Income tax laws can be complex, especially for traders and investors. How much tax one pays depends on trading activities and the tax laws in their country. Calculating tax owed from trading is not always straightforward, which is why many traders seek professional assistance when preparing tax returns.
In India, tax on traders and investors is calculated as per the Income Tax Act. According to the act, income tax is levied on all forms of income, including trading profits. The tax rate depends on the tax bracket one falls into, ranging from 10% up to 30%. Additionally, capital gains tax may apply to certain trades, depending on the tax laws in one’s state or region.
With that being said, the following article will provide a step-by-step guide to calculating the tax on trader & investor income, including what tax is payable and how to file tax returns.
Calculating Income Tax on Trading
- Calculate your trading gains or losses – The first step in calculating tax owed from trading activities is calculating the profit (or loss) made from all trades over the tax year. Consider any brokerage fees paid and any tax allowances available when determining whether you have earned a gain or loss.
- Understand tax rates applicable to traders – Different tax rates may apply depending on the type of trade and income bracket one falls into. For example, long-term capital gains tax can range from 5%-20% depending on which tax bracket an individual falls into. Additionally, tax allowances may apply in certain cases, so it’s important to understand the tax laws applicable to traders in your jurisdiction.
File tax returns – Once you have calculated your trading gains or losses and understand the tax rates applicable to traders, you are ready to file tax returns. When filing tax returns for income earned from trading activities, including all relevant information, such as total trading profits/losses and tax rates applied and any tax allowances available.
Short-Term Capital Gains Tax
This type of tax applies to trades held for less than one year. In India, the short-term capital gains tax rate is 15%, plus any applicable surcharge or cess. Depending on your tax bracket, this tax rate can range from 10%-30%.
Suppose you have made a profit of Rs. 1 lakh from trading in stocks over the tax year and fall within the tax bracket of 20%. Thus, your tax rate would be 15% plus the applicable surcharge (5%), thus amounting to an effective tax rate of 20%.
In this case, your tax liability will amount to Rs.20,000 (Rs.1 lakh x 20%). This means you would need to pay Rs.20,000 tax on the profits earned from trading in stocks for less than one year.
Long-Term Capital Gains Tax
Long-term capital gains tax applies to trades held for more than one year. In India, the long-term capital gains tax rate is 10% (plus applicable surcharge and cess). However, no tax will be payable if you have earned a profit of up to ₹1 lakh in a particular tax year. Additionally, certain exemptions may apply in some cases.
Knowing the rules and regulations governing taxation for traders and investors in your jurisdiction is important. With Shoonya by Finvasia, you can directly invest in the stock market at lifetime zero-brokerage. So, why wait?