Tax Implications of Online Share Trading: What You Need to Know

One important feature of the financial environment is the income tax on intraday trading. Both traders and investors frequently find it to be confusing. Purchasing and selling financial products during the same trading day is known as intraday trading, and the goal is to profit from brief price movements.

Even if there is a chance for significant earnings, it is crucial to comprehend the tax ramifications. The profits derived from intraday trading are taxable, and traders must comprehend the intricacies of these tax laws in order to trade the market effectively.

So, let’s explore the tax implications of buying and selling stocks in intraday trading

What is Intraday Trading?

It involves both the buying and selling of stocks (long trades) or the selling and buying of shares (short trades) during a single trading day. The goal of an intraday trader is to earn on the same day by taking advantage of short-term price swings rather than to own equity shares. These gains are subject to taxes.

Income Tax Rules on Online Share Trading – Income Head, ITR Form, and Due Date

1. Income Head
   Gains and profits from a career and business. Your intraday trading profits will be regarded as speculative business profits. Because you are trading without intending to take delivery of the contract (ownership), it is deemed speculative.
2. ITR Form
   You have to prepare financial documents and file an ITR-3, as intraday trading is considered a business income. Investigate which ITR to submit.
3. TR Due Date
   31st July – if Tax Audit is not applicable 31st October – if Tax Audit is applicable

What is Turnover for Intraday Trading?

Turnover in intraday trading is equal to the total of profits and losses.

The total of both positive and negative differences is known as absolute turnover (the profit amount is added to the loss amount rather than subtracted). Trading Turnover can be computed using a trade-wise or scrip-wise approach.

For example: At ₹75, Pooja purchases 100 shares of ABC company. She sells them for ₹80. She purchases 200 Paytm shares the following day for ₹500, which she sells for ₹460 at the end of the day.

First trade profit = (80-75) * 100 is 500 ₹. -8,000 is the loss from the second trade (460-500) * 200. Profit (total) = 500 + 8,000 = ₹ 8,500

What is a Demat Account?

A dematerialised or digitally formatted account that contains shares and other associated securities is known as a demat account. Dematerialisation is the process of transforming tangible shares into digital form, facilitating simple trading—that is, the ability to purchase and sell these assets both online and offline. Depository Participants, regulated stockbrokers, and depositories like NSDL and CDSL are among the intermediaries where demat accounts can be opened.

According to the regulations of the stockbrokers and the Depository Participants, there are different fees associated with opening a Demat account. Opening a Demat account is a fairly easy process that can be completed online. India has seen an enormous increase in the quantity of newly established Demat accounts in the post-pandemic phase.

Benefits of Demat Account

There are several benefits associated with having a Demat account, making it an essential tool for investors in today’s financial landscape.

1. Convenience and Safety
   One of the primary advantages of a Demat account is the convenience it offers. Unlike physical share certificates, which can be lost, stolen, or damaged, securities held in a Demat account are stored electronically. This reduces the overall risk of physical damage or loss, providing a secure way to hold investments.

   Moreover, the ease of access to securities through a Demat account simplifies the overall process of buying, selling, and transferring shares. Investors can manage their portfolios online, anytime and anywhere, without the need for physical paperwork or personal visits to a broker’s office. This convenience streamlines the investment process and saves valuable time for investors.

2. Cost-Effectiveness
   Another significant benefit of a Demat account is its cost-effectiveness. With the traditional method of holding physical share certificates, investors incur expenses related to stamp duty, handling charges, and other administrative fees. In contrast, maintaining a Demat account involves minimal costs, primarily consisting of account maintenance charges levied by the Depository Participant (DP).

   Additionally, Demat accounts reduce the need for physical documentation and paperwork, leading to savings in storage and handling costs. Overall, the cost-effectiveness of Demat accounts makes them a preferred choice for investors seeking to optimise their investment expenses.

3. Efficiency in TradingDemat accounts enhance the efficiency of trading in the financial markets. Transactions involving buying, selling, or transferring securities can be executed swiftly through electronic platforms linked to the Demat account. This real-time processing ensures faster settlement of trades, eliminating delays associated with physical share certificates.

   Furthermore, Demat accounts facilitate seamless integration with online trading platforms, providing investors with access to a wide range of financial instruments and market opportunities. The ability to monitor portfolio performance and execute trades instantly contributes to efficient decision-making and capital utilisation.

4. Facilitates Borrowing and LendingDemat accounts also enable investors to participate in borrowing and lending activities in the securities market. Through mechanisms such as securities lending and borrowing (SLB), investors can lend their securities to earn additional income or borrow securities for short-selling purposes. This functionality enhances liquidity in the market and offers opportunities for generating returns beyond traditional investment avenues.

What are the Tax Implications of Trading Stocks?

Dividends and capital gains are the two ways that the Demat account generates revenue. This is an explanation of how investors’ tax treatment of such income is calculated.

