Earning income from stocks? Here's how to account for taxes

Knowing how stock trades are classified under the IT Act can enable you to save on tax while remaining on the right side of the law.

Earning income from stocks Here how to account for taxes

Trading in stocks and shares is a great way to generate wealth, but it is important to know the tax implications. While filing our income tax return (ITR), we need to categorise our total income under various sections. This is because under the Income Tax Act 1961, incomes are categorised under different heads for calculation of tax. 

The different categories or heads under which income is entered for IT filing are:

  • Income from salary
  • Income from business/profession
  • Income from house property 
  • Income from capital gains (short-term as well as long-term)
  • Income from other sources 
  • Stock trading is the buying and selling of stocks and shares, and these days it’s largely done online. Stocks are a capital asset and any income from stock trading is added to income from capital gains.

How is speculative income from intraday trading taxed?

An exception to this is when there is intra-day trading of stocks, which is considered to be speculation income and is classified under the category of business income as a separate head within that category and is taxable at the income tax slab rate in which you fall. When the selling price of the stock is higher than the purchase price, you make capital income on that transaction and this is liable for taxation. 

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How are profits from stocks taxed?

Any stock or share held for less than or up to a year is considered a short-term capital asset. Gains on this are classified as short-term capital gains and taxable at 15%. Likewise, a stock held for over a year is a long-term capital asset and any profits made on its sale are classified as long-term capital gains and taxable at 10%. So, by holding a stock for over a year, you can make some tax savings. It is worth noting that long-term capital gains of up to Rs 1 lakh a year are tax-free.  

Related: Taxpayers mandated to share details of each mutual fund, stock sold 

How to e-file tax for capital gains and speculative income?

It is important to know these classifications, especially when it’s time to file your ITR. It is also useful to rely on the online income tax calculator for calculating your tax liability during the year to pay advance tax and before filing your ITR.

For e-filing of ITR, log on to the IT department’s website. If you have income from short-term and long-term capital gains, you need to file Form ITR 2 and in case of speculation income you will need to use Form ITR 3. In the process, you will see separate columns for short-term and long-term capital gains as they are taxable at different rates.

Once the ITR is filed, you can pay the tax via netbanking and generate a tax paid receipt instantly. In the meanwhile, look at these 9 Work-from-home stocks that performed robustly during the pandemic.  

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