Module 7 Markets and Taxation

Chapter 2

Basics

32

2.1 – Overview

India needs help from all of us countrymen in developing a tax culture. The fear of the income tax department can be removed only by gaining knowledge of all the basic rules and regulations. Income tax rates in India have drastically reduced from over 90% in the early seventies to now (2020) where no tax has to be paid on annual income up to Rs 2.5lks. But the apathy of taxpayers towards filing income tax returns and paying taxes continues till today.

With the systems used by the IT department becoming sophisticated every year, the chances of repercussions in terms of notices and penalties due to non-filing, misfiling, and hiding information while filing your income tax returns (ITR) is going up significantly. Similar to how Income-tax (IT) department has access to all your bank account details, they can also check up on all your capital market activity easily through the exchanges as they are all mapped to your PAN (Permanent account number). With AADHAR slowly getting linked everywhere the day isn’t far when the IT department will be able to send you a consolidated activity (income and expenses) statement, similar to how NSDL/CDSL sends for your holdings across all Demat accounts.

Check this notice received by a client who hadn’t declared his trading activity on commodity exchanges in FY 2012/13. The notice was sent only in 2015 asking for an explanation. Check this link that has a list of various codes in which these notices are sent by the IT department.

whytax

Even if the intent is there to be compliant, most people including many Chartered Accountants (CAs) don’t understand the subject of taxation when investing & trading very well. We had put up a blog post, “Taxation Simplified” on Z-Connect many years back simplifying key aspects of taxation for market participants. We received a few thousand queries on that post. Answering all of them it was obvious that we had to do a lot more to simplify all aspects around taxation while trading or investing in the markets, hence this module.

If you only invest in stocks or mutual funds filing returns is quite simple, but can get tricky if trading intraday stocks or financial derivatives (futures and options).

We will in this module break all the concepts down into small easy to understand chapters without any of that jargon typically used by CA’s or tax consultants. Here is a sneak peek into what you can expect going forward in this module –

  1. Introduction (Setting the Context)
  2. Basics
  3. Classify your Market Activity
  4. Taxation for Investors
  5. Taxation for Traders
  6. Turnover, Balance Sheet, and P&L
  7. ITR Forms (The Finale)

M7-C1-cartoon

2.2 – What is income tax?

It is a tax levied by the Government of India on the income of every person. The provisions governing the Income-tax Law are given in the Income-tax Act, 1961. In simpler words, Income Tax is a portion of the money that you earn paid to the government of India.

Why should I pay tax?

Yes, India does not offer social security and free medical facilities as being provided in some developed countries, but the government needs funds collected as taxes to discharge a number of responsibilities like Government hospitals, Education, National defense, Infrastructure development just to name a few.

Who is supposed to pay income tax?

Income-tax is to be paid by every person who earns more than the minimum income slab set by the government. The term ‘person’ as defined under the Income-tax Act covers in its ambit natural as well as artificial persons (including corporate).

Only 5 percent of over 130 crore population file income tax returns and only 1.5 crore Indians (<1%) pay any income tax. If you had to compare, over 45% of the population in a developed economy like the U.S.A pay taxes. Part of the reason for such an abysmally low number is also because many Indians don’t earn enough to qualify to pay income tax, but the larger factor has got to do with a lack of tax culture.

Taxes have to be paid based on how much income you earn every financial year. The financial year in India starts from April 1st and ends on 31st March. Do note that year can be specified either as a financial year (FY) or assessment Year (AY).

FY is used to denote the actual year the income was earned for which you are filing taxes. So FY 2019/20 is the financial year starting April 1st, 2019, and ending 31st March 2020.

AY is used to denote the year in which you are supposed to file your taxes. So AY 2020/21 is the year when you file the returns for income earned in FY 2019/20. So AY 2020/21 and FY 2019/20 are one and the same. So you will use ITR with AY 2020/21 on it to file your taxes for the income earned in the financial year starting April 1st, 2019, and ending 31st March 2020.

2.3 – Income tax slabs in India for financial year 2020/21

All Indians have to pay taxes on the total income earned every year as per the below tax slabs they belong to. If you are salaried, your employer would already be paying taxes on your behalf to the government and issuing you a ‘Form 16’ as an acknowledgment for having paid the taxes. Your employer will not have access to all your sources of income, like bank interest, capital gains, rental income, and others. You are supposed to use the form 16, add all your other income, calculate and pay any additional tax, and file your income tax returns before due date every year. The tax slab for individuals (FY 20/21) is as below –

Individual (age upto 60 years)

Income slabs Tax Rates
0 – Rs 2.5lks NIL
Rs 2.5lks – Rs 5lks 5% of the amount by which income exceeds Rs 2.5lks.
Rs 5lks – Rs 10lks Rs. 12,500 + 20% of the amount by which income exceeds Rs 5lks
10lks and above Rs. 112,500 + 30% of the amount by which income exceeds Rs 10lks

