Beginning to dabble in stocks? Know the tax implications on gains made

For those who are just starting on stock market investments or have been at it for some time but are only now facing the burden of taxes, it is imperative to know about the tax liabilities of their stock gains and trades. However, that’s easier said than done. The stock market is bigger than any of our imaginations. Even for the purposes of taxes, the purview of the stock market is quite large, which makes it not so easy to determine the tax eligibility of a particular stock trade or profit.

But, the government doesn’t care whether you are a beginner or a stock market pundit. You must pay taxes on your gains. And your stock gains, along with all your income sources, must be mentioned while filing the annual income tax returns. Here are the steps to be followed.

Criteria for stock transactions

The two basic criteria used for determining the taxation on stock transactions are called the t-factor and the j-factor, which stand for time factor and job factor, respectively.

From the time perspective, the income or gains from the stock market are divided into the following:

-Short-term gains

-Long-term gains

Similarly, the stock gains can be divided into two categories based on the job factor:

-Full-time job: for those trading stocks on a full-time basis

-Part-time basis: those trading stocks on a part-time basis

Let’s discuss these criteria in detail here.

Tax Treatment of Stocks based on the t-factor

On short-term gains made from the stock market, the capital gains tax is fixed at 15 percent of the profit. However, in case there is a loss in the short term, the same can be carried forward for up to eight years. Short-term capital gains refer to the profits earned from the stock trades that are closed within 12 months.

Long term gains are the profits made from trades that are squared up after 12 months or more. Such long-term gains are liable for a flat 10 percent tax.

Tax treatment of stocks based on the j-factor

Depending on whether a person is trading in the stock market full-time or part-time, his/her tax liability will differ.

For those trading stocks on a part-time basis and have another full-time business or income source, stock trading shall be regarded as an investment and income from this activity shall be regarded as business income.

On the other hand, people trading full-time in a partnership or owner company shall be treated as full-time traders, and the income from such trading activities shall be regarded as speculative business income and will be taxed accordingly.

Regular income from stock trading activities is treated as speculative business income. Similarly, profits of people trading stocks with short-term horizons are treated as speculative business income.

On the other hand, part-time trading of stocks is treated as an investment. Similarly, stock trading activities with a long-term horizon are treated as an investment.

Also read: How tax-loss harvesting on investments can minimise your capital gains tax outflows

Tax on income from debentures, bonds, and mutual funds

Based on the time factor, the tax liability on income from these sources can be divided into the following categories:

Short term capital gains: Gains made from the sale of securities within 36 months of purchase. Such gains are eligible for normal tax rates and losses can be carried forward for up to eight years.

Long-term capital gains: Profits earned from the sale of the said securities, bonds, debentures and/or mutual funds after 36 months of holding.

Also read: Factor investing: How you can avoid mutual funds and create your own stock portfolio

Tax on income from derivatives, commodities, and currency

For the purposes of taxation, the income from derivatives, commodities and currency is treated as non-speculative business income. The same is taxed as per normal slab rates.

For more information about taxation on stocks, one is advised to read related articles on investment, stock trading and income tax rules.