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Taxation explained an important factor to consider about investments.
Being aware of taxation laws is crucial for every trader and investor. If you aren’t wary regarding taxation on your investments, you might end up investing in financial instruments that you later regret because of the tax on them. Is there tax when you buy and sell shares on the stock market? This answer is yes. Here’s everything you need to know about stock market taxation.
1. Taxation on Gains
When you purchase equity shares for the long haul or for the short term, taxation is applied to the gains you incur from these shares. These types of stock market taxation are known as STCG tax and LTCG tax. STCG tax refers to short term capital gains tax and LTCG tax refers to long term capital gains tax. If your equity holdings are sold within 12 months of buying them you will incur STCG taxation at 15%. If you sell your equity holdings any time after 12 months have passed, you incur LTCG tax. LTCG is applied at 10% if you earn more than ₹1 lakhs in long term capital gains from your equity holdings.
2. Taxation on Transactions
All the equities that are bought and sold on the stock market also undergo a form of stock market taxation. This is known as Securities Transaction Tax (STT). STT applies to all of one’s equity shares that are bought and/or sold on the exchange. This is particularly for those equity shares that have been listed on that stock exchange. Hence, any purchase of equities listed on their respective stock exchange will be subjected to STT.
3. Speculative Business Income
This type of stock market taxation applies to those who dabble in intraday trading. Intraday trading is a trading strategy where one buys and sells the same stock within a single trading day. Any income or returns generated from intraday trading are classed as speculative business income. As per the Income Tax Act’s Section 43 (5), these profits are to be added to your annual income. Hence, day trade returns will increase your annual income and be tax according to the tax slab you fall into. Keep in mind that you can offset your speculative intraday losses against any other kinds of speculative gains to reduce your tax burden.
4. Non-speculative Business Income
When one trades futures and options on the stock market, a kind of indirect stock market taxation can be applied. Similar to intraday trading, the gains from trading futures and options are classed as non-speculative business income and add to your annual income when you file your income tax. The higher your annual income the greater the chance that you will enter a bigger tax slab. Hence, both speculative business income and non-speculative business income are progress forms of taxation that are paid for you in the form of income tax. However, even non-speculative income is a double-edged sword. Let’s assume you incur non speculative losses. You can offset this loss against any income that doesn’t count as salary to reduce your income tax burden.