The common and intuitive approach is to consider a person with a long term perspective as an investor and a person with a shorter term perspective as a trader. But from a taxation standpoint, there is a deeper significance to this distinction. Taxes on intraday share trading are very different from delivery trading. Similarly, intraday trading taxation classifies it as speculative business income while a BTST is classified as non-speculative business income. Taxation for investors in equities is quite straightforward and has been well documented although we will also look at that for understanding purposes. This is more a tax guide for traders, who need to understand a plethora of nuaes pertaining to taxation of equities.
First, how is equity investments taxed?
Equity investments are fairly straightforward. Any profits made within a period of 1 year will be treated as short term capital gains and will be taxed at the rate of 15% of the profit. However, if the stock is held for a period beyond 1 year then it is classified as long term capital gains. In that case the profits are entirely tax-free. Since long term gains are tax free, there is no question of carry forward of long-term capital losses. However, short term capital gains are taxable and hence short-term capital losses can be carried forward for a period of 8 years from the financial year in which the losses arise. This is the simplest form of treating profits / losses on shares. When you file your income tax returns every year, these profits or losses under LTCG and STCG can be shown under the capital gains section and the tax will be paid on the appropriate amount.
Adding the complication of business income versus capital gains
The above example of showing capital gains as part of your income statement is the simplest way of filing your capital gains returns. But there are cases when the profits or losses from your share trading cannot be shown under the capital gains segment of your Income Tax Returns. When you are predominantly a trader or most of your equities are held as stock-in-trade, then these profits / losses from shares will have to be shown as business income and returns must be filed accordingly. While there are no hard and fast rules to distinguish between normal capital gains and capital gains as business income, there are some basic parameters that the Act has laid out.
If the volume of digital share trading transactions exceeds Rs.2 crore in any financial year then you have to get an audit done and then your auditor may insist that you file this income as business income.
There is also a profit threshold that has been fixed of 6%. If the profit is below 6% of the total volumes done, then that is also considered as a fit case for treating the incomes from stocks and shares as business income rather than as regular capital gains.
Lastly, the principle of materiality is applied. If the income from share market activity accounts for a significant chunk of your overall income, then you will have to show your share market activity as business income rather than as capital gains.
Speculative Income versus non-speculative business income..
Once the above criteria are applied and you are clear that your income from shares and stocks has to be classified as business income, the next step is to distinguish between speculative income and non-speculative business income. Let us consider the following points here.
All intraday trades will be classified as speculative income. Whether you buy in the morning and cover by evening or whether you sell in the morning and cover in the evening, the transaction remains a speculative transaction. That is because an intraday transaction does not result in delivery of shares and therefore becomes speculative by definition.
BTST (Buy today and sell tomorrow) and STBT (sell today and buy tomorrow) exist in a slightly grey area. While they are speculative in nature they do result in delivery of shares although the trader does take on the short delivery risk in BTST and STBT trades. Hence BTST and STBT can be classified as non-speculative business income.
We come to the all-important subject of trading in F&O. While F&O does not result in delivery, they are intended to hedge the risk of your underlying. Hence it has been specified that income from F&O shall be classified as non-speculative business income.
Why this classification is important from a practical point of view
When you are filing as business income, there is no fixed rate of tax payable. You are taxed at your peak rate applicable. Both the speculative income and non-speculative business income are clubbed under the head of business income and added to your salary and the gross figure is taxed. However, the difference arises in carry forward and set-off. For example, accumulated non-speculative business losses can be written off against non-speculative business profits or even against speculative income. But the reverse does not hold true. Speculative losses can only be written off against speculative profits and not against non-speculative business income.
Subtle classifications of business income and speculative transactions lie at the core of this tax guide for traders. Taxes on intraday share trading are in the form of speculative income. When you understand intraday trading taxation, it helps you better understand the concept of effective returns.