Taxation Made Simpler
Before we write or read anything, don’t you think there should be a purpose? The purpose of this article is to educate you with the knowledge of ‘income tax’.
What is income tax? Why income tax?
A part of your income that you are supposed to pay to the government is income tax. The purpose of collecting income tax is to facilitate the government’s functions that include developing the infrastructure, education, government hospitals, paying the salaries of government workers etc.
The next question that comes to our mind is ‘how much tax is to be paid?’
This is a very broad question and would require something more than just knowing which slab you belong to. The answer to this question involves the type of your income. Your market activity can be classified into four types, Long term capital gains, short term capital gains, speculative business income and non-speculative business income.
Knowing the type of your income
Long Term Capital Gains- The profits you have generated from a stock in which you’ve invested for at least one year (365 days) qualifies as LTCG. The tax on this income is 0%.
Short Term Capital Gains- The profits generated from a stock or equity mutual funds holding for more than 1 day and less than 365 days is categorized as STCG. The tax in STCG is flat 15%.
Speculative Business Income- As per section 43(5) of the Income Tax Act, 1961, profits earned by trading equity or stocks for intraday or non-delivery is categorized under speculative business income.
Non-Speculative Business Income- Income from trading futures & options on recognized exchanges (equity, commodity, and currency) is categorized under non-speculative business income as per section 43(5) of the Income Tax Act, 1961.
Now, what percentage of your business income is to be paid as tax?
There is no fixed percentage like capital gains tax rate, instead what you’ll have to do is just add the business income to your other income and the tax has to be paid as per the tax slab you fall in (the slab rates are mentioned above).
Although there’s no threshold frequency set by the IT department, it is advised that you declare trading as non-speculative business income and not STCG when the frequency of trades is high. One of the advantages in doing so is offsetting F&O losses with any income other than salary (like rent and interest). For example, if the F&O loss incurred is 3,00,000 and your other income is 8,00,000 the tax to be paid is only on 5,00,000. One can also carry forward the intra-day equity loss (speculative loss) up to four years provided the returns are filed on time. These losses can be set off only against other speculative gains.
Looking at the drawbacks of declaring trading as a business income, if your gains are high and you fall under the 30% tax slab you will effectively be paying 30% of your profit as tax. You’d be potentially paying higher taxes. Declaring business income would also mean you will need the help of a CA to file your returns, which is an added cost.
Indexation
The tax for non-equity based mutual funds, property or gold is flat 20% but with a benefit of indexation. We’d all agree with the fact that inflation eats up almost all the profits earned from investments made in the ones mentioned above. Inflation is the average increase in price level of goods and services in an economy. Indexation is a method to determine the true value after considering the effect of inflation. It can be calculated using the Cost of Inflation Index (CII).
Tax Loss Harvesting
At the end of a financial year you might have realized profits and unrealized losses and would end up paying taxes for the realized profits and carrying forward losses to the next year. This means immediate outgo of cash and any interest you would’ve able to generate goes away as taxes. You can book the loss and reduce the tax liability for that year. This is called tax loss harvesting.
A Note on BTST (Buy Today, Sell Tomorrow)
Which category would BTST come under? Speculative business income, non-speculative business income or STCG? It can be considered as non-speculative/STCG as the exchange already charges the security transaction tax (STT) on all BTST trades. If BTST trades are done few times a year, it can be considered as STCG but if done frequently it is best to classify it as speculative business income.