Senior citizen (age 60 to 80 years)

Income slabs Tax Rates
0 – Rs 3lks NIL
Rs 3lks – Rs 5lks 5% of amount by which income exceeds Rs 3lks.
Rs 5lks – Rs 10lks Rs. 10,000 + 20% of the amount by which income exceeds Rs 5lks
10lks and above Rs. 110,000 + 30% of the amount by which income exceeds Rs 10lks

Super senior citizen (age 80 years and above)

Income slabs Tax Rates
0 – Rs 5 lks NIL
Rs 5lks – Rs 10lks 20% of the amount by which income exceeds Rs 5lks
10lks and above Rs. 100,000 + 30% of the amount by which income exceeds Rs 10lks

If total income between Rs 2.5 to Rs 5lks, you can claim for the 5% tax rebate and effectively paying zero tax.

Surcharge for all the above age groups:  10% of income tax if income between Rs 50lks to Rs 1 crore. 15% if income between Rs 1 Crore to Rs 2 crores. 25% if income between Rs 2 crores to Rs 5 crores. 37% if it exceeds Rs 5 crores.

Budget 2020 has introduced a new tax regime where the taxpayer has an option to decide either to pay taxes as per the above slabs claiming the various deductions (eg. Investment in ELSS, House rent allowance, etc) or let go of all deductions and opt-in for the below tax slabs. The surcharge as applicable above.

0 – Rs 2.5lks NIL
Rs 2.5lks – Rs 5lks 5% of the amount by which income exceeds Rs 2.5lks.
Rs 5lks – Rs 7.5lks Rs. 12,500 + 10% of the amount by which income exceeds Rs 5lks
Rs 7.5lks – Rs 10lks Rs. 37,500 + 15% of the amount by which income exceeds Rs 7.5lks
Rs 10lks- Rs 12.5lks Rs. 75,000 + 20% of the amount by which income exceeds Rs 10lks
Rs 12.5lks- Rs 15lks Rs. 1,25,000 + 25% of the amount by which income exceeds Rs 12.5lks
Above 15lks Rs. 187,500 + 30% of the amount by which income exceeds Rs 15lks

 

From the next chapter, we will start focusing in detail on all aspects of taxation when trading and investing in the markets.


Key takeaways from this chapter

  1. Filing correct Income tax return is the duty of every Indian
  2. The Income-tax department has access to your market activity
  3. Only 5% of Indians file Income tax returns and ~1% pay any income tax.
  4. Financial year (FY) is the year when income was earned, Assessment year (AY) is the year you file your taxes on the income earned
  5. The financial year is between 1st of April of the current year and 31st March of the following year
  6. The income tax applicable to you depends on the income tax slab you belong to
  7. The income tax slabs vary based on your age group

Disclaimer – Do consult a chartered accountant (CA) before filing your returns. The content above is for your general knowledge only. Content meant for Individual retail investors/traders in India.

32 comments

  1. NiThUn GoWdA says:

    It’s really a great topic and very helpful and need full for every traders n investors n all, Thnq 🙂

  2. rahul says:

    very thoughtful, well researched and informative acticle.
    kudos to you nithin!!!
    thanks a million

  3. Sumathi Anand kumar says:

    Sir
    Simple to understand.thank u

  4. kashinath says:

    Whether the previous FY’s unknowingly left out other ncome shall be taken for consideration in the present FY?

  5. Siva says:

    Tax slabs are different for women, correct me if i am wrong.

  6. Aditya Rai says:

    Great Track…It just helping us a lot about taxation…

  7. suman bag says:

    I am a west Bengal government employee. I am also doing intraday trading. How can I calculate my tax?

  8. sunny says:

    suppose i buy stocks worth Rs 100000 is this money exempted from tax deduction??

    • Nithin Kamath says:

      No, it doesn’t work like tax saving instruments. If you buy stocks worth 1lk and then sell it for 1.5lk after 1 year, you have to pay no tax on the Rs 50k gain.

  9. Dipti Pandey says:

    grt job Nithin..

  10. Surya says:

    I think you need to change the tax rate as per the budget 2017

  11. Premlata Kabra says:

    In the above tax slabs you wrote…

    Rs 5lks – Rs 10lks Rs. 25,000 + 20% of the amount by which income exceeds Rs 5lks
    10lks and above Rs. 125,000 + 30% of the amount by which income exceeds Rs 10lks

    So that means ……

    scenario 1……….
    if I have income of 6 lakhs then tax amount for income above 5 lakhs i.e 1 lakh will be 25K+20K i.e total 45k tax on 1lakh.

