An active investor or trader need to be mindful, knowledgeable, and smart about income tax implications from such activities. Trading in shares may be treated as business income (speculative) or as capital gains (investment) depending on the situation.
Intra-day trading (and Futures and Options trading by individuals) is considered speculative business activity. From a tax standpoint, intraday trading will be handled under the head, ‘Profit from business and profession’. The income is added to your regular business/professional income and attract maximum tax as per your income tax slabs.
Delivery-based trading and trading from investment purposes are treated based on the time horizon (short-term or long-term). If shares are held for less than 12 months before selling, the gain or loss arising from that transaction is classified as Short Term. If shares are held for more than 12 months before selling, the gain or loss arising from that transaction is classified as Long Term.
How to treat such earnings?
Short-term Capital gains (STCG) and Long-term Capital gains (LTCG) apply when shares are held with a motive of investment and delivery-based trading. STCG or LTCG cannot be combined or adjusted with earnings from intra-day trading.
How to treat such losses?
Intra-day losses (from speculative business) can be set-off only against intra-day gains. Such losses can be carried forward for four assessment years and be offset only against gains from speculative business.
Capital losses from delivery-based trading can be set off against gains from investments, depending on whether they are short-term or long-term. Long-term capital loss can be set off only against LTCG and cannot be adjusted against any other other heads of income. On the other hand, short-term capital loss can be set off against STCG or LTCG. Also, unadjusted losses can be carried forward for eight assessment years.
So, declare the losses, actively square off short-term losses, and use the 4-year/8-year window to reduce taxes due to losses. One can also have two portfolios to differentiate intra-day and investment activities. The intra-day trading earnings will be combined with business income, and investment earnings can be treated as capital gains.
What about tax treatment on equity and debt mutual funds? Stay tuned.
Monday, May 16
Intra-day trading, long-term capital gains, short-term capital gains and losses from a income tax perspective
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