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Tax Implications of Trading in Securities

CA Santhosh Gupta Kethepalli 
on 17 August 2020

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With the rise in online trading avenues as well as investor awareness, a larger number of people are now channeling their investments into the financial markets.

1) Whether Income from trading of Securities is Business Income/Capital Gain:

Certain taxpayers treat gains or losses from the sale of shares as 'income from business', while certain others treat it as 'Capital gains'. Whether your gains/losses from sale of shares should be treated as business income or be taxed under capital gains, has been a matter of much debate.

i. Clarification from CBDT:

Taxpayers have now been offered a choice of how they want to treat such income. Once they choose, they must however continue the same method in subsequent years too, unless there is a major change in circumstances of the case. Do note that the choice has been made applicable only to listed shares or securities.

With a view to reducing litigation in such matters, CBDT has issued the following circular no 6/2016 dated 29th February 2016:

a) If the taxpayer himself opts to treat his listed shares as stock-in-trade, the income shall be treated as business income. Irrespective of the period of holding of listed shares. The AO shall accept this stand chosen by the taxpayer.

When you treat the sale of shares as business income, you are allowed to reduce expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year, and consequently be charged at tax slab rates.

b) If the taxpayer opts to treat the income as capital gains, the AO shall not put it to dispute. This is applicable for listed shares held for a period of more than 12 months. However, this stand once taken by a taxpayer in a particular assessment year shall be applicable in subsequent assessment years also.

If you treat your income as capital gains, expenses incurred on transfer are deductible. Also, long term gains from equity above Rs 1 lakh annually are taxable, while short term gains are taxed at 15%.

c) In all other cases, the nature of transaction (whether capital gains or business income) shall continue to be decided basis the concept of 'significant trading activity' and the intention of the taxpayer to hold shares as 'stock' or as 'investment'.

The above guidance would prevent unnecessary questioning from Assessing Officers during Scrutiny, regarding the classification of income.

Tax Implications of Trading in Securities

ii. What about Unlisted Securities:

In case of sale of unlisted shares for which no formal market exists for trading, the department has given its view. Income arising from transfer of unlisted shares would be taxed under the head 'Capital Gain', irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach (as per Circular F.No.225/12/2016/ITA.II dated 02-05-2016).

2) Securities Transaction Tax (STT):

STT is applicable on all equity shares which are sold or bought on a stock exchange (i.e. only applicable for shares which are listed on a stock exchange). Any sale/purchase which happens on a stock exchange is subject to STT.

3) Taxation of Capital Gains in case of Shares held for the Purpose of Investment:

Trader invests to earn long-term gains by buying a particular share. He takes delivery of the share and holds them to earn a profit when the price of share increases in the future or to earn dividends on the share.

Particulars

Short Term Capital Gain

Long Term Capital Gain

Holding Period

< 12 Months

12 Months or More

Benefit Of Taxation

Not Available

Not Available

Tax Rate

15%

Not taxable up to the limit of Rs.100000/-.

Above it, Taxable @ 10% (Sec.112A of I.T Act).

Adjustment of Losses

Can be Adjusted against Short term or Long term capital gains

Can be adjusted only against Long Term Capital Gains

Chapter VIA Deductions

Available only for STCG other than those taxable u/s.111A

Not Available

Set Off and Carry Forward

Losses can be carried forward for next 8years, and can be set off against short-term or long term capital gains

(Can be carried forward only if return is filed within the original due date)

Losses can be carried forward for next 8years, and can be set off only against long-term capital gains

(Can be carried forward only if return is filed within the original due date)

Ex:-Amar purchased shares for Rs.100 on 30th September 2017 and sold them for Rs.120 on 31st December 2018. The Value of the Stock was Rs. 110 as on 31st January 2018. Out of the capital gains of Rs. 20 (i.e 120-100), Rs. 10 (i.e. 110-100) is not taxable. Rest Rs. 10 is taxable as Capital gains @10% without indexation.

4) Taxation of Gains in case of Shares held for the Purpose other than for Investment:-

In intraday stock trading, traders earn money by buying or selling stocks on the same day. Every intraday trade needs to be closed by the end of the day and there is no delivery of shares. The objective is to earn a profit by speculating on the daily price fluctuations of stocks.

Taxability:- Income from Intraday trading is being added to all other incomes, and taxes paid as per the applicable tax slab and expenses related to trading can be deducted.

Particulars

Intra Day Equity Trading

Intra Day Futures & Options Trading

Type

Speculative

Non Speculative

Adjustment of Losses

Can be adjusted only against other speculative gains

Can be adjusted against any other head, except salaries

Set off & Carry Forward

Losses can be carried forward for next 4years, and can be set off only against speculative gains

(Can be carried forward only if return is filed within the original due date)

Losses can be carried forward for next 8years, and can be set off only against non-speculative gains

(Can be carried forward only if return is filed within the original due date)

 

5) Advance tax when you have realized capital gains:

Every taxpayer with business income or with realized (profit booked) short term capital gains is required to pay advance tax on 15th June, 15th Sept, 15th December, and 15th March.Advance tax is paid keeping in mind an approximate income and taxes that you would have to pay on your business and capital gain income by the end of the year.

When you are investing in the stock markets, it is very tough to extrapolate the capital gain (STCG) or profit that will be earned by selling shares for an entire year just based on STCG earned for a small period of time. So if you have sold shares and are sitting on profits (STCG), it is best to pay advance tax only on that profit which is booked until now. Even if you eventually end up making a profit for the entire year which is lesser than for what you had paid advance tax, you can claim for a tax refund.

 

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