Are Stock Market Holdings Tax Deductible?

Firstly, what are Stock Markets? The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or over-the-counter (OTC) marketplaces that operate under a defined set of regulations. It is a global network of exchange where large sums of money move on a daily basis. It’s a marketplace where securities are traded. Securities are rights to financial assets like a business share. They are, of course, virtual markets that exist across the world and are easily accessible for trading to all those who possess an internet connection and can create a Demat Account.

How To Deduct Tax on Stock Returns?

We must also take into account exactly is the meaning of a stock? A stock, share or equity, is a financial instrument that reflects ownership in a firm or organisation and a proportionate claim on the assets of the firm and the earnings of the firm, i.e. the profits it generates. Companies divide the ownership of their companies into shares which may then be bought by customers from the stock market at market prices, doing so they become one of the many owners of the company. This gives them the power to vote on decisions in the company and makes them eligible to receive a set dividend annually, decided upon by the board of directors.

This is how companies generate capital for their business transactions, as more and more people buy these shares, their valuation at the stock market keeps increasing, which would prompt some to sell these shares at a higher price than they originally bought them for, allowing them to make a quick profit. This is practised by many people on a daily basis across the world and is majorly responsible for the routine rise and the fall of stock prices every day and even down to every minute.

Companies usually sell their stocks to raise funds to expand and grow their businesses. This is generally started via an IPO (initial public offering) (IPO). This is when a business starts selling a portion of its stock to the general public; in other words, the firm goes public and anybody may purchase and sell the company’s stock. This form of business is better than the older form of partnership companies as it allows for the generation of greater capital from the shareholders to be used for the company.

Tax Deductibility

Salaries, rentals, and profits are all known to be taxed. Many people, young and old, earn money by buying and selling stocks, but they are uncertain how their earnings from stock trading will be taxed. The profits and losses made from these transactions are known as capital gains.

There are different ways that capital gains are taxed depending upon the duration of the investments. There are short term investments and long term investments.

Short Term Investments

If a seller sells equity shares listed on a stock exchange within 12 months after the acquisition, the seller may realize a short-term capital gain or loss. When shares are sold at a price higher than the purchase price, the seller earns a short-term capital gain, and when they are sold at a price lower than the purchase price, the seller suffers a short-term capital loss.

Long Term Investment

If a seller sells equity shares listed on a stock market after 12 months, the seller may realize a long-term capital gain or a long-term capital loss depending upon the purchasing price and the selling price of the shares.

Taxation on Both Investments

Short Term: Short-term capital gains are taxed at a rate of 15%. Short-term capital gains are taxed at a special rate of 15%, regardless of the tax bracket. Additionally, if total taxable income excluding short-term gains is less than taxable income of Rs 2.5 lakh, the deficit can be offset by short-term profits. The remaining short-term profits will be taxed at a rate of 15% plus a 4% cess.

Long Term: Long-term capital gains on stock exchange-listed stocks are not taxed up to a ceiling of Rs 1 lakh. According to budget 2018 amendments, long-term capital gains of more than Rs 1 lakh on the sale of equity shares or equity-oriented units of a mutual fund will be subject to a capital gains tax of 10%, with the seller losing the advantage of indexation. These rules apply to transfers that occur on or after April 1, 2018. Earlier long term capital gains were not taxed by the government, it was only since 2018 when the regulations were amended that the new tax was introduced.

In case of loss on short term capital from the sale of stock, it can be offset against any short- or long-term capital gain from any capital asset. If the loss is not completely offset, it can be carried forward for a further eight years and offset against any short- or long-term capital gains achieved during that time. In the case of long term capital loss from equity shares, it was deemed a complete loss until the year 2018 — it could not be modified or carried forward. This is due to the exclusion of long-term capital gains from listed equity shares. Losses incurred as a result of them were also not permitted to be set off or carried forward. After amending the legislation, in 2018, to tax capital gains in excess of Rs 1 lakh at 10%, the government has also announced that any losses originating from listed stocks, equities shares, mutual funds, and/or any other similar investments will be permitted to be carried forward for 8 years.

Classification of The Gains

Gains or losses from the sale of shares are treated differently by different taxpayers. Some might classify them as income from a business, while others might treat them as capital gains. As such one can classify the gains as either of them. One can deduct expenditures paid in obtaining such business revenue if you regard the sale of shares as business income. In such situations, the gains would be added to your total income for the fiscal year, and tax slab rates would apply. If the interest is treated as capital gains then as mentioned before 15% for the short term, and 10% tax for long term capital gains is applicable.

Taxpayers have the option of how they wish to handle such revenue from listed securities. But once they have chosen, they must, however, use the same technique in the following years unless there is a significant change in the circumstances. The Central Board of Direct Taxes also known as CBDT has stated that the revenue will be taxed as business income if the taxpayer chooses to regard his listed shares as stock-in-trade, regardless of how long the listed shares are held. This decision, once made by a taxpayer in a given assessment year, will apply in the following assessment years as well. In future years, the taxpayer will not be able to change his decision.

But this is limited only to listed securities, unlisted securities do not have this luxury, as such irrespective of the period of holding, these gains are classified as Capital Gains and nothing else.

So, it is pretty clear that in India, income from stock holdings is clearly tax-deductible. The percentage of tax, as mentioned previously, may vary depending upon the time period for which the stock is held. As long as these are considered to be listed securities, they may be classified as capital gains tax or as income from the business, in which case the gains would be considered as the annual income and taxed in accordance with the stipulated tax slab depending upon the total annual income, this choice has been given directly to the businessman.

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Shashank Sekuri
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