Dilwar (example) had invested a major part of his savings in the stock market. However, he was confused about the tax treatment of the profit arising from equity investment. First you need to know that there is no tax exemption on direct equity investment. (Investment in ELSS mutual funds offer tax exemption under 80C). So, our entire focus is on the various tax that is applicable in the PROFIT from equity investment. In this article, we are focusing on applicable tax on share trading and how one can optimize it.Suppose you have purchased a share at Rs 100 and sold it at Rs 110. There is 10% profit from the transaction. However from this 10% (Rs. 10) an investor has to pay STT, brokerage charge, exchange charge, service charge as well as capital gain tax. Besides capital gain tax all are fixed. To minimize capital gain tax one need to understand how such tax on share trading works:Income Tax on share trading u2013Income tax on share trading depends on whether you are showing it as u201cCapital gainu201d or u201cBusiness Incomeu201d.Capital gain: If you are trading in stock market as an investor (mostly involved in delivery based trading), the gains from trading can be classified as:Long term capital gain: u2023 If equity shares are sold after 12 months holding then such gain is subject to tax exemption. However, the security must be traded an Indian stock exchange on which STT has been paid. Exemption on long-term capital gain tax is not applicable if the shares are sold on the exchange outside India. Long term capital loss from equity shares is a dead loss u2023 it can neither be adjusted nor carried forward.Short term capital gain: If equity shares are sold within 12 months from the date of purchase, then the short term capital gain tax of 15% is applicable irrespective of the personal tax slab (10%, 20% etc). If investoru2019s other income excluding short-term capital gain is less than basic exemption limit then he can take benefit of such shortfall in basic exemption limit. Any short-term capital loss from equity trading can be set off against any short-term capital gains. The important points to note here is that long-term capital gain arising on shares sold directly to a friend without routing it through Indian stock exchange are not exempted from tax as STT is not paid on such shares.Business income: If you are trading in the stock market frequently (mostly non-delivery trade), returns from it can be classified as follows:Speculative Business income: Profit from intraday trading is categorized under speculative business income. Tax treatment is similar to your Business income tax. It is taxed as per the tax slab you fall in while losses can be offset only against speculative gains. Non-speculative Business income: Income from trading futures & options on recognized exchanges (equity, commodity, & currency) is categorized under non-speculative business income. Tax on share trading in such cases is similar to your business income tax. The profits on F/O trading is taxed as per the tax slab you fall in whereas losses on such F/O trading can be set off against business profit.So, the important point is whether to classify income from share trading under u201ccapital gainu201d or u201cbusiness incomeu201d. In general, if you are mostly involved in delivery based trading with very few non-delivery based trading then it is better to classify the income under u201cCapital Gainu201d head. (Consult with your chartered accountant before finalizing the IT return)Taxation on DividendA company shares a part of its profit with the shareholders in the form of dividend. Dividend in the hand of investor is tax-free. The company has already paid Dividend Distribution Tax. So effectively 15% tax has been already paid by the company on the investoru2019s behalf. Therefore such dividend is tax-free in the hands of the investor.How to optimize post tax returns:-Tax on share trading can be reduced considerably by following certain Tax saving methods u2013Trading as business income: u2013If you consider your trading gain as u201cbusiness incomeu201d then you have to pay tax as per your Tax slab. The benefit is you can deduct your trading related expenses from the gain. Suppose you made a profit of Rs 1,00,000 from equity trading and you fall into 20% tax bracket so you need to pay 20% of 1,00,000 as tax. However, this tax outgo can be reduced by showing related expenses or by adjusting loss from share trading. Expenses on internet bill, telephone bill, newspaper/magazine purchase, computer charge, brokerage etc can be adjusted with your trading profit. For example, consider your internet+telephone bill as 24,000 (full year), Computer depreciation charge as 10,000, newspaper and magazine charge as 6,000, brokerage and related expense is 4,000. So, total trading related expense comes as (24,000+10,000+6,000+4,000) = 44,000. From the trading profit of 1,00,000 (1Lac) you can deduct 44,000 as expenses and thus net business profit comes at only 56,000. So, instead of paying tax on 1 Lac your taxable income stands at only 56,000.Capital gain as investment income:-If you donu2019t want to classify your trading activity as u201cbusinessu201d then you need to pay only short term capital gain tax at 15%. This can be offset against only against short-term capital loss. Long term capital loss is a dead loss it canu2019t be adjusted or carried forward as long term capital gain is exempt from Tax. An Investor can save tax on its short term capital gain by realizing losses existing in the portfolio.Suppose, you have Short term capital gain of Rs10,000. This means you have to pay 15% of 10000 i.e, Rs 1500 as tax. At the same time you have stocks (purchased within 1 year) in your portfolio those are showing loss of Rs. 5,000. You are confident that over long run those stock will turn profitable. However to lower tax outgo you can sell and repurchase the same stock at the same rate after 2 days (As delivery takes T+2 days). So, your net profit stands at (10,000 u2023 5,000) = 5,000. Thus you have to pay tax of just Rs 750 (15% of 5,000) instead of Rs 1,500. In this process, you can continue holding the stock having good long-term prospects and also save tax.Thus investors should clearly understand various tax on share trading to reap maximum benefits from the investment. As by varying your holding period, classifying income as u201ccapital gainu201d or u201cbusiness incomeu201d and by taking advantages of tax optimization measures you can reduce your tax liabilities considerably.Important Note: u2023 Consult with your chartered accountant before implementing any of the above measures. All income sources must be considered before classification of income from equity investment. Approach to your CA for an in-depth look at your overall financial statement before finalizing IT return.