from the stock market.

The income from stock market can be classified into three broad categories:

1.     Capital Income (It may be short-term capital gain or long-term capital gain)

2.     Speculative Business Income

3.     Non-Speculative Business Income

Now let us understand what each of these means.

1.     Capital Income:

If your transaction frequency is low and you intend to hold your investment in stock for capital appreciation and you earn dividend out of it, then your income will be treated as capital income or capital gains.

 Capital gains can be further classified into long term capital gains and short term capital gains. This bifurcation depends on the period of holding the stocks. If you hold your investment for more than 12 months then it will be long term capital gains. Likewise, if you hold your investment for less than 12 months then it will be short term capital gains.

Taxation of Long Term Capital Gains:

Long term capital gains are exempt from tax which means that you are not required to pay any tax if you hold your investments for more than 12 months. Let us understand this by an example.

Example :- 

Let’s say, you purchased shares of Reliance Industries for Rs. 50,000. You sell these shares after 5 years at Rs. 80,000. In this case, the profit earned of Rs. 30,000 is considered as long term capital gain. This is because you are selling the shares after 1 year from the date of purchase. The tax applicable on Rs. 30,000 is nil as long-term capital gains are exempt from tax.

Taxation of Short Term Capital Gains:

 Short term capital gains are taxable @ 15%.

Example :- 

Let us understand this with the same example of Reliance Industries. You purchased shares of Reliance Industries for Rs. 50,000. You sell these shares after 3 months at Rs. 55,000. In this case, the profit earned of Rs. 5,000 is considered as short term capital gains. This is because you are selling the shares within 12 months from the date of purchase. The tax applicable on short-term capital gains is 15%. So you are liable to pay a tax of Rs. 750 (5,000 x 15%).

2.     Speculative Business Income:

If you aim to take the advantage of price speculation and do not intend to hold the stock for capital appreciation, then your income will be classified under speculative business income. In this category, your stock holding period is less and the volume of transactions are high. So any profit earned by the trading of shares in intraday (non-delivery) is classified under speculative business income.

Taxation of Speculative Business Income:

Income from speculative business is clubbed with other business income and taxed under the head ‘Profits and Gains from Business and Profession’ (PGBP). There is no fixed rate of tax under this category. The tax has to be paid based on the slab rate applicable to you.

Example :-

Like for example, your business income is Rs. 50,00,000 and income from intraday trading is Rs. 1,00,000. So to find out the tax liability, your total business income (speculative and non-speculative) is to be added and based on the tax slab, your tax liability will be determined. Like in this example, Total income = Rs. 51,00,000 (Rs. 50,00,000 business income + Rs. 1,00,000 intraday trading income) and you have to pay the tax on Rs. 51,00,000 based on the slab rate you fall in.

 

0 to Rs. 2,50,000 (0%)

Nil

Rs. 2,50,000toRs.5,00,000 (10%)

Rs. 25,000

Rs. 5,00,000toRs. 10,00,000 (20%)

Rs. 1,00,000

Rs. 10,00,000 and above (30%)

Rs. 12,30,000 (i.e. 51,00,000 – 10,00,000 x 30%)

 

Hence total tax = Rs. 25,000 + Rs. 1,00,000 + Rs. 12,30,000 = Rs. 13,55,000

 

3.     Non-Speculative Business Income:

If you trade in Futures & Options market, you are a trader. So, any income arising from trading in Futures & Options market is categorised under non-speculative business.

Taxation of Non-Speculative Business Income:

Income from non-speculative business is clubbed with other income and taxed in total at the applicable income tax slab rate.

Example

Like for example, your business income is Rs. 20,00,000 and income from trading in Futures & Options is Rs. 3,00,000. As such for tax liability, your total income is Rs. 23,00,000 (Rs. 20,00,000 + Rs. 3,00,000) and you have to pay the tax on Rs. 23,00,000 based on the slab rate applicable to you.

 

0 to Rs. 2,50,000 (0%)

Nil

Rs. 2,50,000toRs.5,00,000 (10%)

Rs. 25,000

Rs. 5,00,000toRs. 10,00,000 (20%)

Rs. 1,00,000

Rs. 10,00,000 and above (30%)

Rs. 12,30,000 (i.e. 51,00,000 – 10,00,000 x 30%)

 

                     Hence total tax = Rs. 25,000 + Rs. 1,00,000 + Rs. 3,90,000 = Rs. 5,15,000

 

As explained above, it is clear that F&O trading is categorised under non-speculative business and intraday equity trading is categorised under speculative business.

 

Taxation of Dividend Received on Shares:

If you receive any dividend on shares of an Indian company, that dividend is fully exempt from tax. However, the company has to pay dividend distribution tax at the rate of 15% on the dividend paid by it.

 

Conclusion

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