It’s tax time again which means a couple of things if you trade shares in India – you might need to pay tax on the profits or gains you’ve made and you may be able to claim deductions.
Depending on how often you trade shares and how you classify yourself to the Income Tax Department (ITD), you could be eligible to claim tax benefits such as deductions on trading-related costs.
Whether you’re a trader or an investor, this guide explains how much tax you need to pay and whether you’re eligible for benefits.
Do I need to pay tax on shares?
Yes, you need to pay tax on any profits that you’ve made from share trading during the year. The profits can be categorised as either capital gains or business income and each will be calculated using its own different tax rates. The tax will then be added as part of your tax liability for the year along with taxes from your other taxable income.
Dividends are also included in your taxable income. The ITD will already have a record of the dividends you’ve earned throughout the year. In fact, your Income Tax Return (ITR) form will be automatically pre-filled with your dividend income, taxable at the slab rates applicable for the financial year.
Profits aren’t taxable until you actually sell your shares. If you sell before April 1, your profits will be included as your taxable income this financial year and if you sell after April 1, it’s added to the following tax return.
Before filing your ITR, be sure to classify your trading activity and your profits correctly as each category has its own different tax implications.
Capital gains vs business income
There are two types of share transactions that you need to know, equity delivery and intraday trades. An equity delivery trade is when you buy shares and hold them for more than one day before selling them back. Profits from this type of trades are considered as capital gains. In India, capital gains are classified into two categories:
- Long-term capital gains (LTCG). Profits or gains made from selling shares or equity-oriented mutual funds with a holding period of more than 12 months.
- Short-term capital gains (STCG). Profits or gains earned from selling shares or equity-oriented mutual funds with a holding period of more than one day and less than 12 months.
For LTCG, profits below ₹1 lakh are exempt from tax. Profits exceeding ₹1 lakh are taxable at a rate of 10%. This applies only to transactions executed on recognised Indian stock exchanges, where securities transaction tax (STT) is paid. For off-market transactions of listed or unlisted shares, the LTCG tax rate is set at 20%.
Tax on STCG is set at a flat rate of 15% of the profits and this also only applies to share transactions done on recognised stock exchanges (STT is paid). For off-market transactions, the profits are taxable as per your applicable slab rates.
On the other hand, an intraday trade is when you buy and sell shares within the same day. This type tends to have a higher frequency of trades. If your trades fall into this category or if trading is your primary source of income, then it is best to classify your capital gains as business income. There are two categories of business income:
- Speculative business income. Income derived from equity intraday trades. This is considered speculative as your trades will be executed without the intention of taking delivery of the contract.
- Non-speculative business income. Income received from trading futures and options. This is considered non-speculative as these instruments are specifically defined and used for hedging purposes and also for delivery of the underlying contracts.
Unlike capital gains, tax on business income from your share transactions has no fixed rate. Your business income is added to your other taxable income and taxes are paid at the slab rates applicable for the financial year (see below).
Income tax slabs and rates
|₹0 – ₹2,50,000||0%|
|₹2,50,001 – ₹5,00,000||5%|
|₹5,00,001 – ₹7,50,000||10%|
|₹7,50,001 – ₹10,00,000||15%|
|₹10,00,001 – ₹12,50,000||20%|
|₹12,50,001 – ₹15,00,000||25%|
How to calculate tax on shares sold
Profits you make from share trading are classified based on your trading activity. The tax you pay on your shares will depend on which category you fit into and will be added as part of your tax liability for the year.
Tax on LTCG and STCG
If you’re a casual investor and your trades are executed after a holding period of more than one day (equity delivery), the profits you’ve made are classified as either STCG or LTCG depending on how long you hold the shares before selling them back.
Case study: How to calculate tax on STCG and LTCG?
Let’s say in the month of July 2018 you bought 100 shares of Bajaj Finance Ltd (BAJFINANCE) at ₹2,000 per share from the BSE (formerly Bombay Stock Exchange). The shares were then sold through the National Stock Exchange in India (NSE) in June 2020 at ₹4,900 per share.
In the case above, the listed shares were bought in July 2018 and sold in June 2020, after holding them for a period of more than 12 months. The profit from this transaction is considered as LTCG. As profits below ₹1 lakh are exempt from tax, your taxable profit is (₹4,90,000 – ₹2,00,000) – ₹1,00,000 = ₹1,90,000. Tax on LTCG is set at 10%, so your tax liability is ₹1,90,000 x 10% = ₹19,000.
In another case, you bought 100 shares of Reliance Industries Ltd (RELIANCE) at ₹1,400 per share from the NSE in the month of November 2020. These shares were sold through the same stock exchange in March 2021 at ₹2,000 per share.
In the given case above, the listed shares were bought in November 2020 and sold in March 2021, hence the holding period is less than 12 months. The profit from this transaction is then treated as STCG and taxable at 15%. So the taxable profit is ₹2,00,000 – ₹1,40,000 = ₹60,000 and your tax liability is ₹60,000 x 15% = ₹9,000.
If you incur capital loss instead of gain from your share transaction, the loss can be set off against the gains you’ve made. Short-term capital loss can be set off against both STCG and LTCG, while long-term capital loss can be set off only against LTCG.
If the loss can’t be absorbed entirely in the year when the shares are sold, it can be carried forward for eight consecutive years. This applies to both short-term or long-term capital losses but will only be allowed if you file your ITR within the due date. So make sure you file your ITR even if the income you earn in a year is less than the minimum taxable income.
Case study: How to set off loss and how can it be carried forward?
Let’s assume that in this year, your short-term capital loss from a trade is ₹1,00,000 and profit from another trade is ₹50,000. Since the loss can’t be set off entirely, the unabsorbed loss of ₹50,000 can be carried forward for another eight years and the 15% tax on STCG is not levied this year.
