Continue reading the previous chapter
You can be considered an investor if you -
It is better to treat transactions (buy/sells), if they are frequent, as trades than investments. Any income that is considered trades falls under non-speculative income. However, if it is investments it falls under capital gain.
This will give you access to a big scenario-
This was discussed in the previous chapter. To refresh your memory, there is no standard IT department rule to determine frequency or long term.
There is nothing to be concerned about as long as you have a clear intent and are consistent over financial years in how you identify high frequency or long-term issues.
It is important to note that if you engage in equity delivery-based trades more often than a few time per week it would be better to treat all of them as 'trades and classify income from them instead of capital gains.
It is important to reiterate that investing in the markets or trading on them is your only source of income. Even if you trade with a low frequency, it is better to consider income from equity trades as business income and not capital gains.
However, if your main source of income is a salaried employee or a business that you own, it's easier to include your equity trades in capital gains, even though they are more frequent.
Last Updated March 2, 2016
The income tax department finally clarified the matter by allowing individuals to choose whether to show their stock investments as capital gains (trading income) or business income (trading income). This applies regardless of how long they have held the securities and shares. The taxpayer must continue to follow the same stance no matter what the position is. This circular is available.
This chapter is all about investing. We will therefore keep the discussion to points 1 and 2. In the next chapter, we will discuss taxation of trading/business income.
First, you should know that intraday stock trades are transactions in which you sell and buy (long trades), or sell and buy (shorttrades) stocks in a single trading session. You can also buy stocks/equity, and then wait until it arrives at your DEMAT account to sell it. This is known as 'equity delivery-based' transactions.
Capital gains can be defined as any gain or profit made through equity delivery-based trades or mutual fund investments. These can be sub-divided into:
Below are details on the taxation of long-term capital gains for mutual funds and equity.
Stocks/equity: 0% for the first Rs 1lk, @10% above Rs 1lk
The above taxation rate applies only to transactions (buy/sells), executed on stock exchanges that are recognized and where STT (Security Transaction Tax) is paid. LTCG refers to a holding period that exceeds one year.
Transactions (buy/sell) that are done off-market, where shares are transferred to one another via delivery instruction booklet rather than via a recognized exchange paying STT, will result in LTCG of 20% for both listed and unlisted stocks. (Listed are those that trade on recognized exchanges). You will pay higher capital gains tax if you have an off-market transaction Security Transaction Tax is not charged.
A gift received from a relative via DIS slip is not considered a transaction and therefore not capital gain. It is important to not treat gift as transfer. This could include: (i) spouse of an individual (iii), brother or sibling of the individuals (iii), brother or sisters of the spouse(v) any lineal descendant or ascendant of any individual (vi) spouse of any person referred to under clauses (iii to (vi).
Equity mutual funds (MFs): 0% for the first Rs 1lk, @10% for any amount exceeding Rs 1lk
Like equity delivery based trades but without the tax, any gains in equity-oriented mutual fund investments for longer than a year are considered LTCG. They are exempted from taxes up to Rs 1lk a year. Equity-oriented mutual funds are those that have at least 65% of their investable funds in equity or shares of domestic businesses.
Non-equity-oriented/Debt-MF - Flat 20% on the gain with Indexation Benefit
The Union budget 2014 made a significant change in non-equity mutual fund policy. Instead of investing for 1 year in equity-based mutual funds, you must stay invested for 3 consecutive years in non-equity/debt fund to have the investment considered long-term capital gain. The gain is considered STCG if the funds are sold within three years of realizing profits.
You get the indexation advantage to calculate your net capital gains when you calculate capital gains for non-equity-oriented mutual funds, property and other assets where you are subject to LTCG tax.
We can all agree that inflation is a major factor in reducing profits from investing in capital assets like the ones I mentioned.
Here is an example that will help anyone understand inflation.
If a box of sweets was priced at Rs.100 last fiscal year, it is possible that the same item could be purchased for Rs.110 this fiscal year. Inflation is responsible for the price difference, which is in this case 10%. Inflation refers to the percentage of money that has a lower purchasing price.
