There are numerous aspects that need to be considered when investing in stock market, one such element is taxation. Though it might seem like any other deduction, it does affect your returns massively. Each and every stock market investment avenue has different taxation structure which need to be observed well. Derivatives too have taxes levied on them which if not attended can lead to terrible outcomes.
With international trade gaining momentum investors are looking forward to getting substantial gains. Countries like Japan,Korea and China have been performing well in terms of global commodity import and export. This has grabbed the attention of potential investors who have now started investing in commodities and futures. Indian stock market too, has seen a progressive upward trend in the previous quarter and the reason can be attributed to the increase in FDI and NRI investments.
The concept of derivatives is pretty simple. Basically, it is a contract between two parties which enables security for one and profit for another. One of the notable properties of derivatives is, it creates liquidity and distributes risks by allowing the investor to take financial responsibility of the stock without owning them. Usually traded in futures, derivatives deal in commodity stocks which and are ideal short term trading and long term investments.
The taxation of derivatives is one of the complex processes in India and is said to be a controversial segment with no defined answers. As derivatives are still in their introductory phase, there are no specific law or impositions on them; the existing ones are under testing. Currently, they are categorized under the general Income Tax Act, mostly under section 9. According to the section 9(1) (i) of the Income Tax Act any income accrued from businesses, property or asset is eligible for taxation. Which brings us to the conclusion that derivatives can be taxed to some extent.
However, there are some exemptions for derivatives trading which can help you while investing. Unlike some countries which do not impose taxes on NRI investments, due to absence of constitutional provisions for derivatives, The Indian government does impose taxes on income gained by NRIs from their investments in the Indian stock market. On the other hand, the Financial Act 1996 exempts tax for payments made towards interest. In this act ‘interest payments’ have not been specified, which has given investors the liberty of tax exemption for investments in Forex.