If you are an investor or a trader in the stock market, you might be wondering how your income from selling shares is taxed. After all, you don’t want to pay more tax than you have to, or worse, get into trouble with the tax authorities for not reporting your income correctly.
In this article, we will explain how to calculate income tax on stock market earnings along with your salary, and what are the rules and exemptions that apply to different types of income from shares. We will also answer some frequently asked questions on this topic.
What are the types of income from shares?
Income from shares can be classified into two categories: capital gains and business income.
Capital gains
Capital gains are the profits or losses that you make when you sell your shares at a higher or lower price than what you bought them for. Capital gains can be further divided into two types: short-term capital gains (STCG) and long-term capital gains (LTCG).
Short-term capital gains (STCG)
STCG are the gains that you make when you sell your shares within 12 months of buying them. For example, if you buy 100 shares of ABC Ltd. at Rs. 100 per share on 1st January 2023, and sell them at Rs. 120 per share on 30th June 2023, you will make a STCG of Rs. 2,000 (100 x (120 – 100)).
Long-term capital gains (LTCG)
LTCG are the gains that you make when you sell your shares after holding them for more than 12 months. For example, if you buy 100 shares of XYZ Ltd. at Rs. 200 per share on 1st January 2023, and sell them at Rs. 250 per share on 1st February 2024, you will make a LTCG of Rs. 5,000 (100 x (250 – 200)).
Business income
Business income is the income that you earn from trading in shares as a regular activity, with the intention of making profits from price fluctuations. Business income can also be further divided into two types: speculative business income and non-speculative business income.
Speculative business income
Speculative business income is the income that you earn from intraday trading, i.e., buying and selling shares on the same day. For example, if you buy 100 shares of PQR Ltd. at Rs. 300 per share on 1st March 2023, and sell them at Rs. 320 per share on the same day, you will earn a speculative business income of Rs. 2,000 (100 x (320 – 300)).
Non-speculative business income
Non-speculative business income is the income that you earn from trading in shares other than intraday trading, i.e., holding shares for more than one day. For example, if you buy 100 shares of LMN Ltd. at Rs. 400 per share on 1st April 2023, and sell them at Rs. 420 per share on 15th April 2023, you will earn a non-speculative business income of Rs. 2,000 (100 x (420 – 400)).
How is income tax calculated on stock market earnings?
The tax treatment of your stock market earnings depends on whether they are classified as capital gains or business income, and whether they are short-term or long-term in nature.
Taxation of capital gains
The taxation of capital gains from equity shares listed on a recognized stock exchange in India is as follows:
- STCG are taxed at a flat rate of 15%, irrespective of your tax slab.
- LTCG are taxed at a flat rate of 10%, but only if they exceed Rs. 1 lakh in a financial year. LTCG up to Rs. 1 lakh are exempt from tax.
- There is no benefit of indexation for calculating LTCG from equity shares.
- There is no tax deducted at source (TDS) on capital gains from equity shares.
The calculation of capital gain is done by deducting the purchase price and the expenses related to the sale (such as brokerage, stamp duty, etc.) from the sale price.
For example, suppose you have the following transactions in equity shares in the financial year 2023-24:
| Transaction | Date | Shares | Purchase Price | Sale Price |
|---|---|---|---|---|
| Buy ABC Ltd. | 01/01/2023 | 100 | Rs. 100 | – |
| Sell ABC Ltd. | 30/06/2023 | 100 | – | Rs. 120 |
| Buy XYZ Ltd. | 01/01/2023 | 100 | Rs. 200 | – |
| Sell XYZ Ltd. | 01/02/2024 | 100 | – | Rs. 250 |
| Buy PQR Ltd. | 01/03/2023 | 100 | Rs. 300 | – |
| Sell PQR Ltd. | 01/03/2023 | 100 | – | Rs. 320 |
- Assuming that the brokerage and other expenses are 0.5% of the transaction value, your capital gains will be as follows:
| Transaction | Capital Gain Type | Capital Gain Amount |
|---|---|---|
| Sell ABC Ltd. | STCG | Rs. 1,900 (100 x (120 – 100) – (0.5% x 100 x (120 + 100))) |
| Sell XYZ Ltd. | LTCG | Rs. 4,750 (100 x (250 – 200) – (0.5% x 100 x (250 + 200))) |
| Sell PQR Ltd. | Speculative business income | Rs. 1,900 (100 x (320 – 300) – (0.5% x 100 x (320 + 300))) |
Your total STCG will be Rs. 1,900, which will be taxed at 15%, resulting in a tax liability of Rs. 285.
Your total LTCG will be Rs. 4,750, which will be taxed at 10%, but only if it exceeds Rs. 1 lakh in a financial year. Since it does not exceed Rs. 1 lakh, it will be exempt from tax.
