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Income Tax on Share Trading

We all know that an individual’s income from salary, rental income & business income is subject to tax. But what about an individual who get income from sale or buy of shares? Many people spend their lot of time in share market to purchase and sell shares but are not sure of how this income is taxed? Income/Loss from sale of equity shares is comes under the head ‘Capital Gains’.

Short-Term Capital Gains and Losses

If equity shares listed on a stock exchange are sold within the period of 12 months of buy, the seller may consider it short term capital gain or incur short-term capital loss. When shares are sold at a price higher than the purchase price then the seller makes short-term capital gain.

Long-Term Capital Gains and Losses

If equity shares listed on a stock exchange are sold after the period of 12 months of purchase, the seller may consider it long-term capital gain or incur long-term capital loss. When the Budget 2018 was not introduced then long-term capital gain made on sale of equity shares or equity-oriented units of mutual fund was exempt from tax U/S 10(38)

According the provisions of the Financial Budget of 2018, if a seller makes long term capital gain of more than INR 1 lacs on sale of equity shares or mutual fund’s equity unit, the gain made will draw up a capital gains tax of 10% long-term capital gains tax. The indexation’s benefit will not be available to the seller too. These provisions apply to transfers made on or after April 01, 2018.

Taxation of Gains from Equity Shares

Tax on short-term capital gains

Short term capital gains are taxable at 15%. Irrespective of your tax slab, Special rate of tax of 15% is applicable to short term capital gains. If your total taxable income excluding short term gains is below taxable income i.e INR 2.5 lacs – you can adjust this shortfall against your short term gains. Rest short term gains shall be then taxed at 15% + 4% CESS on it.

Tax on long-term capital gains

Long term capital gain on equity shares listed on a stock exchange are not taxable up to the limit of INR 1 lac. According to the amendments in budget 2018, the long term capital gain of more than INR 1 lac on the sale of equity shares or equity-oriented units of the mutual fund will attract a capital gains tax of 10% and the indexation’s benefit will not be available to the seller. These provisions apply to transfers made on or after April 01 2018.

Loss from Equity Shares

Short-term capital loss

Any short term capital loss from sale of equity shares can be set off against short term or long term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for 8 years and adjusted against any short term or long term capital gains made during these 8 years.

It is important to note that a taxpayer will only be allowed to carry forward losses if he/she has filed his /her income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an ITR is a must for carrying forward these losses.  

Long-term capital loss

Long term capital loss from equity shares until Budget 2018 was counted as a dead loss – It can neither be carried forward nor adjusted. Since Long Term Capital gains from listed equity shares were exempt. After the Budget 2018 has amended the law to tax such gains made in excess of INR 1 lac @ 10%, the government has also notified that any losses occurred from such listed equity shares, mutual funds etc. are allowed to be carry forward.

Securities Transaction Tax (STT)

Securities Transaction Tax is applicable on all equity shares which are sold or purchased on a stock exchange. The above tax implications are only applicable for those shares which are listed on a stock exchange. Any sale/purchase on a stock exchange is subject to STT. Thus, these tax implications discussed above are only for shares on which Securities Transaction Tax is paid.

Guidance for you to treating share sale as business income

Some taxpayers treat gains or losses from the sale of shares as ‘income from business’, while some others treat it as ‘Capital gains’. Whether your gains or losses from sale of shares should be taxed under capital gains or treated as business income, has been a matter of much debate. In case of significant share trading activity (for example trade regularly in Futures & Options), usually your income is classified as income from business. In such a case you need to file an ITR-3 and your income from share trading is shown under ‘income from business & profession’.

Calculation of income from business V/S capital gains

When you count the sale of shares as business income, you are allowed to lower the expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year, and hereof be charged at tax slab rates. If you treat your income as capital gains, expenses on transfer are deductible. Long term gains from equity above INR 1 lac annually are taxable, while short term gains are taxed at the rate of 15%.

What should be classified as significant share trading activity which led to uncertainty and a lot of litigation?

Taxpayers receive notices from the IT department and end up putting a lot of time and energy to explain why they chose a particular tax treatment for the sale of shares?

New clarification from CBDT

Taxpayers have now been offered a choice of how they want to treat income from share trading?

Once they choose, they should however continue the same method in subsequent years too, unless there is a major change in case’s circumstances. Important point to note that the choice has been made applicable only to listed shares or securities.

With a view to minimizing litigation in such matters, CBDT has issued these instructions–

If the taxpayer themselves choose to treat their listed shares as stock-in-trade, the income will be treated as business income. Irrespective of holding period of listed shares.

If the taxpayer choose to treat the income as capital gains, the AO shall not put it to dispute. This is applicable to those listed shares which held for a period of more than 12 months. But this stand once taken by a taxpayer in a particular assessment year will be applicable in subsequent assessment years too and the taxpayer will not be allowed to take a different stand in subsequent years.

In all other cases, the transaction’s type (capital gains or business income) will continue to be decided on the basis the concept of ‘significant trading activity’ and the taxpayer’s intention to hold shares as ‘stock’ or as ‘investment’. The above guidance would save you from AO’s unnecessary questioning regarding the classification of income.

In this context, How to treat sale of unlisted shares?

In case of sale of unlisted shares for which no formal market exists for trading, the department has given their view. Income getting from transfer of unlisted shares would be taxed under the term ‘Capital Gain’, irrespective of holding period, with a view to avoid disputes and to maintain uniform perspective.