Article explains provisions related to Treatment of Income from trading of Securities(Business Income/ or Capital Gain?), Securities Transaction Tax (STT) Treatment, Taxation of Capital Gains in case of Shares held for the Purpose of Investment, Taxation of Gains in case of Shares held for the Purpose other than for Investment and Advance tax when you have realized capital gains.

With the increase in online trading avenues as well as investor awareness, a larger number of individuals 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.

Trading in Securities

i. Clarification from CBDT:-

Taxpayers have now been offered a choice of how they need 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 selection 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. When you treat the sale of shares as business income, you’re eligible to deduct expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the fiscal 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 greater than 12 months. 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 carry shares as ‘stock’ or as ‘investment’.

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

ii. What about Unlisted Securities:-

In case of sale of unlisted shares, no formal market exists for trading, the department has given its view. Income arising from transfer of unlisted shares would be taxed under the top ‘Capital Gain’, regardless 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 market. Any sale/purchase which happens on a stock market 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 8 years, 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 8 years, 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 4 years, 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 8 years, 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. 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.

So if you’ve got sold shares and are sitting on profits (STCG), it’s best to pay advance tax only thereon profit which is booked till date. 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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4 Comments

  1. DEEPAK SONI says:

    THE ARTICLE IS CREATING CONFUSION RATHER THAT CLARITY.
    AND WHY THE ASSESSEE SHOULD MAKE PAYMENT OF ADVANCE TAX ? THE ASSESSEE SHOULD NOT MAKE EVEN ON 15 MARCH. HE SHOULD MAKE PAYMENT ONLY ON 31 MATCH AFTER ENTIRE PICTURE IS CLEAR. REFUND FROM THE INCOME DEPARTMENT IS VIRTUALLY WITHIN REASONABLE PERIOD IS AN IMPOSSIBLE TASK.

    1. Santhosh Gupta says:

      Hi Deepak
      1) Advance Tax:-
      Neither you nor me can decide when to pay our Advance Taxes. As incorporated in our Income Tax Act one has to discharge his tax liability in Four Installments (i.e. on 15th June/15th September/15th December and 15th March) if his tax liability exceeds Rs.10000/- [Sec.211 of I.T Act, 1961], if you are unable to do so, then one has to face consequences of Interest {234B & 234C}on such late remittance of Tax Liability.
      2) Refunds:-
      Refunds now a days are quite faster than those of earlier days, once your ITR got processed by CPC then the refund if any will be credited to your bank account mentioned in the IT Return not more than 15 days.
      click here for more details about refund:- {https://tax2win.in/income-tax-refund-status}. Here it is saying that it takes 30 days to get your refund
      3)Clarification:-
      Every author providing his writings to Taxguru or some other platform is to provide a simplified view of the Provisions, be it in Direct Tax/Indirect Tax/Company Law. To get such a view the readers should also put their efforts to get the understanding of what the Author is trying to say.
      Its because you do not have the understanding of basic provisions of Income Tax (like Do concept of Advance Tax exists in Direct Tax), may be that may be the reason you failed to understand the little tricky provisions like Capital Gain Transactions.
      Example:- Mr.A entered into a trade on 15-04-2019 and has booked a profit of Rs.1000000/-on such trade. Why do he has to wait to discharge his tax liability till 31-03-2020, he can dicharge his tax liability on 1st Installment date (i.e. on 15-06-2019).
      If you cannot estimate your income and are unwilling to pay Advance Tax in the installment mode provided, then you have to face Interest consequences u/s.234B & 234C of Income Tax Act.
      Feel free to ask if any doubts still remain.

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