Stock Trading Tax Implications – Tax saving is a word that everyone loves – except the government! The reason is simple. The government taxes almost anything and everything.
In 2018, India became the only country in the world to tax both long-term and short-term capital gains. If you don’t understand the big words, stay with this article for a few more minutes to find out.
Stock Trading Tax Implications
A few years earlier, most taxes on mutual funds, dividends and long-term capital gains were exempt, which encouraged most employees and self-employed people to invest in the stock market. But now everything has changed and the government has become a bit aggressive towards investors and traders.
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However, with some knowledge about taxes and tax planning, you can save over INR 150,000 in taxes per year. This article presents some simple and smart tax saving tips for traders and investors.
Before I jump straight into tax saving ways or tax saving ideas, here are some tax terms and principles you need to understand when it comes to mutual fund trading and taxation.
Note: All rules and terminology are clearly related to stock and mutual fund trading. This does not apply to the sale of other fixed assets, such as a house or land.
Long-Term Capital Gain (LTCG): Whenever you sell a stock or equity mutual fund after holding it for more than 12 months, the resulting gain/loss is called long-term capital gain/loss.
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Short-Term Capital Gain: Whenever you sell a stock or mutual fund after holding it for less than 12 months, the resulting gain/loss is called short-term capital gain/loss.
Note: Yields of debt mutual funds are considered LTCG only if the holding period is at least 36 months. (While for all other transactions, long-term consideration is considered, assuming holding for at least 12 months for a debt mutual fund is 36 months. Therefore, you have to wait longer to pay lower taxes.)
As already known, basic terminologies and taxation of capital gains. Let’s move on to tax savings.
As an investor, your profits can drop by 20% to 16% if you don’t plan your taxes properly. The tax saving advice for entrepreneurs provided below is not based on loopholes or the use of relaxations.
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These tips for entrepreneurs on how to save tax are 100% legal and original methods of saving tax. The Indian government is offering some tax saving opportunities to boost investment and encourage saving.
The first tip for entrepreneurs on how to save tax is to include the 80C deduction in your tax return. ELSS is an equity mutual fund that qualifies for deductions. If you invest ₹1,50,000 in ELSS every year, you can save ₹46,800 (assuming your annual income is above ₹10 lakh).
The best thing about saving under ELSS is that you can save tax with this investment, whether you are an employee, self-employed or a professional.
As mentioned above, LTCG is taxed at lower rates (10%) than STCG (15%). So whenever you make an investment, try to hold it for more than a year to save an extra 5% profit. Moreover, in the case of LTCG, there is also an exemption limit of ₹1 lakh which cannot be availed in the case of STCG.
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The most important reason why I told you about STCG and LTCG at the beginning of the article was to make you aware of the importance of dates.
Always write down purchase dates and plan ahead before you want to sell stocks. You can sell shares or mutual funds for a few extra days to benefit from lower LTCG tax rates.
Suppose you invested in the IPO on December 31, 2021 and you want to sell the shares after a year, try to sell after January 1, 2023. If you sell the shares later than one year (which most people do if they see a price increase), you will be deprived 1 lakh exemption limit and you will be taxed at high rate under STCG which is 15.6%.
There is an exemption of ₹1 lakh for LTCG. If you are not a regular high-value investor, you can plan your stocks or mutual funds so that capital gains do not exceed the exemption limit.
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To do this correctly, you need to understand the financial year. The financial year starts on April 1 of a given year and ends on March 31 of the following year. Any gains made during this period are called capital gains for the year.
If you have already made a profit of 1 lakh in the financial year, keep the sale of other investments for the next financial year.
Probably one of the most useful tax saving tips for traders and investors. Even after all the deductions, exemptions and planning, if you have a large amount of LTCG, buy a residential house and the LTCG will be tax-free. (Article 54 of the Financial Law).
You bought shares for ₹20 lakh and sold them for ₹51 lakh after holding them for more than 1 year (equity) or 3 years (debt mutual funds). Here’s how much you’ll pay in tax if you don’t buy a home.
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Invest the entire sale proceeds (51 lakh) in purchasing a new residential house within 1 year from the date of sale and save the entire tax of 3 lakh 12,000.
If you already own a residential home, you cannot claim a section 54 deduction as mentioned above. However, you can reinvest long-term equity sales in reported bonds or government securities.
To claim the exemption, you must purchase the bond or security within 6 months of the date of sale of the asset. The maximum investment allowed is 50 lakh (twice a year).
Most novice investors make the same mistake by not recording brokerage fees, commissions, and other fees incurred when buying and selling stocks.
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Reporting your expenses reduces your capital gain, which in turn reduces your taxes. Maintaining all the correct details using an Excel spreadsheet or portfolio management application will help you save on taxes.
All the above tax saving tips were mainly related to equity and equity mutual funds, but now it’s time to go for debt funds. Debt funds are generally charged higher rates than equity mutual funds, but the LTCG on debt equity is calculated after indexation.
This is not the case with debt fund PPAs. Cost inflation can be adjusted based on a specific chart. For example, if the relevant index rate is 100 on the date of purchase and 120 on the date of sale, the capital gain will be calculated as follows:
Indexing is a complex topic that should be left to professionals or income tax software like ClearTax. ClearTax automatically calculates capital gain after indexation and other expenses incurred. Calculates taxes and helps you save money.
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Accept the fact that stock trading will not always be profitable. Most people think that losses make no sense, but even a broken clock shows the right time twice a day, and so do losses. You can offset losses against profits in the same year or in subsequent years.
The most important advice for traders is that you should keep accurate records of your losses and profits in order to offset the loss with profits and reduce your capital gains tax.
If you are a high-value investor whose primary source of income is stock trading and investing, it is advisable to take it to the next level and trade stocks as an entity and not just as a source of income.
The biggest benefit of these tips for traders is that the income will be treated as business income rather than capital gains. Capital gains tax is charged directly on any profits made on sale, while business income is only calculated after deducting all expenses.
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You can deduct any other expenses you incur to earn this income, such as rent, depreciation, wages, phone bills and internet expenses.
If you brought in shares worth ₹10 lakh and sold them for ₹15 lakh in six months. The incurred expenses amount to PLN 20,000. due to intermediation.
Profit = 4,80,000 – Rent – ​​depreciation (computer, office furniture, smartphone) – bills (internet, phone) = let’s assume 1,50,000
Therefore, trading as a business can save you a lot of taxes if you are a high-volume trader. Low volume traders should not trade as a company as it is complex and requires meeting many government standards.
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ClearTax income tax software can help you calculate your tax liability and record your taxes correctly. ClearTax is used by thousands of taxpayers and small businesses across India to manage their income tax and GST. ClearTax can help you:
*These exclusions are accompanied by several clauses and exceptions. If you decide to take one of these exemptions, consult a specialist.
Related Categories: TPS Software | Expense Management Software | Debt collection software | Accounting software | Stock Software | Cryptocurrency Software Investing in the stock market can be a profitable business. However, it is important to understand the tax implications of your trading activities. Investors and traders are taxed on stock income.
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