There was an interesting mail from a reader last week. This gentleman had opened an internet trading account with a broker and was operating with a small corpus. He reported that he was mostly using tips provided by the broker. He was told if his transactions were higher than Rs 10 lakh, he would come under the tax net. His mail sought clarifications on the broker’s advice. He was confident that since he regularly paid the Securities Transactions Tax, there was no other tax to be paid. While reprimanding market players for sharp practices, regulators seem to be treating retail investors with kid gloves. Rather undeservedly, in my view.
The laws of the land on income and its taxability are quite clearly laid out. Anyone who is ‘making some money’ by trading in the stock market should know that such additional income is subject to tax. The investor who wrote to me is earning a series of short-term capital gains and each one of these is taxable at 15 per cent. It is not clear if large numbers of actively trading investors are even aware of the need to compute their short-term capital gains on a “first-in-first-out” basis, and account for gains and losses on each of their transactions. Perhaps many are filing their income tax returns (ITR) without any reference to their trading activity.
Next, the question of the Rs 10 lakh limit. It is likely to have come from the definition of the threshold of income, above which getting the accounts audited is mandatory. This limit has been increased to Rs 20 lakh and is applicable to those who derive income from business or profession. Income from trading in the stock market will fall under “non-specified professions” and it is mandatory to maintain account books, if the turnover is over Rs 20 lakh. The treatment of capital gains and expenses will also differ. While the investor will be able to claim set-off for short-term capital losses against short-term capital gains, the return to be filed is not his usual ITR-1 used by salaried employees, but ITR-4. The investor also needs to know that buying and selling on the same day, without taking delivery of the underlying, is a speculative transaction under the law.
When I spoke to some of my broker friends, they told me several investors who traded with them did not care much about tax implications. They are happy to file their returns from salary income and are blissfully ignorant about any other tax liability they may be incurring. This seems to be the most blatant violation to which regulators have turned a blind eye.
Most debates about investor protection and education seem to feature a patronising view of the “small” investor. The policy view seems to be that retail investors are gullible. It may only be partially true. Most may be audacious in their investment transactions, stoked by the confidence that they are viewed as holy cows, which will not be harmed. An NFO is subscribed by a large number of retail investors, only to be sold off on listing — clearly a speculative transaction, not worthy of concessional pricing. There are a large number of investors trading in stocks, derivatives and commodities with little worry about accounting for and paying taxes on their transactions.
Several brokers report about housewives who come to their offices and trade on terminals, until their kids return home from school. They have been given a kitty by their doting husbands, so they can ‘make some money on the side’. It can be safely assumed that none would care about clubbing provisions under the Income Tax Act, which apply to such incomes. I am trying hard not to be cynical, but perhaps it is time to revisit what innocent retail investors are actually up to.
The writer is managing director, Centre for Investment Education and Learning
