Introduction – Tax on Stock Trading
As you know, all transactions that take place in the country are taxed. Stock market related transactions are not exempted from this rule. But the tax on stock trading in India differs from that on other financial transactions. In this article, we will discuss all taxes levied on stock market transactions and how they concur or differ based on duration of holding the securities. The different taxes we will look at include taxes on transactions and on capital gains.
Taxes on Transactions
When you take a trade on the stock market, you have to pay certain brokerage charges as well as other taxes levied on the transaction. Generally, these taxes are levied as a percentage of the transaction value and may differ based on the type of security (equity, derivatives, commodities, etc.). Now, let us look at the tax on share market trading in India and find out the different percentages for each segment and type of trade.
Securities Transaction Tax (STT) / Commodities Transaction Tax (CTT)
Prior to introduction of STT/CTT, people used to show fictitious net losses on their trading and investments to avoid paying taxes on their income on trading in the stock market or commodity market. To ensure that people stopped evading taxation, the government decided to levy tax on the trading transactions, making it a tax collected at source (TCS). STT is directly levied on purchase and sale of securities such as stocks, derivatives, and equity mutual funds. It is also applicable on IPO transactions. It is governed by the Securities Transaction Tax Act which was introduced by the then Finance Minister P. Chidambaram and has been applicable since 2004. It is collected by the stock exchange where the transaction takes place.
STT rates for Equity Trading:
Intraday Trades: STT is charged only on sell side at 0.025% of transaction value.
Delivery Trades: STT is charged on both legs of the transaction, buy and sell, at 0.1% of transaction value.
STT for Derivative Trading:
Futures Contracts: 0.01% of the transaction’s sell side turnover, irrespective of whether it is an intraday or positional trade.
Options Contracts: Charged on premium value of the sell side transaction at 0.05%.
There is no STT on trading of Currency Derivatives.
CTT on Commodity Derivatives:
0.01% on the sell side transaction of commodity futures. This is not applicable on agricultural commodities.
STT/CTT is applicable on the transaction value and thus increases the total transaction value.
Stamp Duty is a tax charged by the state government on the transfer of security from one party to another. Previously, the stamp duty was different for every state but now it is uniform for all states since 1st July, 2020. This uniform rate has ensured that states do not take undue advantage of the duty by charging a higher rate.
Stamp Duty Rates:
Equity Intraday Trades: 0.015% on buy side
Equity Delivery Trades: 0.003% on buy side
Equity Futures Trades: 0.002% on buy side
Equity Options Trades: 0.002% on buy side
Currency Futures Contracts Trades: 0.0001% on buy side
Commodity Futures Contracts Trading: 0.002% on buy side
Commodity Options Contracts Trading: 0.003% on buy side
Goods and Services Tax
GST is a tax levied by the Government of India on trading since it is considered as a service rendered to the trader or investor. It has two equal components: SGST (State Goods and Services Tax) and CGST (Central Goods and Services Tax). This means that half of the total GST will go to the State government while the other half will go the Central government. It is levied on Brokerage, Transaction Charges, and Clearing Member Charges.
The GST on trading is 18% (9% SGST and 9% CGST), irrespective of the trading segment or security traded.
Capital Gains Tax
Any profit that you book on your trades is subject to taxation. This taxation percentage is fixed for transactions on recognized exchanges if you have paid STT. If not, the capital gains are taxed according to the tax slab your annual income falls under. It is divided into two categories depending on the duration of the trade (which is calculated from date of acquisition of security to date of sale or transfer), Short Term or Long Term.
Now let us take a look on income tax on share trading profit in India 2022.
STCG refers to Short Term Capital Gains Tax. Short term refers to holding a trade for a duration of less than one year. This includes tax on intraday trading as well as delivery trades and it is applicable on all types of securities traded on the stock markets. It is levied at 15% of the profit made from the trades.
LTCG refers to Long Term Capital Gains Tax. Long term refers to holding a trade for a duration of one year or more than one year. This tax is applicable at 10% of profit if the profit made from the trade is more than ₹1 lakh. This is applicable to gains made from selling your equity investments and on equity-oriented mutual fund investments. It is not applicable to Derivatives trading of any segment since derivatives contracts have an expiry of one week or one month.
Prior to Budget 2018, there was no Long Term Capital Gains tax on the profit made on long term investments. This tax was introduced in the financial budget of 2018 and is applicable only on gains starting from 1st February, 2018.
Stock Market Losses
Any losses made on the stock market can be offset against the gain or profit made by the trader. You can offset your short term losses against short term gains or long term gains whereas long term losses can only be offset against the long term gains. In case the loss is not entire set off against one year of capital gain, it can be carried forward for up to eight years from incurring the loss. But this can only be done if the taxpayer has filed it as a loss in that financial year’s income tax returns within the due date for tax filing.
In addition to the various taxes on transactions and capital gains, there are a few other charges involved in trading on the stock market. SEBI (Securities Exchange Board of India) charges fees of ₹0.10 per lakh on Equity and Derivative trades, ₹0.15 per lakh on Currency Derivatives and Commodity Derivatives Trading. While this is not a tax and only a fee charged by SEBI, it also adds to the entire charge you pay for your trading transactions. Clearing Members charge a certain fee on derivatives trading in equity, currency, and commodities segment. Stock exchanges also charge the trader with certain Transaction Charges. These charges differ for each stock exchange (NSE, BSE, MCX, and NCDEX) and for different types of securities. The two stock depositories, NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited), also charge for holding the shares in dematerialized form but this charge is taken from the Brokerage Firm (as it is the depository participant), not from the trader or investor. Since these charges are lower than the taxes discussed above, they have not been discussed in more detail in this article. This concludes our discussion on tax on share market trading in India. These taxes are above and beyond the brokerage charged by your stock market broker. We hope this has been useful and has helped you understand more about the charges on trading transactions and the taxes levied on them.
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