Filing taxes for a trader/investor is one of the daunting task in the whole financial year, especially if you are an active trader and have amassed short term capital gains. To make things simplify, we have outlined some important points in this article related to tax filing on capital market gains. Although, the income tax filing has quite a months to go, it is always better to start early so that at the time of filing you may be free of all the hassles.
Let me start by stating that it is mandatory and very much advisable to file tax if you are a trader or an investor and irrespective of whether you are in profit or in loss. Over the past few years, I have seen many of my clients who vehemently declare their trading profits, but in years they have losses, they assume they need not to mention that, as there is no net increase in their income. As a matter of fact, it is equally important to declare your trading losses as it can largely help you in saving tax.
Ok, for those who are a bit confused with the terms ‘trader’ or ‘investor’ let me go clear on that front. You are considered as an ‘investor’ if you buy shares of a company and hold it more more than one year and sell it for profit/loss after an year of holding. Traders, on other hand are the one who trade actively in any segment be it equity, derivatives (F&O) or commodity and have holding period for less than one year.
Tax implication for an investor
The biggest benefit under Income tax for an investor is that there is absolutely NO tax on long term capital gains. So, whatever amount of profit you book after a holding period of 1 year is totally exempt from taxes. However, the flip side is if you have booked losses on your long term holdings (holding period >1 year) it cannot be adjusted against any long or short term capital gain from any source.
Tax implication for traders
Since trading is considered as a business activity any income derived from trading equity, derivatives or commodity is accounted under ‘business income’ & is termed as ‘short term capital gain’. For tax purpose, short term capital gains from capital markets is added to your other source of income for ex. salary, other business etc and then taxes are paid according to the tax slabs.
|Income tax slab (in Rs.)||Tax|
|0 to 2,50,000||No tax|
|2,50,001 to 5,00,000||10%|
|5,00,001 to 10,00,000||20%|
However, if you are exclusively a trader and trading is your ONLY source of income; irrespective of the tax slab you fall in, the short term capital gains will be taxed at a flat rate of 15%.
For example, if you have trading profits of more than 12 lakhs in this financial year, you have to give a flat tax of 15% (as it is short term capital gain) instead of the normal slab of 30%, which would have been applicable if this income would have been from salary.
The second good part with being a trader is that short term capital loss doesn’t go unaccounted unlike long term losses. Since it is as a business loss, it can net off against any business income (expect salary) for the next 8 years.
For example, If a person A has a diamond business and his net profit from the business is 30 lakhs and he makes a loss of 5 lakhs in trading business, his net income taxable for the year will be ( 30-5) i.e, 25 lakhs only and this loss of 5 lakhs can be net off for 8 years provided the the loss is declared in IT return. Also, one can show expenses in trading business like rent, consultancy charges, electricity etc to bring down the taxable income.
Hope this article threw light on some of the important aspects regarding taxation. If you have any sort of query regarding taxes and capital markets, please drop in your query in the discussion box below and we will assist you ASAP.