If India's average inflation rate is 6.5%, would a large portion of your long-term capital gain be lost to inflation if you invested in a debt fund?
Let's say you have invested Rs.100,000.00 in a debt fund. After three years, you get Rs. 130,000/- back. This is a Rs.30,000/- long term capital gain. However, in the same time period, assume that the purchasing price of money has dropped by 18k due to inflation. Do you think it is fair to continue to earn long-term capital gains on all 30k? This is a complete waste of money.
Indexation is a simple way to determine the true price of an asset, after taking into account the inflation. The Cost inflation index can help you determine the true value of an asset after taking into account the effect of inflation. Income tax website can also be used to do this.
Let me illustrate this by using an example of the purchase/sale a debt mutual funds.
Purchase Value: Rs.100,000.
2005 was the year of purchase
Sale value: Rs 300,000
Year of sale 2015
Capital gain long term: Rs. 200,000/-
I would be subject to 20% tax on capital gains exceeding Rs 200,000/- without indexation. This amounts to Rs 40,000//.
We can still reduce the LTCG if we consider indexation.
The cost inflation index (CII) is used to calculate indexed purchase values. Below is the cost inflation indicator from the income tax website up to 2019/20. This contains CII data prior to 2001/02.
Referring to the previous example:
CII in 2005: 117
CII in 2015: 240
Indexed Purchase Value = Purchase Value * (CII in the year of sale/CII in the year of purchase).
Indexed purchase price = Rs 100000 * (240/117)
= Rs 205128.21
Long-term capital gain = Sale Value - Indexed Purchase Value
In this example, we demonstrate how to do it.
LTCG = Rs 300,000. - Rs 205128.21
= Rs 94871.79/.
The tax would now be 20% of Rs. 94,871.79 = Rs 18,974.36, which is much lower than the Rs 40,000/- that you would have to pay if the indexation benefit was not available.
The indexed purchase value of all long-term capital gains that are taxable, such as debt funds, real property, and gold, can be calculated using the same method I mentioned earlier. Instead of manually calculating the indexed value of your capital assets, you could use the Cost inflation utility of the IT department.
Interesting thing about 20% after indexation of non-equity-oriented or debt funds is that most funds return between 8 and 10%, and inflation in India has generally been around that level for many years. You won't usually have to pay tax on LTCG of non equity oriented funds, thanks to the indexation benefit.
Tax on short-term capital gains for equity or mutual funds is discussed below.
If the buy/sell transactions are made on stock exchanges that have STT (Security transaction taxes), it is 15% of your gain. STCG applies to holdings of more than one day but not longer than 12 months.
Transactions (buy/sell) that are made via off-market transfers (where shares are transferred between one person and another via delivery instruction booklet, not on an exchange) will not be subject to STT. STCG will then be taxed at the applicable tax slab rate. If you earn more than Rs.10,00,000.00 per annum in salary, STCG will be subject to 30% tax. STCG applies only when your income is above the Rs 2.5lks/year minimum tax slab. If there is no income other than the annual salary, and it assumes there was Rs 1lk STCG then the flat 15% tax would not apply.
15% of the gain for equity mutual funds (MF).
Like STCG for equity delivery-based trades (STCG), any gain from equity-oriented mutual funds that is less than one year old is treated as STCG. The gain will be taxed at 15%. If 65% of funds are invested in domestic businesses, a fund can be considered Equity-based.
Non-equity oriented/DebtMF: Based on your individual tax slab
The Union budget 2014 made a significant change in non-equity mutual fund rules. To be considered long-term capital gain, you must stay invested for at least 3 years. STCG is the accumulation of gains from investments made in these funds that are less than three years old. STCG must be added to other income from your business and tax as per your income tax bracket.
If you earn Rs 800,000./- annually in your business/salary, and you have STCG of Rs 100,000/– from debt funds, then you fall under the 20% threshold as your total income exceeds Rs 9,00,000. In this case, 20% of your STCG will be taxed.
