This is a question I used to keep on asking me, and didn’t find simple and concise blog or video explaining the tax obligation from Indian market context.
There is a good piece of information available at Zerdha varsity, that has good explanation, which shall surely help any trader or investor to understand their tax obligation. I would try to elaborate the same in my way with some basic example and simple language.
Before we start discussing about the tax, let us first understand who is considered Trader and who is Investor, and which category shall we belong.
A Trader: Who trades on stock without delivery (doesn’t carry/hold the stock to next day) and trades on Future/Options for intraday is typically called Traders.
An Investor: Who buys Stocks for delivery and holds it for more than 1 day.
Now let us try an understand what are different type of Tax, from Income tax perspective and how they are defined.
Speculative Income: Traders who generally trades on equity based stocks for intraday (or BTST & STBT) without delivery obligation, income from these type of trades shall fall under Speculative Income.
Non-Speculative Income: Traders who trades on Future or Options in FO segment, income from those type of transactions are Non-Speculative Income.
STCG (Short Term Capital Gain): Any investors who holds any stock for more than 1 day and less than 1 Year, any profit from such transaction shall fall under STCG.
LTCG (Long Term Capital Gain): Any investors who holds any stock for more than 1 year, any profit from such transaction shall fall under LTCG.
Let us now understand what is the Tax applicable for the above transaction/Tax category.
Speculative Income: Speculative income falls under Business income category, and any income from speculative income get added to your other business income and taxed as per existing income tax slab.
Non-Speculative Income: Speculative income falls under Business income category, and any income from non-speculative income get added to your other business income and taxed as per existing income tax slab.
From tax applicability perspective both Speculative income and non-speculative income are under same category of Business income.
STCG (Short Term Capital Gain): Short Term Capital gain is flat 15% applicable on your earned profit from selling the Stock.
LTCG (Long Term Capital Gain): Long Term Capital gain is flat 10% applicable on your earned profit from selling the stock.
Below image shall explain how tax is applicable if you are a salaried individual and earn from stock market as both Trader and Investor.
Let us now try to understand how Total tax on your salary or business income is calculated. This is straightforward, as its based on your income and the applicable Income tax slab 2018-2019.
If your taxable income (including Salary and Business income) is below Rs 2.5 lks then there is no income tax applicable. If income is between Rs 2.5lks to Rs 5lks then 5% of amount by which income exceeds Rs 2.5lks. If income is between Rs 5lks to Rs 10lks, then Rs. 12,500 + 20% of the amount by which income exceeds Rs 5lks is applicable. In case your taxable income is more than Rs. 10lks then Rs. 112,500 + 30% of the amount by which income exceeds Rs 10lks.
Below diagram might help you understand this pictorially.