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Tax Implications on Traders and Investors

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Tax Implications on Traders and Investors, This article will try to focus on defining the terms – traders and investors and at the same time will analyze the tax effects on each of them. So this article is useful for both investors and traders to analyze their tax positions and plan for better tax management. Now check more details about “Tax Implications on Traders and Investors” from below….

Tax Implications on Traders and Investors

Tax Implications on Traders and Investors

Who is an investor?

Investor is the person who buys or sells on delivery basis. Put simply, investor actually holds the stocks for certain time period which will entitle him to be owner of those holdings. He would prefer to sell the stocks only after he becomes owner ( after 2 days for T+2 or 5 days in case of T+5 ).He does not engage in option or future trading and also would not prefer same day trading (popular as intraday trading).

Who is a trader?

Trader is a person who engages in intraday trading, futures and options trading and may also be carrying out trading in currency and commodities market. His main objectives lay down in speculative business income, which would imply trading without accepting or giving delivery of the stocks. 

Taxation of income earned by an investor or trader

Income earned by the investor through share trading could be classified as below

Long Term Capital gain

Long Term Capital Gain (LTCG) would refer to gain arising out of the sale of shares held for more than 12 months.LTCG is basically exempt in case of equity shares and equity related saving schemes. Only condition for such exemption is that shares are to be sold through recognized stock exchange only where the securities transaction tax would be applicable. If the LTCG is off market transaction (not on stock exchange), then tax rate would be 10% for listed stocks and 20% for non listed securities.

Long term capital loss on equity shares cannot be set off as Income Tax Act has exempted the long term profit / gain on equity shares.

Short Term Capital gain

Short Term capital Gain (STCG) would refer to gain arising from sale of shares held for a period of less than 12 months. STCG is taxable at 15% rate slab irrespective of individual income tax slabs.

Short Term Capital Loss can be set off against short term capital gains in the same year and they can also be carried forward until next 8 assessment years to be set off against short term capital gain only.

Speculation income

Speculation income arises from speculative activity, which includes intraday trading, which happens when the trader trades on no delivery basis. This income is added to non speculative business income and taxed at rate of individual income tax slab rates.

Speculation loss can be set off against speculation income only and eligible is to be set off against speculation income till next 4 assessment years.

Business income from trading

This would cover non speculative business income from trading which would be futures and options trading. Due to its nature of business income, business expenses are allowed to be deducted from the profit.

Non speculative business income is also clubbed with other business income and losses from the same are eligible to be set off against any other business income except salary income. Non speculative business loss could be carried forward for 8 assessment years to be set off against non speculative business income.

Conclusion

If you are an investor or trader, tax awareness is vital part of stock trading. There can be many combinations for a single investor or trader, like short term capital gain and speculative income or long term capital gain and speculative loss etc.So understand the tax implications of the same as they impact on cash outlay capable of reducing your income.

Also this tax framework would guide you to be wiser investor or trader by planning for a better tax position which will reduce tax payable or increase loss set off against income.

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About Yash Shah

Yash Shah is passionate article writer and has written more than 100 articles in the field of Finance, Insurance, Stock Market, Company Law, Auditing, Taxation and many others. In case of any queries or suggestions, you can reach the author @ [email protected], you can also catch him on facebook @ yashshah299

One comment

  1. Can I be an investor and a trader at the same time. I.e trade stocks as an investor and options as a trader

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