Thanks to technology upgradation and various zero brokerage platforms, access to the stock market has become convenient and simple. On this front, it is imperative to be acquainted with the tax obligations attached with the income earned from trading or investing in stocks and mutual funds.
Taxation of stocks and mutual funds : In addition to the profit or loss made on sale of stocks or mutual funds (referred as ‘sale income’), the said instruments can fetch dividends. The taxability of sale income and dividend work differently. Further, the taxability of sale income depends on the frequency/ quantum of sale made by the investor.
Taxability of dividend income : This is simple. Dividends are generally classified under “Income from other sources" and are taxed at the applicable income-tax rates. The Company paying dividends will deduct tax at source and this varies based on the type of investor.
Taxability of sale income :
(A) For active trading investors, sale income comes under the category of “income from business". In cases where trading is undertaken without delivery, it is treated as “speculative business income". Expenses like brokers’ commission, internet charges, demat account charges, etc., can be subtracted from gains earned. In such instances, the tax shall be paid on net profit and a tax audit will need to be carried out if the trading volume exceeds ₹5 crore in a given financial year.
In case of loss, it can be adjusted against other income sources (except salary). Excess loss can be carried forward and set off against business income in the subsequent year.
Loss of the year is allowed to be carried forward for eight years in case of normal business loss and is restricted to 4 years for speculative business loss and that too adjustment only with speculative business profits.
(B) For persons making investment and not actively trading, the sale income gets categorised as capital gains (CG). CG tax rate on sale of mutual funds/ stocks varies based on the period of holding the instrument before sale.
In case of loss on sale, it is allowed to be carried forward for 8 years and set-off in the year of gain.
Here is how mutual funds and equity shares are taxed
*without indexation benefit over and above ₹1 lakh (Exemption from Long Term CG provided for listed equity shares/ equity-oriented MF was withdrawn with effect from 1 February 2018)
Share Buy-Back by listed companies: Where Indian listed companies carry out share buy-back, the proceeds received by the shareholder are exempt from income tax as share buy-back tax is paid by the listed company
Other aspect: Equity Exchange Traded Funds (ETFs) are taxed at par with equity oriented mutual funds. Taxation of derivatives is not covered.