1. Any investment that is liquidated or sold by investors at a price greater than its cost results in capital gains. Depending on how long the asset is held, the gains may be either short-term or long-term.
   • Short Term capital gains When shares or comparable securities are kept for less than a year or less than twelve months, there are short-term capital gains from investments made in the Demat account. The taxpayer is subject to short-term capital gains tax, which is levied at a flat rate of 15%.
   • Long-term capital gains When stock shares or a comparable security is held for more than a year, long-term gains, or LTCG, are realised. Taxpayers are given assistance under the Income Tax Act in the form of a one-million rupee tax exemption on long-term capital gains. Over this exemption threshold, long-term capital gains are subject to flat 10% taxation without indexation.
2. Capital lossIn contrast to capital gains, a capital loss happens when the share or comparable security’s net sale value is less than its acquisition cost. Like capital gains, a capital loss can also take the shape of a long-term or short-term capital loss based on how long it is held.
   • Short-term capital loss Short-term capital loss is the phrase used to describe a capital loss on shares or comparable securities held for less than a year. The advantage for taxpayers is that they can deduct this loss against any long-term or short-term capital gains for the current year. For a span of eight years, taxpayers can carry forward any excess losses.
   • Long-term capital loss A long-term capital loss occurs when shares that have been held for longer than a year are sold. A long-term capital loss can only be deducted from long-term capital profits, in contrast to a short-term capital loss. For a maximum of eight years, any excess long-term capital loss may be carried forward.
3. Taxation of Dividends
   Online share dealers have additional considerations to make besides capital gains and dividend taxation. One potential benefit of investing in stocks is the potential for dividend payments, which are made to shareholders as a percentage of the businessess profits. One can categorise dividends as qualified or non-qualified, and qualified dividends are usually subject to a lower tax rate than non-qualified dividends. Dividend tax treatment varies based on a number of variables, including your tax bracket and the kind of account you own the shares.
4. Securities Transaction Tax (STT)
   Sales and acquisitions of securities from demat accounts are subject to STT. This tax is paid at the time of the transaction by investors and traders. STT contributes to funding both government and stock market oversight.

   For traders in these areas, the amount of STT is a significant expense that must be taken into account. It is contingent upon the nature of the transaction and the value of the assets being exchanged.

5. Tax Deducted at Source (TDS)
   TDS refers to the process whereby the organisation in charge of executing the transaction—typically your broker—deducts a predetermined amount of tax at the source before transferring the proceeds of the sale to your demat account when you sell assets and realise capital gains.

   You are making a prepayment of your income tax obligation with this TDS amount. It guarantees that the government timely collects capital gains taxes.

6. Holders of demat accounts should take this deduction into account when determining their ultimate tax due. If necessary, they can claim a credit for the TDS on their tax returns.
7. Goods and Services Tax (GST)
8. GST is applied to some fees that depositories, registrars, and brokers charge for demat account services. Transaction fees are increased by GST rates, which differ according to the type of service. Rates vary between 18% and 28% based on the applicable tax slabs.
9. To ensure compliance with tax laws, demat account holders should carefully review the contract notes and statements they get from brokers in order to understand the GST component.

Ways to Save Tax through your Demat Account

Two well-liked strategies drastically reduce your tax bill on Demat accounts.

• Investing in a Unit-Linked Investment Plan [ULIP] or an Equity-Linked Savings Scheme [ELSS] in a mutual fund is one option if you want to develop your wealth over time and get a tax benefit. You can save up to ₹1.5 lakh with one of these investing options within a fiscal year.
• Your ELSS investments’ long-term capital gains will only be subject to taxation if they surpass ₹1 lakh. However, the majority of your investment in a ULIP is tax-exempt.

The Bottom Line

Although there are many advantages to trading shares online, there are also tax ramifications that should be considered. To avoid any shocks during tax season, investors must educate themselves on the tax laws and regulations pertaining to online share trading. People may successfully traverse the world of online share trading and make informed judgments if they have the right information and direction. Online share trading is the buying and selling of stocks, securities, or other financial instruments through an internet-based platform or a stock market app.

Frequently Asked Questions

What is the difference between short-term and long-term capital gains?

Short-term capital gains are for assets held for less than a year, while long-term capital gains are for assets held for more than a year.

What is online share trading?

Online share trading is the buying and selling of stocks, securities or other financial instruments through an internet-based platform.

Are profits from online share trading subject to taxation?

Yes, profits made from buying and selling stocks are determined capital gains and are subject to taxation.

How are capital gains taxed?

Tax rates for capital gains depend on an individual’s income level, with short-term gains being taxed at a higher rate than long-term gains.

Do foreign stocks have different tax implications?

Profits from selling foreign stocks are subject to both US and foreign taxes, but investors may be able to claim a credit for foreign taxes paid.

How are taxes on online share trading affected by day trading?

Day traders must report their profits and losses as a business, allowing for deductions of related expenses.