ITR for Stock Market Income
Introduction
Choosing the right ITR form is always important, particularly when you are dealing with stock market transactions. There are several categories under which stock market transactions are classified. They are Delivery-based transactions, Intra-day transactions (i.e. Non-delivery based) and Futures & Options (i.e. F&O).
If you are dealing with the stock market, first you need to identify under which category you fall. Accordingly, the applicable ITR form should be selected.
Let’s understand these categories and the relevant ITR forms in this article.
Delivery based Transactions
In Indian Capital markets, you can trade in two different ways. Either you can trade-in and trade-out on the same day or trade-in to hold the stock for a longer tenure.
If you are holding the stock for more than one day, it is called a Delivery-based transaction. It results in stock coming into your Demat account which is why it is called Delivery based. These stocks can be held in your Demat as long as you wish to continue.
Again in Delivery-based transactions, one needs to classify them either as Investor or Trader depending on factors like Motive, Frequency of trades and Accounting treatment. These factors determine whether an individual is a Trader or Investor.
Investor – If you are an Investor in Delivery-based transactions, any gain resulting from selling the stock will be taxable under the head Capital Gains. To report Capital Gain income, one has to file ITR2.
Trader – If you are a Trader in Delivery-based transactions, any gain resulting from selling the stock will be taxable as Non-speculative Business Income under the head Profits and Gains from Business or Profession. To report Business income, one has to file ITR3.
Intra-day Transactions
If you are doing trade-in and trade-out on the same day, then such transactions will known as Intra-day transactions. Unlike Delivery based transactions, the stock will not come into your Demat. So buying and selling of the stock happens on the same day.
Since it is a risky approach to investing, only a few prefer the intra-day method of investment.
Any gain from these Intra-day transactions results in Speculative business income which is chargeable under Profits and Gains from Business or Profession. To report such income, one must file ITR3.
Futures & Options
Futures & Options (F&O) is also called a Derivative Market. The reason behind this is, that it derives value from the underlying assets i.e. Shares or Commodities.
If you are dealing with F&O transactions, any gain arising would be Non-speculative business income and the same is chargeable under Profits and Gains from Business or Profession. To report such income, one must file ITR3.
Dividend Income
If you have invested in the stocks for a longer tenure, probably you might have received some dividend from such investment. Meaning, that such investment is covered under Delivery-based transactions as an Investor.
Such dividend income is taxable under Income from Other sources and hence the same can be reported through the ITR1 form.
ITR for Capital Gain and Salary
Nowadays most salaried individuals are actively engaged in the Stock market either as Investor or Trader. If you also have Capital gains from the stock market (i.e. as an Investor) apart from the salary, house property income and interest, then you need to file ITR2.
Instead, if you have gain from either Intra-day or F&O, then ITR3 is the correct form to file.
Conclusion
In this way first, identify whether you are an Investor or Trader based on your stock market activity in the relevant financial year. Then choose the applicable ITR form and file it before the due date.
If you are having stock market losses, it is a must to file your ITR before the due date to carry forward the current year’s losses to the next year. Otherwise, you will lose the tax benefit on such losses in the upcoming years.
Hope you have enjoyed the article, thank you for your time.
