Ever since the covid-19 pandemic set in, many people resorted to direct trading in stocks. Some of the brokerages have seen a surge in the number of new demat accounts after February this year. If you are among those who traded in stocks during the financial year 2020 and are planning to file tax returns for the year, you should know how the gains from stock trading are taxed. Also, let’s understand where to report them in the income tax return (ITR) and which ITR form to file.
Trading is different from investing
Buying or selling of stocks on the same day is known as intraday trading. In the case of investing, the investor takes the delivery of shares and holds it for at least a day. In intraday trading, the intention of the trader is not to hold the stock for the long term based on the growth prospects of the underlying stock, but to make foreseeable gains based on the volatility of shares on that particular day.
Therefore, income from intraday trading is either speculation gain or loss, which comes under the head of business income. It is added to the other incomes such as salary and taxed as per the marginal slab rate of the person.
“As intraday trading is done with the objective to earn income or profit from fluctuation in prices of the stocks, thus it is arguably considered under business income category taxable under the head ‘Income from business or profession,” said Parizad Sirwalla, partner and head, global mobility services, tax at KPMG India.
While buying a particular stock, the trader or investor has to mention whether she intends to buy for intraday or delivery (to hold the shares for more than one day).
In the case of investing, the transaction of sale gives rise to either capital gains or capital losses. These gains and losses are classified as long-term and short-term capital gains depending on the holding period. If a stock is held for more than a year, they are classified as long-term, else short-term. The long-term gains above ₹1 lakh are taxed at 10% while short-term gains are taxed at the rate of 15%.
While arriving at the income or loss from trading of stocks, you are allowed to deduct the expenses related to trading in stocks as business expenses. “Expenses such as internet charges, telephone charges, broker’s commission and demat account charges, among others, can be claimed as deduction as business expenses,” said Archit Gupta, founder and CEO of Cleartax, a tax filing portal.
Also, losses arising from intraday trading are allowed to be set off only against profit from any other speculative business. “You cannot set off the speculative loss from incomes such as salary, any other business, house property or any other income. You can carry forward the loss to the next four years for set off against future speculative income,” said Gupta. To carry forward the losses, you must disclose them in your ITR.
Which ITR form to use?
ITR-3 has been notified for FY19-20 for individuals, including salaried individuals, having income from profits from business or profession. “ITR-3 may be used by intraday traders for filing their tax returns by reporting all the required details therein (including any loss from such trading),” said Sirwalla.
According to Gupta, the income tax department is yet to enable the filing of ITR-3 for the assessment year 2020-21.