The tax difference between LTCG vs STCG can be quite significant for investors. You would be required to pay 15% tax on all STCG gains if you sold stocks within 360 days of when you bought them. If the same stock was held for five days longer (1 year) or 365, all gains would be exempted from tax as it would be LTCG.
Investors should keep track of the days since they purchased stock. If the stock has been purchased multiple times in the holding period, the period will be calculated using FIFO (First In First Out) method.
Let me explain -
Let's say that you purchased 100 shares of Reliance on the 10th April 2014. On the 1st 2014, 100 more shares were purchased at Rs.800 each.
One year later, 150 shares were sold at 920 on May 1, st 2015.
According to FIFO guidelines 100 shares should have been purchased on the 10th thApril 2014, and 50 shares of the 100 bought on the 1st st 2014. These shares should be considered sold.
For shares purchased on 10 th April 2014 gains = Rs120 (920-800)x100 = Rs 12,000/(LTCG and thus 0 tax).
Shares bought after June 1 st have a gain of Rs 100 (920-820) multiplied by 50 = Rs 5,000/ (STCG, 15% tax).
This is a small sales pitch. If you trade at Upstox, the holdings page in our backoffice platform called Console will track your holdings over time. It also shows you a breakdown of any transactions.
Here's a quick snapshot of the same.
Apart from Stock market box Q and equity tax P&L, an Indian brokerage is the only one that gives you a breakdown of speculative Income, STCG and LTCG.
STT (Securities Transaction Tax), is a tax that India's government must pay on trades made on stock exchanges recognized by the government. Off-market transactions, which involve shares being transferred from one DEMAT (demat) to another via delivery instructions slips rather than routing trades via an exchange, are exempted from the tax. As explained above, off-market transactions are subject to a higher capital gains tax. Current STT rate for equity delivery-based trades is 0.1%.
When calculating taxes on capital gains, STT can't be added to the cost of acquisition or sale of shares/stocks/equity. Brokerage and any other fees (SEBI charges, SEBI charges, service tax, etc.) you pay for buying/selling shares on an exchange can be added onto the price of the share. This allows you to indirectly benefit from these costs.
Tax advance for capital gains (STCG).
Taxes on business income and short-term capital gains must be paid in advance. The amount of income and taxes you will have to pay by the end the year on your capital gains and business income is taken into consideration when paying advance tax. As an individual, you must pay 15% of the annual tax that is expected to be paid for the financial year by 15 th June. This amount is 45% by 15 th September, 75% at 15 th Dec and 100% by 15, th March. For each period it is delayed, a penalty of around 12% annualized interest would be imposed on those who fail to pay.
It is difficult to calculate the capital gain (STCG), or profit, if you invest in stock markets. This can be done based only on STCG earned over a short period. If you have already sold shares but are still sitting on the profits (STCG), you should only pay advance tax on the profit. You can still claim a tax refund even if your profit for the year is less than what you paid in advance tax. The IT department processes tax refunds quickly.
What ITR form should be used?
Capital gains can be declared on either ITR 2 (or ITR3)
ITR3 (ITR4 until 2017): If you have capital gains and business income
ITR 2: If you have a salary, capital gains or just cash gains.
15% tax is paid on short-term capital gains; 0% on long-term capital gains. What if these were net losses?
If filed within the time limit, short term capital losses can be carried forward for eight consecutive years and offset against any gains. If the net short-term capital loss is Rs.100,000.-, then this loss can be carried forward to the next year. However, 15% of the gain for next year can be used as a deduction against the loss that was carried forward. The loss of Rs.50,000 (Rs.100,000.-Rs.50,000) will be carried forward for seven more years.
After the introduction of LTCG tax @10%), long-term capital losses can be offset against long-term gains.
Only long term capital gains can be offset by long term capital losses. You can offset short term capital loss against long term gains or short term gains.