Many people don’t understand the difference between trading and investing, let alone how they are taxed differently. This is especially true among Indians who invest in stocks, derivatives, and commodities.
So, don’t be surprised when you see traders adopting numerous investing strategies and vice versa. Trading and investing are two different kinds of activities regarding the stock market, derivatives markets, or commodities trading.
In this tax guide for intraday investors, we will explore trading vs investing tax differences and compare the tax implications of trading income and investment income.
Trading Vs Investing Tax: Holding Period
When it comes to investments, the holding period is how long you keep them. If you’re trading stocks in particular, this tends to be a relatively quick procedure lasting from just a few hours up to a couple of months. The goal here is simple: purchase stock at an incredibly low price and then sell once it has increased in value, thus allowing you to make your money back—and more! By utilizing the short-term volatility of Equity markets, profiting off these transactions can become quite easy once mastered.
On the flip side, investors tend to remain in their investments for longer durations – from a few years up to multiple decades. The motto here is that you need time for your investments to mature and reap the rewards; hence even if there are moments of uncertainty, it’s best not to do anything but wait it out.
Trading Vs Investing Tax: Power of Compounding
When trading, discovering the next lucrative trade is of utmost importance. As such, you must continually buy and sell assets in a short window to turn profits; however, this causes you to miss out on one of investing’s most potent tools: compounding. Sure, trading can generate returns but it isn’t dependent upon compounding for that effect.
As an investor, however, you benefit from the power of compounding since investments are typically held for long periods. With enough time and patience, this phenomenon can be nothing short of astounding in exponentially growing your wealth!
Trading Vs Investing Tax: Tax Outgo on Returns
Low taxes are one of the main attractions when it comes to investing as compared to Trading. Trading income earned through the sale of securities—stocks, futures, options, and commodities—is typically taxed at the same rate as normal income in India. This can range from 10-30%.
On the other hand, investment income isn’t taxed at the same rate as long-term gains. Instead, investments held for more than one year are subject to capital gains tax; this ranges from 0-20% depending on your total taxable income bracket.