1. We need to understand that in India profit and loss accruing out of stock transactions is subject to income tax and it needs to be seen in light of a stock being held for more than 12 months and stock being held for less than 12 months.
Scenario I: Stock held more than 12 months
2. One need to understand that if the shares are held for more than 12 months than the same fall in the category of capital gains and as per Section 10(38) of the Income Tax Act, the gains arising from the sale of shares which are subject to Securities Transaction Tax (STT) and which are held for more than 12 months (long term) is exempt from tax. Moreover if one is selling the shares after holding them for more than 12 months and those shares are not listed at any stock exchange than in that scenario one will have to compute the capital gains after indexing the cost based on the index for the year of purchase and the year of sale. The resultant capital gains would be taxed at prevalent rate of taxation. The point here to note is that one should have had paid the Securities Transaction Tax (STT) else the same is recoverable.
Scenario II : Stock held for less than 12 months
3. If the shares have been held for less than 12 months, they will be considered as short-term capital gains and thus the same is taxable at the prevalent income tax rates in the country.
4. For those executing the future & options trading, needs to disclose the gain or loss under the head profits or gains from business or profession (would be treated as a normal business income / loss). In case the share is held with the intention of earning dividend then it has to be treated as a regular trade and not a speculative transaction.
Adjustment of Lossess in IT statement
5. One can set off the losses from the business against any other income for the current year except for salaries. However, if one do not have any other income in the current year, then one can carry forward the losses and set them off against income from the business for that assessment year. One can carry forward the losses up to a period of 8 years provided the losses are non-speculative.
Perspective II : An Update
Now, there are broadly two types of capital gains taxes in Securities transactions.
In stock A, Mr. Sharma has profit of 30,000 and in stock B, Mr. Sharma has a loss of 50,000. Now he has the following 4 options to choose from taxation perspective:
So take a look at your portfolio and understand the possibilities of leveraging any potential capital gain/loss scenario for your benefit in consultation with your Tax Advisor.
Document submission to Income Tax Authorities While filing Income Tax Return
6. The current IT return form do not require submission of any document. However one need to collate the working papers such as the demat statement, ledger extract, contract notes and the gains working statement and keep it on records as the same can be called for at the time of assessment by the ITO.
PS: This post related to income tax liability arising due to gain and lossess in stock transactions is being made as per the request of a reader Mr Dinesh and we must thank him for bringing out this topic which will be of immense help for the readers. Readers are further requested to make this post as an interactive session to clear any IT related issues. We look forward to readers interactive question and answer session. Keep visiting our website for best intraday tips for day trading.
Scenario I: Stock held more than 12 months
2. One need to understand that if the shares are held for more than 12 months than the same fall in the category of capital gains and as per Section 10(38) of the Income Tax Act, the gains arising from the sale of shares which are subject to Securities Transaction Tax (STT) and which are held for more than 12 months (long term) is exempt from tax. Moreover if one is selling the shares after holding them for more than 12 months and those shares are not listed at any stock exchange than in that scenario one will have to compute the capital gains after indexing the cost based on the index for the year of purchase and the year of sale. The resultant capital gains would be taxed at prevalent rate of taxation. The point here to note is that one should have had paid the Securities Transaction Tax (STT) else the same is recoverable.
Scenario II : Stock held for less than 12 months
3. If the shares have been held for less than 12 months, they will be considered as short-term capital gains and thus the same is taxable at the prevalent income tax rates in the country.
4. For those executing the future & options trading, needs to disclose the gain or loss under the head profits or gains from business or profession (would be treated as a normal business income / loss). In case the share is held with the intention of earning dividend then it has to be treated as a regular trade and not a speculative transaction.
Adjustment of Lossess in IT statement
5. One can set off the losses from the business against any other income for the current year except for salaries. However, if one do not have any other income in the current year, then one can carry forward the losses and set them off against income from the business for that assessment year. One can carry forward the losses up to a period of 8 years provided the losses are non-speculative.
Perspective II : An Update
Now, there are broadly two types of capital gains taxes in Securities transactions.
- Short term capital gains tax: If the holding period of the stock is not more than 12 months, then the gains attract a tax rate of 15%
- Long term capital gains tax: If the holding period of the stock is more than 12 months, then the gains do not attract any tax
Let's take a look at an example which will explain the capital gains taxes in details.
Let us say Mr. Sharma has purchased securities A and B both on April 11, 2011 for a total price of 1,00,000 each. As on December 5, 2011, value of his investments is as follows:
| Scenario | Outcome | |
|---|---|---|
| Scenario 1 | He can hold both stocks for more than 12 months; in anticipation of price appreciation | No long term capital gains tax |
| Scenario 2 | He can book profit in stock A and hold stock B which is in loss | On the profit position in stock A he pays short term capital gains tax of 15% |
| Scenario 3 | He can sell stock A; book profits and sell stock B; book losses | Profit of 30,000 in stock A - Loss of 50,000 in stock B = Net Loss of20,00. This loss can be carried forward for 8 years. No short term capital gain tax on profits |
| Scenario 4 | Hold stock A for more than 12 months and book losses in stock B | No long term capital gains tax in stock A and short term capital loss of 50,000. This loss of 50,000 can be carried forward for 8 years. |
So take a look at your portfolio and understand the possibilities of leveraging any potential capital gain/loss scenario for your benefit in consultation with your Tax Advisor.
Document submission to Income Tax Authorities While filing Income Tax Return
6. The current IT return form do not require submission of any document. However one need to collate the working papers such as the demat statement, ledger extract, contract notes and the gains working statement and keep it on records as the same can be called for at the time of assessment by the ITO.
PS: This post related to income tax liability arising due to gain and lossess in stock transactions is being made as per the request of a reader Mr Dinesh and we must thank him for bringing out this topic which will be of immense help for the readers. Readers are further requested to make this post as an interactive session to clear any IT related issues. We look forward to readers interactive question and answer session. Keep visiting our website for best intraday tips for day trading.
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