End to End Taxation on Shares [SIMPLIFIED]

“Unlock the complexities of Income Tax on Shares in this comprehensive guide. Explore classifications, Capital Gains, PGBP, and navigate 44AD, 44AB, and Regular provisions. Understand taxation on listed shares for both delivery-based and non-delivery-based trading. Gain practical insights on reporting, tax rates, and effective strategies for profits and losses.”

Hi there, in this article we are going to discuss Income Tax on Shares from end to end. We will try to understand in sequence points like:

• The nature of Income
• The heads under which the income should be classified
  • Capital Gains
  • PGBP
• Applicability as to 44AD, 44AB and Regular provisions. Calculation of turnover and POH for classification of share into Long term of Short term and,
• Tax rate in case of Profits and Set off and carry forwarding provisions in case of Losses.

TYPES OF INCOME FROM LISTED SHARES:

There can be listed or unlisted shares. In case of listed shares a person can be engaged in either of two activities:

1. Non delivery based trading (Also called as Intra-day trading)

2. Delivery based trading/ investing

1. NON DELIVERY BASED [INTRA-DAY TRADING]

• NATURE & HEAD:
  It can also be called as intra-day trading. In case of intra-day trading of shares the income which arises has to be reported under the head PGBP as SPECULATIVE BUSINESS INCOME.
• HOW TO REPORT?
  It can be reported as Regular or 44AD.
  • Regular: In case when 44AD is not opted than Regular Books of Accounts has to be maintained, Profits/ Losses as actual can be taken and also the expenses of office can also be claimed.
    Tip: Where 44AD is not opted profit can be taken from the report of broker or sub-broker.
  • 44AD: Now usually people have doubt as to applicability of 44AD on Intra-day trading. However there are no restrictions as such and thus 44AD is allowed, if it is otherwise allowed. When 44AD is opted for the minimum profits which an assessee can calim is 6% of the turnover. (We have discussed the calculation for turnover under below section)

• APPLICABILITY OF TAX AUDIT:
  Tax audit as per normal provisions is applicable to business of Intra-day trading also. However since usually intraday trading involves banking mode of payment the limit for audit shall be 10Crores and Not 1 Crore. Now the question what might arise is how to calculate the turnover since the turnover in case of intra-day trading will usually be very high. For calculating the turnover agreegate of absolute values has to be taken which basically means that you should add all the Profits and Losses ignoring the -ve sign for the losses. Let’s say there are only 2 transactions one has 10Rs profit and one has 5Rs loss so the turnover should be 15Rs and not 5Rs.
• PROFIT OR LOSSES:
  • Tax on Profits:
    In case there are profits than they are treated as SPECULATIVE BUSINESS INCOME and are taxed as per slab rates i.e. normal rates.
  • Losses:
    In case of losses, it shall be classified as Speculative business loss and you can off set the losses from the profits of SPECULATIVE BUSINESS INCOME ONLY, and it can be carried forward for Next 4 AY.

2. DELIVERY BASED SHARE TRADING OR INVESTMENTS (Non intra-day)

To determine the nature of income first we have to understand that there are 2 ways in which shares can be treated here. These are:

1. Stock

2. Capital asset

To determine where the shares should be categorised is long debated and disputed matter. However to conclude the matter in short we should try to understand Circular 6/2016 given by CBDT.
CBDT vide the above circular has clarified that the Assessing Officer shall not question the stand taken by the assessee if ASSESSEE:

• • Opts to show it as Stock (i.e. As business income)
  • Opts to show  as Capital Asset but the Period of Holding is more than 12Months (i.e. Under Cap Gains)

Note:

– So basically if an assess opts to show the shares as capital asset and the POH is less than 12Months in such a case, appropriate attention should be given to the nature, frequency and the facts of the case. So that if AO raises the question at later stages, Assessee should be able to substantiate the correctness of the stand taken.

– Also, It is worth noting that the treatment given should be consistent and should not be changed unless there is substantial change in circumstances.

When TREATED AS STOCK:

• NATURE & HEAD
  Where the shares are treated as stock, the nature should be Non speculative business income and should be shown under the head PGBP.
• HOW TO REPORT?
  Again it can be reported Normally or 44AD can also be claimed like in case of intra day trading of shares.
  • Regular:
    In case when 44AD is not opted than Regular Books of Accounts has to be maintained, Profits/ Losses as actual can be taken and also the expenses of office can also be claimed.

Tip: Where 44AD is not opted profit can be taken from the report of broker or sub-broker.

• • 44AD:
    Can be opted here also and the profits to be claimed should be at least 6% of the turnover. (Kindly note that the calculation of turnover would change in this case and we will discuss that in the coming section)

• APPLICABILITY OF TAX AUDIT:
  Tax audit as per normal provisions is applicable to business of Non Intra-Day trading also. However since usually it involves banking mode of payment the limit for audit shall be 10Crores and Not 1 Crore.
  Now the question what arises here is should the turnover be calculated in the similar manner like Intra-day trading of shares. And the answer is No. In case of Non Intra-day trading of shares, Normal sales value is considered rather than the difference amount. Lets say there are 2 transactions where the sales price is 100 and 120 Rs respectively, the turnover shall be 220Rs and not the differential amount.
• PROFIT OR LOSSES:
  • Tax on Profits:
    In case there are profits than they are treated as NON-SPECULATIVE BUSINESS INCOME and are taxed as per slab rates i.e. normal rates.
  • Losses:
    In case of losses, it shall be classified as Non Speculative business loss and for off setting the losses the you have to check for the year. Losses can be off set against any income except salary income in the year when they are occurred. However in the later years, it can be off set against Non speculative business income only. It worth noting that these losses can be carried to next 8 Years.

When TREATED AS CAPITAL ASSET:

• NATURE & HEAD:
  Here the nature can be either long term or short term capital asset where you have to check the POH of 12Months. If it is more than 12 Months it is long term capital asset and otherwise it is short term capital asset.
  In both the cases it should be reported under the head Capital Gains
• HOW TO REPORT?
  If the capital asset is LTCA then it should be reported as LTCG/L and otherwise under STCG/L. [As per Sale consideration and Cost of Acquisition]
  • LONG TERM
    • LTCG(Profits):
      In case of profits tax rate of 10% shall be applicable and no benefit of indexation shall be allowed. However it is worth noting that No Tax shall be levied till 1Lakh Gains.
    • LTCL(Losses):
      In case of losses, it can be off set against LTCG ONLY. And can be carried to next 8 Years.
  • SHOR TERM
    • STCG (Profits):
      In case of profits tax has to be paid at 15% rate.
    • STCL (Losses):
      In case of losses, it can be off set against Short term capital gains or Long term capital gains both. (But no other head). Also carry forwarding is allowed for 8 Years.

A few more practical points to keep in mind.

• Usually it is advisable to not opt for 44AD since  in case profits come lower in the coming years either higher profits have to be shown or audit as per 44AB shall get attracted.
• Proper care should be taken before choosing to show shares as capital asset or stock. There are certain pros and cons in both the cases. Factors such as slab rate, and other income of the assessee, and circumstances of the case shall determine it.
• Also if there are Short term capital losses it should be borne in mind that they can be off set against LTCG also. However the tax rates in LTCG is 10% as opposed to 15% for STCG. Also the period remaining to carry forward should also be considered.

If you have any suggestion or queries, reach me at ca.khandelwalraghav@gmail.com or 9329732333.