Maximise your gains and minimise your taxes on stock market investments with these smart tips and tricks.
As the famous saying goes, ‘In this world, nothing can be said to be certain except death and taxes’. While we can’t do much about the former, there are ways to save on the latter, especially when it comes to stock market gains.
Historically, the stock market has offered great returns to investors, and many investors have reaped profits on their investments. But, with great profits come great tax liabilities. So, whether you are a seasoned trader or investor or just starting, it’s important to understand the various taxes that come into play when it comes to stock market gains.
In this article, we’ll explore intraday taxes, Future and Option (F&O) taxes, short and long-term equity gains, and lastly, we will show you a magic that can help you save taxes. So dive into the world of tax and explore more about it.
Tax on Intraday Profits and Losses
If you are an intraday trader and have made significant profits in a financial year apart from your salary, then you will have to pay taxes.
Now, intraday profits are treated as speculative business income and are taxed as per the individual’s income tax slab rate.
For example, if your total income falls under the 20% tax bracket, the intraday gains will be taxed at 20%. If the total income falls under the 30% tax bracket, the gains will be taxed at 30%.
It’s important to note that if you have booked an intraday loss in a said financial year, you can set off these losses against another speculative gain like intraday gains. Any remaining losses can be carried forward for up to four financial years to set off against future gains. However, intraday gains cannot be set off against long-term capital losses as they are treated as non-speculative business income
Tax on Future and Option
The profits from F&O trading are treated as business income (non-speculative) and taxed per your tax slab. So, if you fall under the 10% tax bracket, your F&O income will be taxed at 10%.
But, if you have made a loss in a said financial year, you can set off the loss against any other income earned in the same year except income from your salary.
For example, suppose you have five income sources: salary, business, long-term capital gain, interest on FDs and rental income. On the other hand, you have incurred a massive loss in F&O. In this case; you can set off your losses against all the income you have earned except salary income.
In addition, if you decide not to adjust your losses from Futures and Options (F&O) for the current assessment year, you can carry forward these losses for up to eight years.
Tax on Short and Long-Term Capital Gain on Equities
Let’s first look at short-term capital gains.
If you buy a share today and sell it within one year, it is termed a short-term capital gain and will be taxed at 15%. Here is a tip, the brokerage charges you pay to your broker are available for deduction but not Securities Transaction Tax (STT)
Let’s assume you have made a short-term capital gain of Rs 2,00,000 and don’t have any other income source; then, you don’t have to pay any taxes because the basic exemption limit is Rs 2,50,000.
What if you have a short-term capital loss?
The short-term capital loss can be offset against short-term and long-term capital gains. And you can also carry forward your short-term capital loss for eight years assessment.
Let’s take a look at long-term capital gains.
Selling a share after one year is classified as long-term capital gain and will be taxed at 10%. Moreover, just like STCG, you can avail of deduction on brokerage except for STT charges.
Like STCG, if your annual income is below Rs 2,50,000, you don’t have to pay any taxes up to an income of Rs 2,50,000. Additionally, you get an additional exemption of Rs 1,00,000.
What if you have a long-term capital loss?
You can set off the loss against long-term capital gains only, or carry forward your long-term loss for eight years assessment.
Magic of Tax Harvesting
1. Profit Harvesting
This strategy allows you to make huge profits while paying minimum tax.
Suppose you have bought shares of company A worth Rs 10,00,000, and you have a target to sell the shares at Rs 12,00,000 after two years. Let’s assume that by the end of the 1st year, your conviction comes true, and you make a profit of Rs 1,00,000.
In this case, you book profits of Rs 1,00,000 and sell your shares at Rs 11,00,000.
You have gained a profit of Rs 1,00,000, which is exempted under an additional exemption on LTCG.
So, you have paid zero tax on a gain of Rs 1,00,000!
After a few days, you again buy the shares of company A by investing Rs 11,00,000 because your target is Rs 12,00,000. And when you sell it by the end of 2nd year, your income would be again Rs 1,00,000, which is exempted under an additional exemption on LTCG.
So, you have paid zero tax on a gain of Rs 2,00,000 in two years!
2. Loss Harvesting
Let’s take the example of Mr Anil and Mr Sunil. Both of them had bought shares in two companies seven months ago.
ABC Ltd: Profit of Rs 50,000
XYZ Ltd: Loss of Rs 30,000
Mr Anil has a high conviction on XYZ Ltd, so he decides not to book a loss. He pays an STCG tax of 15% on Rs 50,000, which comes to Rs 7,500.
On the other hand, Mr Sunil decides to book a loss and hence pays an STCG of Rs 20,000 (Rs 50,000- Rs 30,000), which comes to Rs 3,000.
But, Mr Sunil is an intelligent investor and a better tax planner because he booked a loss and, after a few days, again bought the shares of XYZ Ltd because he also has a high conviction on the stock, just like Anil.
After holding the stock for one year and buying it again, Anil’s conviction came true, and Anil and Sunil’s investment in XYZ is now profitable. As it qualifies as a long-term capital gain (LTCG), they will only have to pay a 10% tax and enjoy an additional deduction of Rs 1,00,000.
So, in the end, Mr Anil and Mr Sunil benefit from long-term capital gains. But, Mr Sunil is a smart investor who was smart enough to use the tax loss harvesting strategy at the start and booked losses to save tax.
To conclude, in the world of stock market investing, every penny counts; hence, saving taxes on your gains is crucial to maximising your returns!