There could be complications in filing an income tax return for those individuals who invest in the stock market. Any income earned by an individual over and above the exempted amount is taxable under the Income Tax Act, 1961. Many investors prefer to invest in stocks but are not aware of the different implications of tax on their transaction.
With a high volatility in the market, investors are putting in a significant amount on various industries in the share market. Any income or loss generated from the sale and purchase of shares will be reported under the head of ‘Capital Gains.’
How to file your tax if you invest in equities
Wondering how to file income tax when you incur profits/losses from the sale of shares? Here are three good-to-know tips that will tell you how to file taxes in case you invest in equities:
- Choose the right ITR form
Every taxpayer should be aware about the relevant income tax form that is applicable based on his business or profession. Further, depending on the type of transactions carried out by the taxpayer, the relevant form will have to be filed. If your income from the sale of shares forms only a small part of the total income, then you will be required to file ITR-2. Investors with a high frequency of trade and a high turnover need to file an ITR-4 as a business owner. For investors who benefit from intraday trading, the profits or losses will be considered as a business income only.
- File ITR-4 as a business owner
Taxpayers who are involved in equity trading need to file an income tax return as a business owner. It will allow them to claim expenses incurred in their business. The expenses include Internet charges, telephone bills, broker’s commission, demat account charges, and any other expenses that are directly related to the business.
- File tax for reporting gains from transactions
If there is a sale of share at a price higher than the purchase price, there will be a capital gain. Shares that are sold within a period of one year of purchase will be considered as short-term and the gain will be a short-term capital gain. Those shares that are sold after a holding period of one year are long-term and the gain on the same will be a long-term capital gain. Long-term capital gain is exempt while short-term capital gain will be taxed at 15%.
In case of short-term capital loss, it may be adjusted against the short-term gain or long-term gain. If the amount of loss is not set off in a particular financial year, it can be carried forward for the next eight financial years. It should be noted that the loss will only be allowed to be carried forward if the income tax return has been filed. The loss can be carried forward even when the income is less than minimum taxable income. In case of a long-term capital loss, it cannot be carried forward or adjusted; it is a dead loss for the investor.
Remember that with the long-term holding of the shares, there will be no major impact on the income tax return, but any gain or loss incurred in the short term will have to be reported and the tax for the same will have to be paid. Be sure to pick the right form and enter the correct details while filing your tax return. And to gain additional tax benefits, it is recommended that you invest in equities for a long period.