Income tax for traders is levied on any gains made from stock market transactions, meaning that traders must declare their profits to the government. The income tax you pay depends on your total capital gains and whether you are a full-time or part-time trader/investor.
This tax guide will look at how your income tax is calculated and what you can expect to pay when trading stocks.
Long-Term Capital Gains
Income earned from investments held for 12 months or more is known as long-term capital gains and comes with a generous 10% income tax rate. This means that if you profit ₹100,000 from stock market transactions, you will pay only ₹10,000 in taxes. If you encounter substantial long-term capital losses, those may be transferred and considered up to the next 8 consecutive years. These can then be used against any short-term capital gain earnings for your benefit.
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Short Term Capital Gains
If you hold your shares for less than 12 months, the income is classified as short-term capital gains and is taxed at your regular marginal rate. This means that if you make a profit of ₹100,000 from stock market transactions, you will pay taxes according to the slab rate applicable to your total taxable income. Essentially, 15% is the lowest tax rate you can expect to pay on your short-term gains.
Tax Deductible Losses
If you suffer a loss in the stock market, it is considered a capital loss and is deductible from capital gains or other income. Essentially, this will make your taxable income lower, so you’ll be paying fewer taxes overall. For example: if you have ₹10,000 of taxable income and incur a ₹5,000 stock market loss, then only ₹5,000 of your total income would be taxed.
Income tax on stock market transactions can sometimes seem complicated, but understanding the laws and regulations surrounding them is essential for any trader/investor. Being aware of your long and short-term capital gains, as well as tax-deductible losses can help you manage your taxes more efficiently and effectively. Knowing this information will also give you an edge in planning your investment strategy and making the most out of your stock market transactions.
Traders can claim certain expenses related to their trading activities as deductions when filing their taxes. This includes brokerage fees, transaction costs, and research expenses on stocks that are held for more than 12 months (long-term). Many traders also opt to take advantage of various tax exemptions such as long-term capital gains tax exemption up to ₹1 lakh under section 54 or the new taxation regime introduced in Budget 2020.
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