Types of equity earnings and Income Tax rules for Equity Share Trading

Introduction

Equity investments are potentially risky, but they produce high returns. No matter how much profit you make, it is always subject to capital gains taxation. If the investment is held for less than a year, short-term capital gains tax rules apply and the Long-term capital gains tax rules apply to investments held for more than a year. Let’s learn about Income Tax rules for equity share trading as per the STCG and LTCG tax and the form for Income Tax on Equity shares.

What are the 2 types of equity earnings?

1. STCG (Short-Term Capital Gain)

If the equity shares are sold within 12 months of the date of purchase, a capital gain tax of 15% is levied, regardless of the prescribed tax slab. If the investor’s other income, other than short-term capital gains, is less than the basic exemption limit, he or she may be able to take advantage of such shortfalls. In contrast to LTCG, losses in equity trading can be offset by any short-term capital gains.

2. LTCG (Long Term Capital Gain)

Equity shares sold after 12 months are tax-free if they are traded on a stock exchange and STT (Securities Transaction Tax) has been paid. Exemption from LTCG is not available if the shares are traded outside of India. Long-term capital losses on equity shares can only be avoided because they cannot be adjusted or carried forward.

Income Tax on Equity Share Trading

• For Domestic Company

• For Foreign Company

Due date and form for Income Tax on Equity Share Trading

• The Form for Income Tax on Equity share: If the income generated is classified as capital gains, all traders must file Form ITR-2 on the Income Tax Website. If a trader’s income comes from a Non-Speculative Business, he or she must file Form ITR-3 and provide mandatory financial statements.

• Due date:

1. 31st July – This is the due date for traders who are not subject to Tax audits.

2. 30th September – This is the due date for traders who are subject to Tax Audit.

Income Tax calculation on Non-delivery equity trade

Traders on any registered stock exchange in India who are primarily engaged in non-delivery trade can earn the following types of returns:

• Income tax on Speculative Business Income: Intra-day trading profits are classified as speculative business income. Taxes on such gains will be similar to income tax on business profits. Losses incurred as a result of these transactions can be offset against business profits.

• The income tax calculation for Non-speculative business income: Non-speculative business income is derived from trading futures on a recognised stock exchange. Again, the taxes levied on share trading in this scenario are comparable to those levied on business income. Losses incurred as a result of such trading can be offset against business profits.

Conclusion

It should be noted that the holding periods of shares and securities vary depending on the type of capital asset. The holding periods of listed equity shares and equity mutual funds differ from those of debt mutual funds for income tax purposes. Their taxability varies as well. So, before you use equity investments as a secondary source of income, you should understand how they are taxed.