When the corona pandemic first hit the Indian stock market in March, 2020, it became a complete mess with tons of loses. But the time that came after that made stock market a sensational topic discussed at every corner of the city. A large group of retailers are engaged in stock market activity without any knowledge of Income Tax rules regarding the income (or loss) arising from those activities. Let’s try to understand what Income Tax Act have for you.

For the sake of understanding, let me divide all the income generated in 4 major categories:-

  • Income from delivery based transaction (Shares held for more than a day)
  • Income from Intra-day activity (Shares squared off in same day)
  • Income from derivatives (Options & Futures)
  • Other ancillary gains

Let’s have a discussion of these concepts one by one.

Income from Delivery Based Transactions

Taxability: – Any income arising from delivery based transactions is taxable under the Capital Gain head. Such gains can be Short term or Long term based on period of holding such shares. If shares are held for more than 12 months then they are classified as Long term (LTCG), otherwise they will be treated as Short Term (STCG).

Remember that even Income from selling shares of IPOs will fall under this category.

Tax Rate: – The income shall be taxable as follows:-

STCG: Taxable @15% under section 111A.

LTCG: Taxable @10% under section 112A. (But no tax on amount up to Rs.1 lac) 

Example on Tax Computation

Ex.1. Mr. Jitender have following incomes

Income from Salary (Computed) Rs.3,00,000
STCG u/s 111A Rs.1,50,000

Then in such case, his tax liability shall be computed as follows

-Basic exemption allowed against salary income

-Tax on balance salary income (50,000*0.05=Rs. 2500)

-Tax on STCG (1,50,000*0.15= Rs.22,500)

-Tax after rebate (2500+22500-12500=12500)

-Health & Education Cess 4% shall also be added

Ex.2. Suppose if Income from salary were Rs.5,00,000 the tax shall be calculated as follows:-

-Basic exemption allowed against salary income

-Tax on balance salary income (2,50,000*0.05=Rs. 12,500)

-Tax on STCG (1,50,000*0.15= Rs.22,500)

-Tax before Cess (12,500+22,500 = Rs.35,000)

-Health & Education Cess 4% shall also be added

Expenses allowable: – Remember following points:-

Expenses allowed Expenses disallowed
Share purchase price STT paid (Proviso to Section 48)
Brokerage on sale and purchase Interest on borrowed money
GST on Brokerage Depreciation of laptops
Other such charges Internet Charges
  Benefit of Indexation

Other points to remember: – Even basic exemption limit can be claimed but no deduction will be allowed for amount specified under Chapter-VIA. Rebate u/s 87A is allowed for STCG but denied for LTCG u/s 112A. Losses can be carried forward for 8 years in both STCG & LTCG or they can be set off in current year. (Not with salary or business income or interest income)

Note: – If shares were purchased before 31st Jan, 2018, then provision regarding grandfathering shall also be considered. For the sake of keeping this topic simple, same has been avoided.

Taxability of Income from Share Market

Income from Intra-day Activities

Taxability: Intra-day transactions are those where sale and purchase of shares takes place on same day. As per section 43(5) of the Income Tax Act, 1961, all such transactions are considered Speculative Transactions. All such Income shall be taxable under head Profit & Gains from Business & Professions (PGBP).

Tax Rate: – Such income shall be taxable at normal rates, i.e. no special rate is provided under Income Tax Act for such incomes.

Expenses allowable: – All the normal business expenses are allowed as expenses such as brokerage paid, GST on charges, interest on money borrowed, internet expenses, depreciation on laptops and even STT can be claimed as expense.

Other points to remember: – Basic exemption limit and deduction under Chapter VI-A is also allowed for such incomes. Rebate u/s 87A is also allowed. But any loss under this category can be carried forward for only 4 years and can be set off only against Speculative income.

Income from Derivatives

Taxability: Trading in Options and future is a complex thing but yet lots of people indulge in such activities. These are called derivative products. Income from these activities is also taxed under PGBP.

Tax Rate: – Such income shall be taxable at normal rates, i.e. no special rate is provided under Income Tax Act for such incomes.

Expenses allowable: – All the normal business expenses are allowed as expenses such as brokerage paid, GST on charges, interest on money borrowed, internet expenses, depreciation on laptops and even STT can be claimed as expense. Assessee can also opt for section 44AD.

Other points to remember: – Basic exemption limit and deduction under Chapter VI-A is also allowed for such incomes. Rebate u/s 87A is also allowed. Any loss under this category can be carried forward for 8 years and can be set off against any income (Other than salary).

Authors Note for PGBP Income

Section 44AB specifies that if business has Sales of more than Rs.1 Crore then they should get their books of account audited by a Chartered Accountant. However this section also provide relief to the traders that if not more than 5% of total receipts and 5% of total expenditure is in cash, then the limit applicable will be Rs.10 crore. Please also consider this fact before filling your ITR.

Other Ancillary Gains

Following activities may also arise in Share market which do have some tax consequences. Let’s go through all those provisions one by one:- 

Dividend Income: Any dividend received shall be taxable under head Income from Other Source. Expenses incurred to earn the income shall be allowed as expense and the income is taxable at normal rates. TDS (if any) shall also be claimed while filling ITRs. Although now a days same get auto-populated in your ITR.

Bonus Shares: If your company has issued any bonus shares then the cost for your bonus shares will be nil and any gain arising from sell of such shares shall be taxable as either STCG or LTCG, depending upon your holding period. Remember that the cost of the original share or security remains unchanged.

Buy Back of shares: Sometimes companies buy back their shares from the existing shareholders. In such case, companies pay a fixed amount for buying back such shares. Here also, gains shall be taxable as either STCG or LTCG.

Right Issue: Sometimes a right is conferred upon the existing shareholders to apply for the shares of company at some discount. You can also sell such entitlements to other for some consideration. If you don’t sell the entitlements and apply for shares yourself then no tax consequences arises till you sale those shares.

In case you sell the entitlement, then all the amount you receive, shall be taxable as STCG. (Since cost of such right shall be deemed to be nil and also such entitlements are always for a small period, hence STCG)

Share split: Many a times, it is seen that companies split their shares. In such case, entire cost incurred to purchase original shares shall be divided proportionately to all the shares after share split.

Author Bio

Qualification: CA in Practice
Company: Bansal Ashish & Associates
Location: Hisar, Haryana, India
Member Since: 18 Jan 2022 | Total Posts: 2
CA in practice, cleared CA Final in Nov 2018 with AIR 7. View Full Profile

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