Stock trading helps you earn regular income if you are a trader. While traders focus on many things, one aspect is often overlooked, which is taxation.
This blog aims to give you a comprehensive understanding of tax on stock trading in India and everything you need to know about it.
Understanding Tax on Stock Trading in India
The tax on stock gains revolves around the concept of capital gains. A capital gain is the profit you earn when you buy shares at a low price and sell them at a higher price.
The tax you are liable to pay on this gain is known as capital gains tax.
As we discussed above, there are two types of stock trades and hence, there are also two types of capital gains: Short Term and Long Term
- Short Term: Short-term capital gains (STCG) occur when you sell shares that you’ve held for less than one year.
- Long Term: Long-term capital gains (LTCG) arise when you sell shares that you’ve held for more than one year.
You need to understand the difference between short and long-term capital gains. That’s because the tax rates on them are quite varied.
The method you will be using to calculate the amount of tax on each profit will also be different. This, in turn, affects the payable tax amount.
Tax Rates on Stock Trading
It doesn’t matter whether you’re trading on the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), or any other platform in India.
The primary and most crucial step in this activity is to keep precise records of your transactions, as they will form the basis of your tax calculations.
The tax rates for stock trading are determined by the duration for which these stocks are held and the type of income they generate. Let’s get into the specifics of this.
Short-Term Capital Gains (STCG)
Short-term Capital Gains are the profits that you earn when you sell your stocks within a year of purchasing them.
The current tax rate for it from equity shares is 15%. However, if you declare these profits as business income, the tax rate can go up to 30%. The exact rate is determined by your income slab.
Long-Term Capital Gains (LTCG)
Long-term Capital gains are the gains you make when you sell the stocks that you have been holding for over a year. The tax rate for LTCG is 10%.
This is applicable only if your profits go over ₹1,00,000 in a financial year. However, your total income can be a variable in calculating the tax rates.
For example, for an income that ranges between ₹ 50 lakhs to ₹1 crore, the LTCG tax rate is 10%. For an income that is more than ₹1 crore, but less than ₹2 crore, the tax rate is 15%, and the tax rate for an income between ₹2 crore to ₹ 5 crore is 25%
How to Calculate Taxes on Stock Trading
Here’s a step-by-step guide on how to calculate taxes on stock trading:
- Identify the Type of Capital Gains: Identify whether your gains are short-term or long-term.
- Calculating the Capital Gains: This part is very easy. Simply take your stock purchase price and your selling price and subtract the former from the latter. And don’t forget to include the brokerage and transaction charges. You can add it to your purchase price to simplify the calculations.
- Applying the Tax Rate: Refer to the tax slab to attain the tax rate that is applicable to you. Based on the type of capital gain. For short-term gains, the rate is 15%. It goes down to 10% for long-term gains that exceed ₹1,00,000.
For example, let’s calculate the tax on both Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) with the given conditions:
Short-Term Capital Gains (STCG)
Let us take an example of when you buy and sell a stock within 3 months. Let’s say you bought a lot of stock at ₹10,00,000.
- Bought at: ₹10,00,000
- You sold at: ₹15,00,000
- Profit:₹5,00,000
Calculation of Tax:
1. Total Income: ₹6,00,000 (annual income) + ₹5,00,000 (STCG) = ₹11,00,000
2. Tax on Income (excluding STCG): For ₹6,00,000 (as per FY 2023-24 tax slabs):
Upto ₹2,50,000: Nil
₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
₹5,00,001 to ₹6,00,000: 10% of ₹1,00,000 = ₹10,000
Total: ₹12,500 + ₹10,000 = ₹22,500
3. Tax on STCG: 15% of ₹5,00,000 = ₹75,000
4. Total Tax Payable: ₹22,500 + ₹75,000 = ₹97,500
Long-Term Capital Gains (LTCG)
Let us take an example of when you buy and sell a stock after holding it for more than 12 months. Let’s say you bought a lot of stock at ₹10,00,000.
- Bought at: ₹10,00,000
- You sold at: ₹15,00,000
- Profit: ₹5,00,000
Indexation benefit: Suppose the Cost Inflation Index (CII) at the time of purchase was 250 and at the time of sale was 280. The indexed purchase price would be:
- Indexed purchase price = (Purchase price × CII at sale) / CII at purchase
- Indexed purchase price = (₹10,00,000 × 280) / 250
- Indexed purchase price = ₹11,20,000
Adjusted profit after indexation:
- Adjusted profit = Sale price – Indexed purchase price
- Adjusted profit = ₹15,00,000 – ₹11,20,000
- Adjusted profit = ₹3,80,000
Calculation of Tax:
1. Total Income: ₹6,00,000 (annual income) + ₹3,80,000 (LTCG) = ₹9,80,000
2. Tax on Income (excluding LTCG): For ₹6,00,000 (as per FY 2023-24 tax slabs):
Upto ₹2,50,000: Nil
₹2,50,001 to ₹5,00,000: 5% of ₹2,50,000 = ₹12,500
₹5,00,001 to ₹6,00,000: 10% of ₹1,00,000 = ₹10,000
Total: ₹12,500 + ₹10,000 = ₹22,500
3. Tax on LTCG: 10% of ₹3,80,000 = ₹38,000
4. Total Tax Payable: ₹22,500 + ₹38,000 = ₹60,500
Summary
- STCG Tax: ₹97,500
- LTCG Tax: ₹60,500
Common Mistakes in Filing Tax for Stock Trading
Filing taxes for stock trading can be complex, and it’s easy to make mistakes. Let’s look at some of the common mistakes and how you can avoid them.
- Not reporting all of your income: Always report all income from stock trading. This includes dividends and capital gains. Take extra precautions so that all of these are timely reported since failing to do so will result in penalties.
- Incorrect calculations: Accurate capital gain calculation is crucial. Account for all costs associated with the trade, such as brokerage fees and other charges. Run the math a couple of times and approve of it only when you see consistent results.
- Ignoring tax loss harvesting: If you incurred any losses on your trades, you can declare them as well. You can then use these losses to balance out the capital gains, hence reducing your tax liability. This method of stock market loss tax deduction in India is quite useful.
- Filing late: The Income Tax Department of India has strict deadlines for filing returns. If you miss these deadlines, you will suffer late filing penalties.
- Missing records: Keeping track of all of your trades, including dates, rates, and fees is an essential practice for accurate tax filing.
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Conclusion
Once you choose stock trading as a source of income, you need to be aware of taxes applicable to such activities. It helps you plan your traders better and helps you avoid penalties in case of misses.
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