How to calculate Income Tax on Stock Market Earnings

Roshni Khatri

28th Jul'22

All kinds of incomes are taxable. Financially responsible individuals are aware of and comprehend the principles of income taxation applied to stock market profits. As far as stock market earnings are considered these are short-term and long-term both kinds of capital gains. You must first be aware that capital gains categories apply to capital gained from the purchase or sale of shares. The holding time of shares has a significant impact on both long- and short-term capital gains. Besides this, you should know about stock lending and borrowing mechanisms as they can guide you while trading in securities.

The term "holding time" describes how long an investment is kept, such as from the date of purchase through the date of transfer of the securities. Well, the holding period is determined in different ways for stock or mutual funds and in different ways for calculating income tax. Let’s discuss the parameters of calculating the income tax on stock market gains!

 

Income tax on Shares

 

How the Gain is Calculated Through Shares

To calculate the tax on the gain we should first have to understand the meaning of the short-term and long-term capital gains, and then we can assess the taxation values on them. Here the method to calculate the taxes is described as under, have a look:

Short-term Capital Gain (STCG)

If an investor transfers or sells the securities within 12 months from the date of purchase, then this kind of gain or loss at the time of selling the securities is known as (STCG) short-term capital gain or short-term capital loss (STCL). Now the question arises when there would be a gain or when loss? So if your selling price is more than the purchase price then it is surely an STCG. 

Short Term Capital Gain: Selling Price of Shares- Purchase price + expenses on sale.

Thus, regardless of the tax bracket, you are in, the short-term capital gain is taxed at a rate of 15%.

Long Term Capital Gain (LTCG)

On a stock exchange, when the securities are sold after 12 months of acquisition then you may have long-term capital gain or loss. Unlike short-term capital gain, LTCG occurs when the selling price is higher than the purchase price. Moreover when investors have a long-term capital gain of more than one lakh then this gain is taxed at the rate of 10% plus the cess, whatever rate it is. The benefit of indexation will not be available to the seller as well.

Short Term Capital Loss (STCL)

The short-term capital loss resulting from equities securities can be adjusted against the long-term or short-term capital gain attributable to any type of capital asset. Now, what if it is not set off? So you can carry this forward for eight years and adjust for any long- or short-term capital gains made over those eight years.

However, You are permitted to carry forward the loss only if you file the IT returns within the due date. It is necessary to submit a return even if your income is less than your taxable income to take advantage of the provisions for carrying forward losses.

 

Income tax on shares

 

Long Term Capital Losses (LTCL)

Any long-term capital loss can be offset and carried forward so it is conceivable to offset the LTCL against any long-term capital gain. It is not possible to offset the LTCL against the STCG. Moreover, if you have long-term capital losses then you can carry forward this for the next eight years against the long-term capital gains. But to be able to do this you need to file the income tax return within the due date.

Security Transaction Tax

This tax is applied when the shares are sold or purchased. This tax is imposed upon equity shares merely, at the time of selling or purchasing them. In short, all the sales and purchases on the stock exchange will invite the STT.

However several people deal in securities but some gain the revenue and others lose their sums. To address this more briefly we should focus on why most people lose money in the stock market, as it can help you in trading safely. 

Business Income and Capital Gain Income

You have the option to treat the income from the sale of shares as your business income. For that, the profits you make through shares are added to your business income in that particular financial year. And such income is taxed according to your income tax slabs. 

On the other hand, if you want to treat the STCG and LTCG separately then you need to pay the taxes mentioned above. The prime concern for the investors is whether the income generated from shares can be treated as business income. Well, for that the taxpayers have to give the reasons to tax departments, for why they want to treat their income from the sale of shares as business income. 

 

Options Available to Taxpayers

Taxpayers have the choice to treat the income generated from the sale of shares as business income. However, once they make the choices then the same method must continue for significant years unless there is any change in the situation of selling the shares. This option is valid for the shares or securities which are listed.

CBDT has made the circulars that state that the taxpayers have the option to treat the income generated through shares as business income and these shares must be listed on the stock exchange, irrespective of how long the shares are held. Besides this, the taxpayer can choose this option only if the shares are held for more than 12 months. And the taxpayer will have to stand with this choice for subsequent years too as the changing stand is not permitted.

 

Income tax on shares

 

Unlisted Shares

If it is about unlisted shares the sale does not take place in any formal market. That’s why the income tax department has declared that the income generated through the sale of unlisted shares, will be taxed as capital gain irrespective of the holding duration. This rule is made to have a uniform approach. 

 

Final Words

Thus for paying the taxes on the income generated through shares, you need to ascertain your duration. Since the tax rates fluctuate depending on whether the capital gain is short-term or long-term, as well as the taxation laws. Hence the taxpayers are supposed to be cautious while dealing in listed as well as unlisted securities. With this, you should also focus on strategies to protect your income from taxes, as this will guide you in doing proper financial planning.

 

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A keen observer, who loves to spend time with nature. A fun loving person, enjoys to explore the new aspects of life. Passionate about reading and learning new things. Roshni is dedicated towards her work and has worked in different professions.

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