Everyone knows that you have to pay taxes on income from salary, rental income and business income.

But have you ever thought about the income from the purchase or sale of shares? Various housewives, retired people, spend their time buying and selling shares but are not sure of how this income is taxed.

The prevalent concept is to consider a person with a long-term point of view as an investor and a person with a shorter-term point of view as a trader. Though from the taxation viewpoint, there is a deeper meaning of this distinction. Taxes imposed on intraday share trading are not similar to those on delivery trading.

Gains from Equity Shares

Short-term capital gains and losses

If equity shares registered under a stock exchange are sold under a year of purchase, the seller might either make short-term capital gain or incur a short-term capital loss. Naturally, the seller makes a short-term capital gain if shares are sold at a higher price than the purchase price.

This formula is used to calculate Short-term capital gain = Sale price – Expenses on Sale – Purchase price 

Long-term capital gains and losses

If equity shares that are registered under a stock exchange are sold after a year of purchase, the seller may make long-term capital gain or bear long-term capital loss.

Before the budget of 2018 was introduced, long-term capital gain made on sale of equity shares or equity-oriented units of mutual fund was not taxable under Section 10(38).

According to the provisions of the Financial Budget of 2018, if a seller makes long term capital gain of 1 lakh rupees or more on sale of equity shares or equity-oriented units of mutual fund, the gain made will be taxable under the capital gains tax of 10% long-term capital gains tax.

Also, the advantage of making the index will not be provided to the seller. These regulations are applicable to transactions made on or after 1 April 2018.

Taxation of Gains from Equity Shares

Tax on short-term capital gains

15% tax is levied on short-term capital gains. It doesn’t matter if your tax slab rate is 10% or 20% or 30% special rate of tax of 15% is applicable to all the short-term capital gains.

Also, if the aggregate taxable income (not including short-term gains) is less than taxable income i.e Rs 2.5 lakh – you can adjust this defect against your short-term gains. The rest of the short-term gains will be taxed at 15% + 4% cess on it after that.

Tax on long-term capital gains

Long term capital gain on equity shares that are registered under a stock exchange are not taxable up to the extent of 1 lakh rupees. According to the changes in budget 2018, the long term capital gain of over 1 lakh rupees on the sale of equity shares or equity-oriented units of the mutual fund will be taxable under a capital gains tax of 10% and the advantage of indexation will not be provided to the person who sells the shares. These regulations are applicable on transfers made on or after 1 April 2018.

Loss from Equity Shares

Short-term capital loss

If you have incurred a short-term capital loss from the sale of equity shares, it can be set off against short-term or long-term capital gain from any capital asset.

If the loss is not completely set off, it can be taken ahead for 8 years and adjusted against any short-term or long-term capital gains made in these 8 years.

Long-term capital loss

Long term capital loss from equity shares up till the introduction of Budget 2018 was just a dead loss – It could neither be adjusted nor carried forward.

This is because Long Term Capital gains that you get from registered equity shares weren’t taxable. Hence, losses from them were not allowed to be adjusted or carried forward.

Though the Budget 2018 has changed the law to tax such gains that are more than 1 lakh rupees @ 10%, the government has also announced that any losses that you get from such listed equity shares, mutual funds, etc. would be allowed to be adjusted or taken ahead. The income tax department has, with its FAQs released on 4 February 2018, among other things, clarified that long-term capital loss from a transfer made on or after 1 April 2018 will be allowed to be adjusted and carried forward according to existing provisions of the Act.

Hence, any long-term capital loss can now be adjusted against any other long-term capital gain and long-term capital loss can also be carried forward to the following eight years for adjustment against long term gains.

Securities Transaction Tax (STT)

Securities Transaction Tax is levied on all equity shares which are sold or purchased on a stock exchange. The tax implications mentioned above are only applicable for shares that are registered under a stock exchange.

Any sale or purchase which is conducted on a stock exchange is subject to STT. Hence, the tax implications we’ve talk about above are only for shares on which Securities Transaction Tax is paid.

Guidance for treating share sale as business income

Many taxpayers consider gains or losses from the sale of shares as ‘income from a business, while the rest treat it as ‘Capital gains’. The matter “if your gains or losses from the sale of shares should be considered as business income or be taxed under capital gains”, has been a matter of much debate. If you do regular share trading activities (e.g. if you are a day trader with lots of activity or if you trade in Futures And Options daily), generally your income is considered as income from the business.

In a scenario like that you need to file an ITR-3 and your income from trading shares is displayed under ‘income from business & profession’.

