Know the tax implications on gains made on stocks

For those who are just starting on stock market investments or have been at it for some time but are only now facing the burden of taxes, it is imperative to know about the tax liabilities of their stock gains and trades.

Stock market is bigger than any of our imaginations. For the purpose of taxes also, stock market is quite large, which makes it not so easy to determine tax liability of a particular stock trade or profit.

It doesn't matter whether you are a beginner or an experienced trader in stock market, you must pay taxes on your gains. And your stock gains along with your income sources must be mentioned while filing income tax return.

Criteria for stock transactions

Two basic criteria is used for determining the taxation on stock transactions are called the T-factor and the J-factor, which stands for Time factor and Job factor.

From Time factor point of view, income or gains from the stock market are divided into the following:

1. Short term gains,

2. Long term gains

Similarly, stock gains can be divided into two categories based on Job factor:

1. Full-Time job, for those trading stocks on full-time basis,

2. Part-Time basis, for those trading stocks on part-time basis.

Tax treatment of stocks based on T-factor

On short term gains made from the stock market, the capital gain tax is fixed at 15% of the profit. In case there is a loss in short term, same can be carried forward for upto 8 years. Short-term capital gains refers to the profits earned from the stock trades that are closed within 12 months.

Long term gains are the profits made from trades that are squared up after 12 months or more. Such long term gains are liable for a flat 10% tax.

Tax treatment of stocks based on J-factor For those trading stocks on a part-time basis and have another full time business or income source, stock trading shall be regarded as an investment and income from this activity shall be regarded as business income. On the other hand, people trading full-time in a partnership or owner company shall be treated as full-time traders, the income from such trading activities shall be regarded as speculative business income and will be taxed accordingly. Regular income from stock trading activities is treated as speculative business income. Similarly, profits of people trading stocks with short term are treated as speculative business income. On the other hand, part time trading of stocks is treated as an investment. Similarly, stock trading activities with long term are treated as an investment. Tax on income from debentures, bonds and mutual funds Based on time factor, tax liability on income from these sources can be divided into following categories: Short term capital gains: Gains made from sale of securities within 36 months of purchase. Such gains are eligible for normal tax rates and losses can be carried forward for upto 8 years. Long term capital gains: Profits earned from the sale of securities, bond, debentures and mutual funds after holding of 36 months.