How are stock market gains taxed and how to declare in ITR? | Angel One (2024)
2021 has been an outstanding year for India’s stock market, with an unprecedented bull run. Resultantly, investors have booked profits throughout the year. However, there are income tax implications associated with it, depending on the nature of the trades.
Mentioning salary, rental income, interest incomes, and likes is a common practice while computing taxes, factoring in the income from selling securities is a miss in most cases. These incomes or profits are taxable and covered under the ITR that you file every year.
So how are these stock market gains taxed? Read on to learn more.
How to Calculate Income Tax on Stock Market Gains?
As per the Income Tax Act of 1961, the taxability of stock market gains varies depending on transaction volume and holding period. If you purchase shares to invest, in that case, they will be regarded as capital assets and taxes as capital gains. Whereas if you purchase shares and then sell them within a short period, repeatedly, it will be treated as business income and taxed accordingly.
Taxation of capital gains has two classifications based on the holding period, short-term capital gains tax and long-term capital gains tax. On the other hand, the business income is taxable as per the slab rate you are subjected to.
Capital Gains Tax – An Overview
As specified above, capital gains tax is applicable to the profit that you earn from your stock market investments. Also, there are two sub-types to it based on the duration of an investment. Here are the details –
Short-term capital gains tax is applicable if one sells the share investment within 12 months of investment. It means, for example, if you make an investment on 21 January 2021 and sell it within 21 January 2022, you will have to pay STCG on your capital gains.
Long-term Capital Gains Tax
Long-term capital gains tax is charged on any gains made through the sale of shares after 12 months of investment. Taking a cue from the example mentioned above, if you sell your investment after 21 January 2022, it will come under LTCG.
Here is a table representing the tax rates of STCG and LTCG:
Type of Tax
Condition
Applicable Tax Rate
Short-term Capital Gains
On the sale of equity shares
10% over and beyond Rs. 1 lakh
Except on the sale of equity shares
20%
Long-term Capital Gains
On security transactions
15%
Not on security transactions
As per the income tax slab
How to Declare Capital Gains on ITR?
You need to use the ITR 2 form to declare your capital gains from any and every such investment. While filling your ITR, you need to complete this process and then compute your annual income tax accordingly.
Bottom Line
The movement of India’s share market has been upwards only in recent times, and it shows no sign of slowing down. Therefore, as an investor, you stand a chance of earning lucrative profits on it. Hence, being aware of the capital gains taxation rules can aid one to pay his/her income tax dues and avoid any legal implications that come with non-payment of income tax properly.
To get all the updates on India’s stock market, refer to the Angel One Blogs.
Source: ET Now
Frequently Asked Questions
What is the last date of filing an income tax return? The last date of filing an income tax return for a financial year is 31 March.
What is the basic income tax exemption limit irrespective of age? The basic income tax exemption limit irrespective of age is Rs. 2.5 lakh in a fiscal year.
What age-wise classifications are on the income tax slab? The age-wise classifications on the income tax slab are – individuals up to 60 years, senior citizens of 60 to 80 years, and super senior citizens of above 80 years.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.
Long-term capital gains arising from equity mutual funds must be reported under schedule 112A in ITR-1, and short-term capital gains must be reported in schedule CG of ITR-1.
For long-term capital gains, individuals have to provide scrip-wise details while they file ITR 2. This will include ISIN, selling price, purchase price, date of different transactions and more. After providing these details in 'Schedule 112A', one has to click on 'Add'.
Capital gains and deductible capital losses are reported on Form 1040, Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040, U.S. Individual Income Tax Return. Capital gains and losses are classified as long-term or short term.
How is capital gain calculated ? Capital gain broadly calculated as Capital gain = ( full value of consideration received on transfer) - ( cost of acquisition of capital asset + cost of improvement of capital asset + expenditure incurred in connection with transfer of capital asset).
Schedule 1 is used to report types of income that aren't listed on the 1040, such as capital gains, alimony, unemployment payments, and gambling winnings. Schedule 1 also includes some common adjustments to income, like the student loan interest deduction and deductions for educator expenses.
Keeping this in mind, they should file ITR-2, assuming such income is in the nature of capital gains and salary income. In exceptional circ*mstances, if the individual has such trading income as business income, they should file ITR-3," said Agrawal.
How to file ITR 2 capital gain? While filing your income tax return using form ITR 2, you must select Schedule 112A to report long-term capital gains or losses from listed equity shares, equity-oriented mutual funds, or units of a business trust.
You report your stock gains and losses in two places, Form 8949 and a Schedule D, to verify that your broker has supplied the IRS with a correct 1099-B. So follow these simple steps: Step #1: Divide the transactions into short- and long-term because they are taxed differently.
This tax is applied to the profit, or capital gain, made from selling assets like stocks, bonds, property and precious metals. It is generally paid when your taxes are filed for the given tax year, not immediately upon selling an asset.
Earned income is any income received from a job or self-employment. Earned income may include wages, salaries, tips, bonuses, and commissions. Income derived from investments and government benefit programs would not be considered earned income. Earned income is taxed differently from unearned income.
Capital gains can be subject to either short-term tax rates or long-term tax rates. Short-term capital gains are treated as ordinary income and taxed according to ordinary income tax brackets. Long-term capital gains are taxed at 0%, 15%, or 20%.
While capital gains may be taxed at a different rate, they're still included in your adjusted gross income (AGI) and can affect your tax bracket and your eligibility for some income-based investment opportunities.
The long-term capital gains from equity-oriented mutual funds need to be reported in 'Schedule 112A'. If you have short-term capital gains, that needs to be reported in Schedule CG.
What is the CGT Six-Year Rule? The capital gains tax property six-year rule allows you to use your property investment as if it was your principal place of residence for up to six years whilst you rent it out.
The formula for calculating capital gains is net capital gain = capital proceeds – cost base. This amount is then included in your assessable income for the relevant financial year and taxed at the applicable rate.
Capital gains and losses are classified as long term if the asset was held for more than one year, and short term if held for a year or less. Short-term capital gains are taxed as ordinary income at rates up to 37 percent; long-term gains are taxed at lower rates, up to 20 percent.
Section 112A imposes a 12.5% long-term capital gains (LTCG) tax on the sale of listed equity shares, equity-oriented mutual funds, and business trusts, applicable to gains exceeding Rs 1.25 lakh.
Section 54F exempts you from paying LTCG tax on the sale of long-term capital assets other than a house if you utilise the sale proceeds to buy/construct a new house. The new house should be purchased either one year before or within two years of the sale of the long-term asset.
How to Claim Deduction Under Section 80TTA. First, add your total interest income under the head 'Income from Other Sources' in your return. Calculate your gross total income for the financial year from all the income heads and then show it as a deduction under Section 80TTA.
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