ITR Filing for Investors: How Are Stock Market Gains Taxed?

The Stock market is incredibly popular in India, with more and more investors investing in the stock market daily. With hundreds and thousands of transactions taking place, it is important to understand how capital gains from stocks are taxed. In India, investors and traders must declare the profits they make in the stock market on their ITR or Income Tax Return filing.

How Are Trading Gains Taxed?

According to the Income-tax Act 1961, a taxpayer’s gains from selling shares vary depending on certain variables such as tenure of possession and number of transactions. When these stocks are maintained for investment motives, they would be categorised as capital assets and subject to taxation under capital gains provisions. On the other hand, if they’re purchased often in quick intervals over an extended period with no fixed holding duration or patterned trades, it could be considered business income that is taxable.

As said earlier, when stock market gains are taxed as capital gains, they can be classified as short-term capital gains (STCG) or long-term capital gains (LTCG). STCG is applicable when the shares are held for a period of less than one year, while LTCG is applicable when the shares are held for more than one year.

The tax rate applicable to both types of stock market gains is different. For STCG, a 15% tax rate is applicable, and there’s no taxation on LTCG if it does not exceed Rs one lakh in a financial year. However, beyond this limit, 10% tax (without indexation) needs to be paid for LTCG exceeding Rs one lakh.

How to Perform ITR Filing for Traders and Investors?

First, it is important to correctly declare capital gains made from transferring shares on your ITR form in the Capital Gains Schedule. It is important to correctly distinguish between short-term and long-term gains when reporting.

Second, you cannot use ITR-1 or ITR-4 forms if you’re looking to report capital gains. Rather, taxpayers must submit their paperwork through the ITR-2 form. For business income that needs reporting, there are two options: either opting for taxation under the presumptive scheme and using the ITR-4 form or going with the usual route and submitting via the ITR-3 form.