    And

    scenario 2……….
    if I have income of 11 lakhs then tax amount for income above 5 lakhs and below upto 10 lakh i.e 5 lakh will be 25K+1lakh i.e total tax 1.25 lakhs and tax on remaining income above 10 lakhs i.e 1 lakh will be 1.25K+30k i.e total tax 1.55k ….

    so the total tax on the income above 5 lakh which in this case/scenario is 6 lakh will be 1.25K + 1.55K = 2Lakh 80K

    That means I am giving almost 50% of my profit in taxes. OMGGGGGGGG

    Please correct me if I am wrong.

  12. mvhemanth says:

    The downloadable PDFs are not updated to the content here sir

  13. Jay D says:

    Hi Nithin/Karthik,

    Now that we have the tax filing deadline I had few questions/doubts after going through multiple sources of information (including varsity).

    I am a private salaried individual and I come under 30% slab. But since the last almost three years I have been trading in Options with zerodha. And net-net for this financial year individually and the previous financial years individually I have been on a loss 7 lac + cumulatively summed up 🙁

    Now my questions here are as follows:

    -> As I am making a loss on Derivatives which is less than 8% of the turnover, do I need an audit from CA for this FY?

    -> And I have never filed losses from the previous years as well (my bad). Now I want to file the losses from the previous financial years as well so that I can use it as set-off against any profit in the future for the coming 8 years. Can I do that?

    -> Another question which is a bit different from the above ones is that when I was going through q.zerodha.com -> Tax P&L report, I saw that on the page (script wise) it is showing me a turnover of around 20lacs and the respective loss in the F&O segment which is correct. But when I downloaded the excel report (tradewise), it does show me the trades but it shows the summed up turnover as zero “0”. Any thoughts on that as its puzzling me a bit?

    Many thanks in advance for looking into my queries 🙂

    Thanks,
    Jay.

  14. Yathin says:

    Sir
    I am doing a trading in the basis of t+2 basis and when it’s my only income as I am just a post graduate. How can I identify whether I am liable to pay tax or not… Please help me

  15. Abhisek says:

    Hi,
    Can you please update the document for the LTCG tax which is set @ 10% for profits above Rs 100,000 with proper illustration for better understanding.
    Also what i found is the different levels at which a person is taxed is not included in the doc.Also categorizing the different options available like PPF, tax saver FD, equity returns based on the respective tax category like EEE, EET etc.
    Thanks

  16. Prakash says:

    If i deposit or withdraw money between my bank and zerodha account, will this transaction be reported to income tax department ?

  17. roshan says:

    Hello sir, I am about to file my income tax. Regarding stocks CA is asking details like name of company, date of purchase, purchase price, date of sale, sale price, transfer expenses, security transaction tax paid in a single document, chronological order.
    I have given documents
    1. Trade book 2. Tax P & L 3. P & L 4.Ledger 5. Annual global statement 6. holding till 31 march 19.
    But he is not convinced. He had asked me to search / inquire more. Where can I get the information. I have raised many tickets in zerodha support regarding this.
    One more thing, actually which documents need to given to CA regarding stocks. I am very confused. Please suggest. Thanks.

  18. Ashwani says:

    sir
    i am holding TATASTEEL since 10 months its divident Ex date was on 4-july-19 but still i didn’t recieved any divident till now , support is giving vague responses ,kindly clearify…

  19. Subhrajit Deb says:

    Sir if I get profit from forex trading what kind of tax I have to pay to Indian govt

  20. Ashwani says:

    sir
    if i have filed itr return on 31 aug (within time) ,and still it is not processed ,then is it an issue ?

  21. DHRUV NATHWANI says:

    the slabs have changed now i guess please do update it

  22. DHRUV NATHWANI says:

    i m sorry its not changed

  23. BRAHMANANDA BERIHA says:

    I am a salaries income person and filling the TDS return each year in time. But it is a matter of regrate that I have making losses in stock market year after year, but never shown my losses even in a single year while filling the TDS return. Can I revised the return now? If yes then how many year I can revised my TDS now. Where I should consult for revision of TDS return since there is no CA in my nereby place to consult.

  24. PANKAJ says:

    I made total F & O transactions Rs 2 coror facing 3 lakh loss
    In such situations it is essential / must to do Auit
    How can I carry forward this loss . means suggest me step to carry forward loss

  25. Sanu George says:

    Chapter 2.3 will be more clear if we say that income tax for a particular year is determined by the Govt. of India through Finance Act published in gazette as ” Finance Act……………” ( year- say 2020, an Act to give effect to the financial proposals of the Central Government for the financial year 2020-2021). This act is available at the link : https://www.incometaxindia.gov.in/Documents/News/Finance-Act-2020.pdf

  26. Neha says:

    Thanks a lot for the detailed explanation . I Have a doubt you mentioned that if you purchase a stock and sell it prior to one year it will be subject to STCG if it’s not actively traded.Can u please define how do you define active trading so that it comes under non speculative income .

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