Your total speculative business income will be Rs. 1,900, which will be taxed as per your tax slab.
Taxation of business income
The taxation of business income from equity shares is as follows:
- Speculative business income is taxed as per your tax slab.
- Non-speculative business income is taxed as per your tax slab.
- You can claim deductions for the expenses incurred for earning the business income, such as brokerage, internet charges, software costs, etc.
- You can set off your speculative business losses against your speculative business income only, and carry forward the remaining losses for four years.
- You can set off your non-speculative business losses against any other income except salary income, and carry forward the remaining losses for eight years.
- There is no TDS on business income from equity shares.
The calculation of business income is done by deducting the purchase price and the expenses related to the sale (such as brokerage, stamp duty, etc.) from the sale price.
For example, suppose you have the following transactions in equity shares in the financial year 2023-24:
| Transaction | Date | Shares | Purchase Price | Sale Price |
|---|---|---|---|---|
| Buy LMN Ltd. | 01/04/2023 | 100 | Rs. 400 | – |
| Sell LMN Ltd. | 15/04/2023 | 100 | – | Rs. 420 |
Assuming that the brokerage and other expenses are 0.5% of the transaction value, your non-speculative business income will be as follows:
| Transaction | Non-Speculative Business Income Amount |
|---|---|
| Sell LMN Ltd. | Rs. 1,900 (100 x (420 – 400) – (0.5% x 100 x (420 + 400))) |
Your total non-speculative business income will be Rs. 1,900, which will be taxed as per your tax slab.
You can claim deductions for the expenses incurred for earning the non-speculative business income, such as brokerage, internet charges, software costs, etc.
How to report stock market earnings in your income tax return?
You need to report your stock market earnings in your income tax return under the appropriate heads and schedules.
If you have capital gains from equity shares, you need to report them under the head ‘Capital Gains’ in Schedule CG of ITR-2 or ITR-3.
If you have business income from equity shares, you need to report them under the head ‘Profits and Gains from Business or Profession’ in Schedule BP of ITR-3.
You also need to report the details of your transactions in equity shares in Schedule EI of ITR-2 or ITR-3.
You can use an online tool like ClearTax to file your income tax return easily and accurately.
How to calculate income tax on stock market earnings along with your salary?
If you have both salary income and stock market earnings in a financial year, you need to add them together to arrive at your gross total income.
You can then claim deductions under various sections of the Income Tax Act, such as Section 80C, Section 80D, Section 80G, etc., to reduce your taxable.
Please note that the information provided here is for general understanding purposes only and should not be considered professional tax advice. For specific tax advice tailored to your individual circ*mstances, it is best to consult a qualified tax advisor.
As an avid investor and finance enthusiast with years of experience navigating the complexities of the stock market, I'm well-versed in the nuances of taxation on stock market earnings. Let's delve into the concepts mentioned in the article:
-
Types of Income from Shares:
- Capital Gains: These are the profits or losses made from selling shares at a higher or lower price than the purchase price. They're categorized into short-term and long-term gains based on the holding period.
- Business Income: This is earned from trading shares as a regular activity with the intention of making profits. It includes speculative and non-speculative business income, differentiated by the trading duration.
-
Taxation of Capital Gains:
- Short-term Capital Gains (STCG): Taxed at a flat rate of 15% regardless of the tax slab.
- Long-term Capital Gains (LTCG): Taxed at a flat rate of 10% if they exceed Rs. 1 lakh in a financial year, otherwise exempt. No benefit of indexation applies, and there's no TDS on these gains.
-
Taxation of Business Income:
- Speculative Business Income: Taxed as per the individual's tax slab. Deductions can be claimed for expenses related to earning this income.
- Non-speculative Business Income: Taxed as per the individual's tax slab. Similar to speculative income, deductions for relevant expenses are permitted.
-
Reporting Stock Market Earnings:
- Capital gains need to be reported under the head 'Capital Gains' in the appropriate schedule of the Income Tax Return form.
- Business income from equity shares should be reported under 'Profits and Gains from Business or Profession' in the relevant schedule.
- Details of transactions in equity shares must be reported in the corresponding schedule of the Income Tax Return form.
-
Calculating Income Tax with Salary and Stock Market Earnings:
- Combine salary income and stock market earnings to determine gross total income.
- Utilize deductions under various sections of the Income Tax Act to reduce taxable income, such as Section 80C, Section 80D, and Section 80G.
By understanding these concepts and following the appropriate reporting and taxation procedures, investors can ensure compliance with tax regulations and optimize their tax liabilities. For personalized advice tailored to individual circ*mstances, consulting a qualified tax advisor is recommended.
