About taxation of Capital Gain/loss on equity shares, MFs and F&O transactions – a guest post

Many small investors enter the stock market without adequate preparation. Some resort to F&O trading in the hope of making quick gains. The consequences are often disastrous. Not only should one learn about how the stock market works and how to choose stocks/funds for trading or investment, one needs to know about the tax implications of various transactions.

In a guest post, Aashish explains the tax implications of profits and losses made in the stock market. If you find the post useful and/or have any questions, please leave a comment using the ‘comments’ link below the post. 

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Profits earned on sale of equity shares and equity-oriented MFs (65% or more of portfolio consisting of equity shares) are taxable as capital gains. Capital gains can be ‘long-term’ or ‘short-term’ depending on the period for which the equity shares/MFs are held.

Equity shares/MFs held for one year or longer are treated as ‘long-term’ for capital gains purposes. Any profit on sale of such shares/MFs is completely exempt from capital gains tax u/s 10(38) of the IT act - provided the transaction is processed through a stock exchange and Securities Transaction tax (STT) is paid. Any long-term capital loss has to be absorbed by the tax payer as such a loss cannot be set-off against a long-term capital gain, which is tax free.

If equity shares/MFs are held for less than one year, they are treated as ‘short-term’ for capital gains purposes. Any profit on sale of such shares/MFs is subject to capital gains tax @15% (+3% cess) u/s 111A of the IT act – provided STT is paid for the transaction. Any short-term capital losses can be set-off against short-term capital gains before calculating short-term capital gains tax.

In case STT is not paid – such as for a private transaction between two parties, or a share buyback by a company directly from its shareholders, or in the case of unlisted privately-held shares and non-equity oriented MFs (less than 65% of portfolio consisting of equity shares), capital gains tax on profit is computed differently.

Any profit earned on sale of such shares/MFs is taxed at normal capital gains tax rates. For short-term capital gains, the tax rate is as per tax payer’s individual tax slab (+3% cess). For long-term capital gains, 2 options for taxation u/s 112 of the IT act (whichever is lower) are available to the tax payer:

Either, the cost of acquisition of shares can be indexed according to the Cost Inflation Index published each year by the tax authorities; tax is assessed @20% (+3% cess) after taking into account the profit based on the indexed cost of acquisition; Or, tax is assessed @10% (+3% cess) without taking into account any cost indexation of such shares.

Futures & Options transactions are not delivery-based. There is no physical delivery of any capital asset. There is no question of any short-term or long-term capital gain or loss as F&O contracts are not treated as capital assets. Any gain or loss on such transactions is considered as regular business gain and loss.

Therefore, F&O profits are taxed as business profits as per tax payer’s individual tax slab (+3% cess). Any F&O losses are treated as business losses and can be set off against any other source of income (other than salary).

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(Aashish Ramchand is passionate about Indian taxation advisory and loves to write about the Indian tax system and its various nuances. A Chartered Accountant by profession, he is the Co-founder of Make My Returns.)