MARGIN TRADING: TAX RULES AND BENEFITS DECODED

MTF offers potential for higher returns, but demands planning and tax compliance

- Neeraj Agarwala

Margin trading facility (MTF) is a powerful financial tool, wherein the investor pays an initial margin, a percentage of the transaction value, while the broker extends a loan for the remaining amount to purchase stocks. The broker holds the units as security, and charges interest. The nature of tax treatment also depends on the type of income generated, and is categorized as follows:

Equity or equity-oriented MFs: If the securities purchased on a recognized stock exchange using MTF are sold within 12 months, the profit is treated as short-term capital gains (STCG), and is taxable at 20%. If the securities are held for more than 12 months, the profit qualifies as long-term capital gain (LTCG). If LTCG exceeds ₹1,25,000 in a fiscal year it is taxed at 12.5% without indexation benefits under Section 112A.

Business income: For frequent traders or those treating trading as a business, income from MTF transactions is classified as business income and is taxed at the applicable income tax slab.

Debt-oriented funds: Under Section 50AA, gains from debt MFs are classified as short-term, regardless of the holding period, and are taxed according to the individual's income tax slab rate.