Calculation of income from business VS capital gains

If you consider the sale of shares as business income, you will be able to reduce expenses that you bear in earning such business income. In a scenario like this, the profits would be added to your net income for the respective year and will be charged at tax slab rates.

When you consider your income as capital gains, expenses that you bear on transfer will be. Also, long-term gains from equity of more than 1 lakh rupees per year are taxable, while short-term gains are taxable at 15%.

The activity that should be considered as significant share trading activity though has lead to unpredictability and a lot of legal actions. Taxpayers get notifications from the tax department and they spend spending a lot of time and energy trying to explain why they chose that specific tax treatment for the sale of shares.

New clarification from CBDT

Taxpayers have been provided with a choice of how they want to consider the income. After they choose, they have to continue the same method in the following years too, unless there is a significant change in circumstances of the case.

Keep in mind that the choice will be applicable only to the registered shares or securities. From the point of view of reducing legal actions in such matters, CBDT has made the following announcement on 29th February 2016– If the taxpayer opts to treat his (registered) shares as stock-in-trade himself, the income shall be considered as business income. Not being respectful of the time of holding of the registered shares.

The Assessing Officer will accept this choice made by the taxpayer. When the taxpayer chooses to consider the income as capital gains, the Assessing Officer won’t put it to dispute. This is applied to registered shares that you hold for more than 12 months.

Though, the choice taken by a taxpayer once in a certain assessment year shall be applicable in the following assessment years also. And the taxpayer will not be able to make another choice in the following years. In other scenarios, the nature of the transaction (irrespective of the fact of it being capital gains or business income) will be decided based on the concept of ‘significant trading activity and the mindset of the taxpayer to hold shares as ‘stock’ or as ‘investment’.

The details mentioned above would save you from unnecessary questioning from Assessing Officers related to the classification of income.

Method of treating non registered shares in these circumstances

Though, while considering the sale of unregistered shares for which no formal market exists for trading, the government has given their view.

Income earned from sale or purchase of unregistered shares would be taxed under the head ‘Capital Gain’, not being respective of the holding time, with a perspective to prevent disputes/litigation and to create uniform approach.

Note that you can call yourself an Investor if you hold equity investments for over 1 year and show income as long-term capital gain (LTCG). You can also call yourself an investor and gains as short-term capital gains (STCG) if the time you hold the shares is more than 1 day and less than 1 year.

What is tax-loss harvesting?

By the end of a financial year, you may find unrealized profits and unrealized losses. When you let it be, you will have to pay taxes on realized profits and carrying forward the losses that you didn’t realize to next year. This will make a higher tax payment immediately, and therefore, any interest that you might have gained on that capital which goes away as taxes.

You can postpone this tax outgo easily by recording the unrealized loss, and quickly getting back on the same trade. By recording the loss, the tax liability for the financial year would decrease.

Is BTST speculative, non-speculative, or Short Term Capital Gain?

Buy today Sell tomorrow (BTST) or Acquire today sell tomorrow (ATST) is very famous among equity traders. It is known as BTST if you buy today and sell tomorrow without getting the delivery of the stock.

If you are not getting the delivery, will it be classified as speculative just like the intraday equity trading?

Different people think differently on this topic, on one hand it’s considered to be speculative because no delivery was taken.

Though, I consider it as non-speculative/Short Term Capital Gain as the exchange itself charges the security transaction tax (STT) for BTST trades just like the regular delivery-based trades. One thing to consider is if such BTST trades are conducted just a few times in the year, show it as STCG, but if done regularly it is best to show it as speculative business income.

Balance sheet and Profit & Loss statements

If you choose to trade as a business income, you need, like any other business to make a balance sheet and P&L or income statement for the particular year. Both of the financial statements may need an audit depending on your turnover and profitability.

Turnover and Tax audit

When do you need an audit?

You need an audit if you have a business income and if your business turnover is more than 5 crore rupees for a financial year (since 2020).

In the scenario of transactions that are digital (equity transactions are 100% digital), this turnover limit is 5 crores rupees. For equity traders, an audit is also needed according to section 44AD in scenarios where turnover is below Rs.5 Crores but profits are lesser than 6% of the turnover and total income is over the minimum exemption limit.

All of this information might change according to time because the government makes amendments in these acts often, so be sure to discuss with an expert before taking any action that might affect you in the long run. Our expert help at WealthBucket will manage you for the National Pension System hassle-free. Our team only holds in over-delivering our clients when you require to invest in equity fundslarge-cap fundsliquid funds or multi-cap funds & many more. You can either contact us at +91 8750005655 or email us at contact@wealthbucket.in.