Is trading possible without paying tax?

Introduction

As we all are aware that there is a tremendous growth in stock market transactions. According to Times of India the investor base has seen more than 3x jump in the last five years, facilitated by rapid growth in digitization, rising investor awareness, financial inclusion, and strong market performance. But unfortunately, the income arising from trading of shares is taxable. If you worry about the taxation part of the same then this article is for you.

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Types of gains on trading of shares

While doing the trading of shares there can be two types of gains as follows

• Short term capital gain
• Long term capital gain

Short Term capital gain tax on trading

Tax on Short term Capital gains can be classified in two different categories as below

• STCG covered under section 111A of Income Tax Act
• STCG Excluding those covered under Section 111A of Income Tax Act

What covered under section 111A?

• Gains arrived from sale of equity shares which are listed under any recognized stock exchange & which include Security transaction tax
• Gains arrived from sale of Equity Oriented mutual funds which are sold under any recognized stock exchange & which include Security transaction tax
• Gains arrived from selling units of Business Trusts
• STCG arrived from the sale of Equity Oriented Mutual Fund units, Equity shares or Business trust units through any recognized stock exchange located in an international financial service center & consideration for which is payable in foreign currency. It will be charges under 111A even if there is no Security Transaction Tax

TAX Implications on STCG on trading of shares

Computation can be done as below:

How to save taxes on short term capital gains on trading of shares?

As to reduce the taxability an Assessee normally takes help of available exemptions & deductions let's check if there is any exemptions & deductions available

Exemptions & Deductions :

Unfortunately, there are no specific exemptions are available for short term capital gains on shares

However, An Assessee can use his un exhausted basic exemption which means if the Basic Exemption is not fully exhausted by any other income, then such short-term capital gain will be reduced by the unexhausted limit & only balance will be taxed.

Note: Only Individuals & HUF can adjust their un-exhausted basic exemption limit.

Basic Exemption limits:

As there are no separate deductions made available to reduce STCG on shares but one can follow below mentioned Tips to reduce the taxability.

Tips to reduce the Burden of STCG on trading of shares

• Individual can adjust their short-term capital loss on shares against other short term capital gains or long-term capital gains
• Individual can carry forward such short-term capital loss as tax adjustment for further 8 years.

As there is not much scope for share investors to save on their tax on STCG on shares. Hence individuals should always invest in Tax savings mutual funds &equity-oriented funds like ELCC (Equity linked saving scheme)

What is ELCC (Equity linked Saving Scheme)

ELSS or Equity Linked Savings Scheme are tax-saving mutual funds in India. They combine the benefits of equity investments with tax deductions under Section 80C. ELSS has a 3-year lock-in period, offering the potential for high returns and tax savings, making it a popular choice for long-term investors.

If you invest in ELSS schemes, then you can avail tax exemption of the invested amount up to a limit of Rs. 150,000. Further, the income that you earn under this scheme at the end of the three-year tenure will be considered as Long-Term Capital Gain (LTCG) and will be taxed at 10% (if the income is above Rs. 1 lakh).

Long term Capital Gains on trading of shares

In budget 2018, Section 10(38) of income tax act 1961 was revoked, an Exemption on Long term capital gains arising from sale of equity shares. The section was introduced in the Finance Act, 2004by the Kelkar Committee. It was done to encourage investments from the Foreign Institutional Investors (FII).

However, after budget 2018, Section 10(38) was replaced by section 112A. This Section postulates taxation on capital gains arising out of following assets:

• Equity Shares
• Equity Oriented Funds or units of Equity oriented Funds
• Business Trusts or units of Business trusts

Tax implications on LTCG

How to save taxes on long term capital gain on trading of shares

1. Exemption under Section 54F

As an individual one can reduce his tax liability by availing exemptions available under Section 54 by fulfilling following parameters:

• An individual needs to reinvest the net consideration amount received from sale of shares in a maximum two residential property
• Reinvestment should be done within 1 Year before or 2 Years after the date of transfer
• Reinvestment can also used to Construct One residential house in India within 3 years from the date of transfer

Note: However, if such investment is not made before the due date of filling of ITR then the amount must be deposit under the CGAS (Capital Gains Account scheme)

Point to be noted:

• The net consideration in excess of Rs. 10 Cr would not be taken in to account for the purpose of deposit in CGAS

However, Exemption will be revoked if Individual sell new property with in the lock in period of 3 Years

Quantum of Exemption

• If Cost of new residential house => Net sale consideration of original asset then entire capital gain will exempt
• If Cost of new residential house < Net sale consideration of original asset then only proportionate capital gains will exempt as under

LTCG* Cost of new residential House/Net sale consideration

However, if cost of new residential house exceeds Rs. 10 crores then the amount exceeding Rs. 10 crores would not be taken into the account for exemption

2. Grandfathering

As before introduction of budget 2018 the long capital gains arising from shares were exempt.

So, question arise how can we calculate cost of acquisition before 31St January 2018?

The cost of Acquisition for the long-term capital asset acquired on or before 31/03/2018 will be the actual cost However, if the actual cost is less than the fair market value of such asset as on 31/03/2018 then the Fair Market value will be deemed to be the cost of acquisition

Further if Net consideration on transfer is less than the Fair market value, then such net consideration or the actual cost whichever is higher will be deemed to be the cost of acquisition.

Step 1: Fair market value as on 31/03/2018 or Net Consideration (Whichever is Less)

Step 2: Step 1 or Actual Cost of Acquisition (Whichever is higher)

Outcome of step 2 will be your cost of acquisition for the computation

Computation:

3. Long Term Capital Loss

Long term capital losses arising out of sale of shares can be setoff against any other long term capital gain of same assessment year

In cases where entire long term capital losses are not setoff then it can be carried forward for further 8 years for tax adjustments.

Illustration

So, let's take an example to understand practically

Mr. X, resident individual has acquired following shares:

• 1,000 Equity shares on 20-05-2023 @160 per share
• 1,500 Equity shares on 13-07-2017 @200 per share

He sold the all shares on 17-03-2024 as below

• @300 per share those acquired on 20-05-2023
• @350 per share those acquired on 13-07-2017

Additional Information:

FMV as on 31/03/18: Rs.275

Mr. X has invested entire capital gains & purchased 1 property & also satisfied all other conditions of sec: 54F

He has also earned Rs. 1,20,000 as commission

Compute Net tax payable if he is opting old regime:

Solution:

FAQs

What is Trading tax?

It is a tax which is imposed on the buying and selling of financial assets such as stocks, bonds etc.

What are the taxes applicable for traders?

There are two types of capital gains taxes which are long-term capital gains and short-term capital gains applicable for traders.

How much trading income is tax free?

Trading income depends on the type of trading activity :

• If profits are made from selling shares which is held for more than one year on listed equity shares and equity-oriented mutual funds are taxed @10% on the amount exceeding 1 lakh
• If profits are made from intraday trading are considered as business income and taxed as per the individual's income tax slab rates.