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Balwant Jain

Tax implications of treatment of share profits business income vis s viz Capital gains

The present tax laws of India provides for taxation of income under specified heads. Any income for which a specific head is specified has to be taxed under the head and cannot generally be taxed under any other head. However since law cannot provide for every eventually, disputes arise as to whether a particular income shall be taxable under one head or the other head like the cases of profits on dealing in shares, rentals received on letting out of various assets.

Disputes have been arising in case of listed securities which can be held as stock in trade as well as capital asset. In case the same is treated as capital asset the surplus shall become taxable under the head capital gains and in case the same are treated as stock in trade, any surplus arising on it shall be treated as business income.

In this article I will attempt to discuss the consequences in case the profit on sale of shares is treated as business income and when it is treated as Capital Gain. The discussion is restricted to profits arising on dealing in listed securities only as the issue generally arises in case of dealing these securities.

In case the profits on listed shares is treated as capital assets the taxation will depend on whether the shares are long term or short term. In case the shares have been held for a period of 12 months or less, any profit arising on it is treated as short term and the tax payers has to pay a tax at flat rate of 15% under Section 111A. However in case the shares have been held for more than 12 months, any profit made on sale of such shares is fully exempt under Section 10(38) of the Income Tax Act. The above treatment of 15% tax for short term capital gains or full exemption for long term capital gain is applicable in case the listed shares are sold through a broker on platform of stock exchange.

However in case the shares are tendered  under buyback offers or open offers where security transaction tax is not paid, the long term capital gains are taxable @ 20% and short term capital gains are treated like any other income and are included in your others incomes and are taxed at the slab rate applicable to you. So it is tax efficient to sell the shares in stock market rather than tendering the same under buy back or open offer unless the price differential more than offsets the additional tax burden. For listed securities other than listed shares the holding period requirement for qualifying as long term is holding for more than 36 months. Thus surplus for such other listed securities held for 36 months or less shall be treated as short term Capital Gain and shall be added to your regular income tax taxed at regular income.

A tax payer cannot claim any deduction under Section 80C, 80 CCC, 80 CCD, 80D. 80DD etc against the long term capital gains or short term capital gains on sale of shares taxable @ 15% and which is included in the income.

For long term Shares, you have option to pay tax @ 20% after applying indexation provisions on the cost or just pay 10% on actual capital gains. In case the long term capital gains are taxable you have the option to claim tax benefits under Section 54F to invest the sale proceeds in another residential house property or alternatively you can avail tax benefits under section 54EC by investing the capital gains in bonds of Rural Electrification Corporation or National Highway Authority.

In case the profits on sale of your securities are treated as business income the tax treatment which follows shall be altogether different. From the profits so made, you will be allowed to claim the deduction in respect of any expenditure which you might have incurred to carry out those transactions. In case the activity of buying and selling of shares is done as an organised activity and the necessary infrastructure has been set up, all the expenses incurred in order to run the set up shall be deductible. Moreover you will not have the option of paying tax at concession rate nor will be able to claim exemptions under Section 54 F or 54EC even if the securities sold by you are long term.

I am sure the above discussion will help you understand the tax implications of a particular treatment of profits on sale of such assets.

The author is a CA, CS and CFPCM. Presently working as Company Secretary of Bombay Oxygen Corporation Limited, he can be reached at jainbalwant@gmail.com

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July 2024