India’s comprehensive taxation regime has provided a detailed guide to calculating taxation applied to incomes under various heads. Its most relevant amendment (for the purposes of this article) was introduced vide the Financial Amendment Bill 2022, which brought in the provisions applicable to virtual digital assets (VDAs). VDAs under the introduced regime have been defined to include ‘Any information or code or number or token (not being Indian currency or foreign currency) which meets certain conditions. Non-fungible token (NFT) or any other token of similar nature, by whatever name called.’. 

Further, it is to be noted that security, for the purposes of trading on the stock exchange market, has been defined to include ‘shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company [or a pooled investment vehicle or other body corporate], derivative, units or any other instrument issued by any collective investment scheme to the investors in such schemes, security receipt as defined under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, units or any other such instrument issued to the investors under any mutual fund scheme, units or any other instrument issued by any pooled investment vehicle, etc.’ as covered under Section 2(h) of the Income Tax Act, 1961 (IT Act). 

To delve into the taxation provision applicable to both, we need to understand that while the taxation regime for VDAs is relatively newer, the taxation applicable to securities has been around for quite a while now and is, therefore, more comprehensive. Furthermore, it is to be noted that on account of this difference, even the specific scenarios concerning taxation on securities have been covered in more detail compared to taxation provisions for VDAs, which are still nascent. 

Taxation for VDAs

Under Section 115BBH of the IT Act, gains made from VDAs are taxed at 30% (plus 4% cess). Further, Section 194S of the IT Act levies a tax deducted at source (TDS) at 1% on the transfer of crypto taxes from July 1, 2022. It is pertinent to note that this TDS levy applies on transactions exceeding 50,000 and 10,000 in certain specified cases. 

Taxes on VDAs apply to all investors, including private and commercial investors, who transfer VDAs during a financial year. It is further pertinent to note that the tax rate for short-term and long-term gains is not differentiated for gains on VDAs and is, therefore, the same for both gains. 

Additionally, the provisions of law capturing taxation on VDAs do not allow for deductions of any expenses, except for the cost of acquisition. A dedicated Schedule VDA has been added to the IT Act to report gains under VDAs. 

Most importantly, any losses incurred through VDA transactions can not be offset against any income, including gains from such VDAs. 

Taxation for Securities Traded on the Stock Exchange

Taxation provisions under the IT Act concerning taxes on stock market gains include taxes on short-term capital gains tax, long-term capital gains tax and security transaction tax. While the tax rate for short-term capital gains is capped at 15 % for equity stocks, the same is 20% in cases of gains from debt stocks. 

On the other hand, long-term capital gains tax applies to gains from the sale of stocks after a period of one year. The tax applies to both equity and debt stocks, and for equity, the tax is capped at 10%, while for debt stocks, the same is capped at a rate of 20%. Furthermore, a surcharge of 10% of the tax amount is applicable on gains exceeding 10,00,000. The IT Act additionally allows for deductions in certain cases, such as if the amount of capital gain does not exceed 1,00,000, the long-term capital gains from the sale of equity shares are exempt from taxation. There are several other exemptions permitted under law for capital gains from securities traded on the stock exchange. 

It is pertinent to note that the IT Act additionally allows for the set off of losses from trading in securities in the stock exchange; however, long-term capital loss can only be set off against long-term capital gains, while short-term capital losses can only be set off against short term capital gains. 

In light of the above, it is evident that the tax provisions dealing with VDAs and stock trading are highly differentiated; therefore, one should consult an expert before filing their income tax returns to avoid any liabilities in the future. 

byAditi Mendiratta

Aditi is a corporate lawyer with a knack for writing that ranges from fictional stories to long-form legal content. Armed with a dual degree in law and mass communication, she aspires to put words to their best use to inform, educate and entertain.

•