Pay tax without pain on stock market gains

You love the stock market and the excitement you get from buying and selling stocks. Just keep in mind that the money you make may attract tax. And with the deadline for filing returns only a few days away, here’s a last minute reference guide on how the gains you made are taxed.

To understand the applicability of capital gains tax on your transactions, the first step is to classify yourself as either a trader or an investor.

Nithin Kamath, Founder and CEO of Zerodha, says the classification depends on how often you buy and sell and is also based on your income. But Raghu Kumar, Co-Founder of RKSV, a brokerage house, admits this is a grey area. Since the rules regarding classification are not in black and white, it will be a good idea to take the advice of an auditor before you file your return.

Any gain or loss made after holding the stock for more than 12 months is considered a long-term capital gain or loss. For an investor, long-term capital gains are completely exempt from tax.

But for a trader, the gains will be considered as business income and taxed at the normal slab rates of 10, 20 or 30 per cent. However, since this is business income, the expenses incurred on trading, such as internet connection charges and so on, can be excluded from the gains.

Gains made within 12 months of the sale of a stock are short-term capital gains, which are taxed at 15 per cent for investors. For traders, short-term gains are taxed the same way as long-term gains. In case of a loss, traders can set off/carry forward both short-term and long-term capital losses. In the case of investors, only the short-term capital loss can be carried forward and set off, with no provision for setting off or carrying forward a long-term capital loss. There is an eight year time limit for setting off a capital loss.

If you make a quick buck through day trading, the profit or loss from such intraday trades is treated as speculative activity. So if you make a profit, it will be added to your income and taxed as per your tax slab. A speculative loss can be taken forward for setting off, but only within the next four years and against speculative income.

If you are playing the F&O market, you are considered a trader. So profits from trading in the F&O market will be considered business income.

This will be added to your income under other heads and the total will be subject to taxation at the applicable income tax slab rate.

As usual, expenses incurred on trading can be deducted.

The loss can be carried forward and set off over the next eight years.

“The big mistake that traders do is they don’t declare the loss at the time of filing their returns,” says Zerodha's Nithin Kamath. “By doing so, the loss cannot be carried forward and set off against income from future years and it becomes a dead loss,” adds Kumar.

Apart from not declaring losses, erroneous calculation of the turnover is another common mistake that traders make. “Turnover is not the contract value, but the sum of the settlement profit and settlement loss for intraday trades in equity,” says Kamath. That is, if you make a profit of say ₹5,000 in one transaction and a loss of ₹5,000 in another transaction, then your turnover will be ₹10,000 (₹5,000 profit +₹5,000 loss).

A third error, according to Kumar, is in choosing the wrong ITR form for filing a tax return. “If you have only long-term capital gains or losses, you need to use ITR 2. For traders, ITR 4 is to be used, but getting your books audited is mandatory if you use this form to file your returns.”

“Auditing is also mandatory if your turnover is either greater than ₹1 crore, or if your turnover is less than ₹1 crore but your profit is less than 8 per cent of your turnover,” adds Kamath.

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