Going forward, let’s say your STCG for next year will be ₹75,000. The ₹50,000 loss which is carried forward from this year will be set off against next year’s gain. Your net STCG for next year will be ₹75,000 – ₹50,000 = ₹25,000 and this amount will be taxable at the rate of 15%.
Tax on business income
If your share transactions are regularly executed on an intraday basis (buy and sell within the same day) or if trading is your primary source of income, then you may classify yourself as a share trader and the profits or gains you’ve made as speculative business income. Your business income will be added as part of your other taxable income and taxed at the applicable slab rates for the year.
You are also entitled to tax benefits of deductions on all trading-related costs, such as brokerage fees, STT, transaction charges, Internet connections, phone bills, advisory and research reports, and depreciation of computers and other trading-related equipment (for capital gains, you can only claim expenses on contract-related charges other than STT, such as brokerage fees, transaction charges and other statutory taxes).
In case you incur speculative business loss from your intraday transactions, the loss can be set off only against any other speculative business income and not against non-speculative business income like income received from trading futures and options. If the speculative loss can’t be set off entirely in a year, it can be carried forward for four consecutive years. However this applies only if you file your ITR on time.
Tax on dividends
Dividends are included as part of your other taxable income. Your ITR form will most probably be pre-filled with your dividend income throughout the year based on the record the ITD has. Your dividends are taxable at the slab rates applicable for the financial year.
Case study: How to calculate tax on business income, dividends and other taxable income?
Let’s assume that in this financial year, your profit from your intraday share transactions is ₹1,50,000. Your salary for the year is ₹6,50,000. You also receive ₹1,00,000 as dividend income from shares you bought and decided not to sell. Therefore, your total taxable income is ₹1,50,000 + ₹6,50,000 + ₹1,00,000 = ₹9,00,000. Your tax liability will then be calculated as per applicable slab rates as shown below.
|₹0 – ₹2,50,000||₹2,50,000||0%||₹0|
|₹2,50,001 – ₹5,00,000||₹2,50,000||5%||₹12,500|
|₹5,00,001 – ₹7,50,000||₹2,50,000||10%||₹25,000|
|₹7,50,001 – ₹10,00,000||₹1,50,000||15%||₹22,500|
|Total tax liability||₹60,000|
How do I pay tax on robo-advice and investment apps?
If you use a robo-advice or investment platform such as Scripbox or Kuvera, you are taxed on any profits you make from your portfolio.
Like regular share trading, the tax on your profits (minus losses) are calculated based on the applicable tax rates and added to your total tax liability. Your platform will typically send a tax statement each year. If you’ve been given dividend payments, these are automatically filed with the ITD.
How to pay tax on US shares
If you invest in US shares, the tax implications are different from transactions executed on Indian stock exchanges. Profits or gains you’ve made from share transactions on the US markets are classified into two: dividends and capital gains.
Tax on dividends
When a US company pays a dividend to you as an Indian investor, the dividend is taxable at a flat rate of 25%. The company withholds 25% of your dividend income and you’ll only receive the remaining 75%. The tax rate is lower compared to the rate for other foreign investors in the US since there is a tax treaty between India and the US.
Your dividend is also taxable in India. The dividend you received in cash or reinvested is added to your taxable income and taxed at the normal slab rate. However you can set off the 25% tax withheld in the US against your tax liability in India due to the Double Tax Avoidance Agreement (DTAA) between the two countries.
Tax on capital gains
Capital gains are profits or gains generated from selling shares at a higher price than the buying price. When you’ve made capital gains from shares transactions on the US markets, there will be no tax applicable in the US. However the profits are taxable in India as per tax law.
As mentioned above, capital gains are classified into two categories: LTCG and STCG. The difference with regular share transactions is that for transactions on the US markets, the holding period threshold is 24 months instead of 12 months.
Profits are treated as STCG when the holding period of the shares is below 24 months and taxable at the applicable slab rates. If you hold the shares for more than 24 month before selling them back, the profits you make are considered as LTCG and attract tax at a rate of 20% (plus applicable surcharges and fees).
How does the ITD classify share traders and share investors?
There are different tax implications depending on how often you trade shares, whether trading is your primary source of income and how you classify yourself to the ITD. Referring to the Central Board of Direct Taxes (CBDT) circular No. 6/2016, you can opt to treat your income from sale of listed shares and securities as either capital gains or business income.
In the circular, the CBDT clarifies that in order to reduce litigation and uncertainty, you as a taxpayer may choose to treat your listed shares as either ‘stock-in-trade’ or ‘investment’. The assessing officer shall accept the stand chosen and will not put it to dispute. However once the stand is taken, the same shall be applicable in the subsequent years, unless there is a major change in circumstances of the case.
This means that you are allowed to classify yourself as a trader, an investor or both. However, this only applies to listed shares with a holding period of more than 12 months. For other cases, the classification of your income will be decided based on the concept of ‘significant trading activity’ and your intention to hold the shares.
How do I file a tax return for shares?
Your tax return for shares is included as part of your regular ITR after April 1.
When you file your ITR, you’ll need to report any profits you’ve made on buying and selling shares throughout the financial year. Any dividends you earn will have already been added to your taxable income by the ITD.
At the end of the financial year, your broker or online share trading platform will send you a tax statement with the total profits you’ve earned. If you’re filing your own ITR, you’ll need to include this number in your report. If you use a tax accountant, send the tax statements to them to work out.
If you use multiple brokers, it’s a good idea to use a portfolio tracker to track total profits across all platforms.
Compare share and CFD trading accounts
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.