Trading Taxes in India
Trading taxes in India can be complex. Rules can vary depending on how your trading activity is classed and what it is you are trading, be it stocks, forex, or options.
This article will break down the key information for online traders, as well as explaining the benefits and drawbacks associated with trading tax rates in India.
Key Takeaways
- The Central Board of Direct Taxes (CBDT) in India is the statutory authority within the Income Tax Department responsible for administering local tax rules.
- The CBDT controls the Indian Revenue Service (IRS), which collects taxes from online traders.
- There are four classifications for determining one’s tax status: long-term capital gains, short-term capital gains, speculative business income, and non-speculative business income.
- Traders who fall under the business income brackets will have some challenges to consider, including the potential for 30% taxes and auditing requirements.
- The process of collating taxes at the end of the year can be made easier using a reputable broker, although there may be some brokerage taxes to consider.
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Trading Classifications
Intraday trading tax in India will depend on which classification you fall under. India’s Central Board of Direct Taxes (CBDT) breaks trading taxes into four distinct categories.
1. Long-Term Capital Gains
If you hold an investment for more than one year (365) days, any profits that arise from your buying and selling of a stock will often be treated as a long-term capital gain. Which, as per section 10 (38) of the Income Tax Act, 1961, is exempt from tax. This means you will get to keep all your profits.
Having said that, there are certain criteria you must meet. Transactions must be done through a recognized exchange where Security Transaction Tax (STT) is paid.
It is also worth noting that exemption of long-term capital gains tax is not applicable if the shares are sold outside of India. On top of that, capital loss from equity shares is generally considered a dead loss. It cannot be adjusted or carried forward.
However, as a short-term trader, you are unlikely to fall into this category.
2. Short-Term Capital Gains
If you hold your stock for more than one day but less than 365 days then you may face a 15% tax. This is because any trading between these time frames will likely fall under the short-term gains classification.
However, your delivery of shares must go into your demat account. Exchanges normally have a settlement time of T+2 working days. So, if you buy a stock on Tuesday it will come into your account on Thursday.
It is worth noting that if your total income is less than the basic exemption limit, you may be able to benefit from such shortfall in your tax free amount. So, commodity trading taxes in India can remain at zero if you don’t turn substantial profits. However, if you are placing a high number of intraday trades, then you may not fall under this tax bracket anyway.
3. Speculative Business Income
This is concerned with intraday trading. Any trade where you buy and sell a security on the same trading day will count as a day trade. Any profits you make from these transactions are normally classed as speculative activity.
Section 43 (5) of the Income Tax Act, states that any such profits will be added to your other income. This means it will be taxed in line with your total income slab.
So, this is a progressive tax and the total value of your obligations will depend on your total profits at the end of the tax year.
4. Non-Speculative Business Income
This category concerns the futures and options trading tax rate in India. Both are viewed differently to other instruments. Any income from trading on recognized exchanges will likely be considered non-speculative business income.
This means your profits will be added to your total income and you will pay in accordance with your tax slab. However, as this income is considered business income, you can offset it against business expenses you have incurred. That means advisors fees, internet bills, software charges and more can all be offset. So, many view option trading tax in India as rather appealing.
Pros & Cons Of Business Income Tax
Those considering registering for business income tax for trading in India, there are some benefits and drawbacks to be aware of:
Pros
- Relatively low tax – If your total income is less than Rs 250,000 then there are zero tax implications. Even if your income is less than Rs 500,000, you pay less than 10% in income tax.
- Expenses – With capital gains, only charges on your contract note other than STT are allowed to be claimed for. However, with business income tax you can claim on everything from brokerage charges and statutory taxes whilst trading, to books and depreciation of electrical devices.
- Offset losses with gains – If you incur any non-speculative losses, you can offset them against any of your income that isn’t salary.
- Carrying forward F&O losses – If you have any net loss (non-speculative F&O + income apart from salary), and you file your returns before the due date, losses can be carried forward for eight years. During those eight years, you can offset the loss against any other business gain. Let’s say you had a net loss of Rs 400,000 and you carried it forward. If the next year you made Rs 3,000,000, you could offset last year’s loss and pay taxes on just Rs 2,600,000.
- Carrying forward intraday equity losses – Speculative or intraday equity losses can be offset against other speculative gains. You can carry forward these losses for four years as long as you file your returns on time. Let’s say you’re an equity trader who lost Rs 25,000 this year and then the next year you made Rs 75,000 profit. You could use last year’s loss to offset this year’s gain. The balance of the loss would be Rs 50,000 which could be carried on for the next three years.
Cons
- Potential for high taxes – If you find yourself in the 30% tax slab, you could pay up to 30% on all your trading profits in tax.
- Audit – You need to keep a close record of all your trades and accounts. If your turnover exceeds Rs 2 crore a year, or if your profit is less than 8% of your turnover, you could be audited.
- ITR forms – If you declare your trading taxes as business income you will have to use ITR4 or 4S. This will probably require the help of a chartered accountant to file your returns. This will be both time-consuming and expensive.
Application
Your initial task will be to determine which of the above categories best describes your trading activities.
If you are unsure and require further clarification on Indian day trading tax rules, you should seek professional tax advice.
‘Tax Slab’
Active day traders whose profits fall under the business income tax rules, will have to pay in accordance with their tax slab. If total earnings are above the minimum income slab, traders may be obliged to pay something.
However, it is worth noting that in India only 2.9% of the over 121 crore population pay taxes, whilst over 45% of US citizens do.
Tax Example
Below is an example of what share trading tax implications in India could look like.
Let’s say your profits at the end of the financial year from day trading were Rs 150,000 and your salary for the year was Rs 350,000. Your total income would be Rs 500,000. In this case, your tax slab would be Rs 25,000.
Collating Your Taxes
It is important to keep track of all your profits and losses, so you can total them up at the end of the tax year.
Many reputable brokerages also offer capital gains/tax statements at the end of the financial year, so it is worth looking out for these to avoid hassle.
Brokerage Taxes
There may also be taxes imposed by your broker to take into account. You should consider several factors in your tax calculations:
- The maximum intraday brokerage offered is around 0.05% for purchasing and 0.05% for selling. You may get even more favorable rates. However, if you’re paying more you may want to consider changing brokers.
- The service tax is 12.36% only on brokerage.
- The STT tax is 0.025% only on the selling value.
- The stamp duty on your overall daily turnover is 0.02%.
- You will also have to pay regulatory charges on daily turnover which amounts to around 0.004%.
Final Word
Day trading tax rules in India are complicated yet more favorable than many other countries. The first hurdle is deciding which of the categories above your trading activity fits into. Whilst you will probably fall under the ‘business income tax’ umbrella, it is important to be aware of the benefits and drawbacks.
This page is not trying to offer tax advice. Therefore, it is always advisable to seek professional guidance before filing your tax returns.
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