Investors will be much worried to pay taxes, rather than to book losses in Stock Market. Financial year ending will make investors cautious regarding taxes that are to be paid for financial and stock gains. As per Income Tax, Profit gained by transacting in Stock Market is Different for Equities, Commodities and Futures &options. Further, it is Classified based on Time period of holding the Stocks.
HOW MANY TYPES OF TAXES ON PROFIT EARNED IN STOCK MARKET:
Broadly, depending upon the type of instrument we are trading and holding time period, they are classified as
LONG TERM CAPITAL GAINS:
Investor selling the share or stock after 1 year of holding, is considered as Long-Term Capital Gains (LTCG). LTCG will be taxed at 10%.
SHORT TERM CAPITAL GAINS:
Investor selling the share or stock before 1 year of holding, is considered as Short-Term Capital Gains (STCG). STCG will be taxed at 15%.
WHAT IS BUSINESS INCOME (INTRADAY AND FUTURES OPTIONS)?
Business income is further Classified into Speculative Income and Non-Speculative income.
SPECULATIVE INCOME(INTRADAY):
Investor making profit in trading intraday stocks is considered as Speculative income, as the intention is clear to make profit by Speculating the movement of Stocks/Shares.
Speculative income is taxed as per tax-slab of individual investor.
NON-SPECULATIVE BUSINESS INCOME (FUTURES AND OPTIONS):
Futures and Options trading is considered as Non-Speculative Business income, as the instrument is Considered for utilizing for Hedging as a part of Risk Management.
Non-Speculative income is also taxed as per tax-slab of individual investor.
WHAT IS TAX-HARVESTING?
Tax Harvesting is to sell the shares that are in loss to compensate the profit earned in Shares during that Financial year to reduce the tax to be paid.
Example: Investor having a profit of 1lakh in STCG, can compensate the tax by selling the shares which are in losses bought before 1year.
Tax-Harvesting is mostly done by investors during the financial year ending. Mostly, investors will sell the shares in losses and buy them on next day or within a week time period.
CAN WE CARRY-FORWARD THE LOSSES?
Investor can carry-forward losses, depending upon the segment and time period of transactions.
- Long term and short-term Capital Loss will be Carry-Forwarded up to 8 years.
- Intraday Loss can be Carry-Forwarded up to 4 years.
- Futures and Options Loss can be Carry-Forwarded up to 4 years.
Above Losses are Carry-forwarded only if they File the Losses in IT-Filing.
Conclusion:
Many Investors will trade in Stock Market without understanding the mechanism and process of Stock market. If Investor receives the notice from income tax department for tax harvesting, he should be answerable.
In India, Tax harvesting is neither legal nor illegal, whereas in US, tax harvesting is illegal.