How gains through margin trading facility transactions are taxed in India

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Subscribe to enjoy similar stories. The margin trading facility (MTF) is a powerful financial instrument. It enables individuals to purchase stocks by paying only a portion of the total value while the broker funds the remaining amount.

In an MTF arrangement, the broker essentially provides a loan to purchase securities. The investor pays an initial margin, a percentage of the transaction value, while the broker finances the remainder. The broker holds the units as security and charges interest.

The nature of tax treatment depends on the type of income generated, categorized as follows: Short-term capital gains (STCG): If the securities purchased on recognized stock exchange using MTF are sold within 12 months, the profit is treated as STCG. The tax rate applicable is 20% under Section 111A. Long-term capital gains (LTCG): If the securities are held for more than 12 months, the profit qualifies as LTCG.

LTCG exceeding ₹1,25,000 in a fiscal year is taxed at 12.5% without indexation benefits under Section 112A. For frequent traders or those treating trading as a business, income from MTF transactions is classified as business income. Tax rates applicable depend on the investor’s income tax slab.

Under Section 50AA, gains from debt mutual funds are classified as short-term, regardless of the holding period, and are taxed according to the individual's income tax slab rate. A key aspect of MTF transactions is the interest paid to the broker on the borrowed amount. The tax treatment of this interest depends on whether the income from MTF transactions is categorized as capital gains or business income.