Income Tax Implications on Stock Market Trading in India

Traders and Investors/Taxpayers in India are liable to pay taxes on their income or profits earned from trading activities. The tax rate applied depends upon the category of gains – short-term capital gains (STCG) or long-term capital gains (LTCG).

If you’re a trader and investor, understanding how stock market gains are taxed in India is essential for tax planning as well as tax compliance.

Keep reading to find out more about tax on traders and taxation for traders in India.

How are Stock Market Gains Taxed?

According to the Income Tax Act 1961, whether or not gains are taxable relies upon a few elements like duration of possession and number of trades. 

  • If an individual purchases stocks with the purpose of investment, then they would be regarded as capital assets, subject to taxation under Capital Gains. 
  • However, if shares change hands frequently in a short time, those transactions will be treated as business income and taxed accordingly.
  • If the holding period of a stock is less than 12 months, then the tax imposed on gains arising out of it will be Short-term Capital Gains (STCG). 
  • On the other hand, if the holding period exceeds 12 months, then the tax applicable on such gains will be Long-term Capital Gains (LTCG). 

Income Tax on Trading

Regarding tax rates, short-term capital gains are taxed at the slab rate, which applies to an individual’s income. In contrast, the long-term capital gains tax rate stands at 10%, with indexation benefits available for equity shares and units of Equity Oriented Funds.

Besides the tax imposed on profits made in trading activities, traders also need to consider tax deductions and available tax exemptions. For instance, any losses arising out of trading activities can be set off against profits earned in the same financial year or carried forward up to 8 years for a future tax deduction.

Tax Planning for Traders

As a trader, the following tax-saving tips might help you minimize tax burden:

  • Invest in long-term equity funds (ELSS) as it provides tax exemption under Section 80C
  • Make use of tax deductions such as those provided by the National Pension Scheme (NPS)
  • Utilise Long Term Capital Gains Tax Exemption on the sale of Equity Shares and Units of Equity Oriented Funds

Invest in tax-free bonds like tax-free Infrastructure Bonds