INDIVIDUALS, both salaried and those in business, invest a portion of their income in bank deposits, mutual funds and shares. There are people who buy and sell securities on a regular basis while another category comprises those who continue to hold on to their investments for a longer period. There are a few others who do both — invest in shares and earn dividends besides buying and selling securities on a daily basis. People who deal in securities listed in a stock market can broadly be categorised as traders and investors. So, how does one find out which category he fits into?
The tax department has issued a circular to help in this process. One of the scenarios given in the circular is where a person deals in securities with an intent to earn profit; he would be termed a "trader". A trader plays with the short-term swings in the stock market to make profits. Such a person does not tend to retain his securities for long. The circular could serve as a guide though the final decision on whether a person would qualify as a trader or investor would depend on individual fact patterns and events surrounding the securities transactions. In some instances such as the one cited earlier where a person does both, he could be a trader as well as an investor. Such individuals would do well to have a clear demarcation between their investment portfolios and trading securities to avoid any tussles with the taxman. So where does tax come into picture in all this and how does it impact?
Let's try and understand.
In the case of an investor, only the profit arising out of a securities sale is taxable in his hands. This profit is taxable as capital gains — short-term if the security is held for less than one year and long-term otherwise. An investor has to pay taxes at the rate of 15% in the case of short-term gains on which Securities Transaction Tax (STT) has been charged while long-term gains are completely exempt when the trans-actions are subject to STT. The Income-Tax Act does not allow for deduction of STT while computing gains in the hands of an investor.
On the contrary, income from purchase and sale of securities is taxable as business income for a trader. Besides, it is the net income that is taxable. In other words, a trader can reduce all expenses incurred in the course of and incidental to the trading activity though these have to be duly supported by documentary evidence. This includes STT paid on taxable securities transactions. An individual trader's net business income will be taxed at progressive rates with a maximum slab rate of 30%. Consequently, individuals who are in the minimum slab rate may find it beneficial to declare the income from investments as business income since their average tax rate may be lower than the 15% for short-term gains. However, this may not be suitable for the higher income category. Besides, people who sell shares which are held for more than one year will prefer to avail complete tax exemption rather than the same being treated as business income. The trader is also subject to additional compliance requirements such as maintenance of books of account and obtaining a tax audit report when the income crosses a particular threshold level.
So, wouldn't it be worthwhile to spend some time understanding how you will be taxed on your investments before the taxman knocks at your door?
