Everyone knows that Income from salary, rental income and business income is taxable under their respective heads. But what about income from sale or purchase of securities? Many stakeholders which includes homemakers, retired people, youth, working professionals spend their time gainfully buying and selling securities but are unsure of how this income is taxed. The first question that comes in mind is whether to treat gains or losses from the sale of securities as ‘Income from Business’, or as ‘Capital gains’. The same has been analyzed as under-

Income from business v. Capital Gains

Certain taxpayers treat gains or losses from the sale of securities as ‘Income from Business’, while certain others treat it as ‘Capital gains’. Whether your gains/losses from sale of securities should be treated as business income or be taxed under capital gains, has been a matter of much debate. In case of significant security trading activity usually your income is classified as income from business.

When you treat the sale of securities 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.If you treat your income as capital gains, expenses incurred on transfer are deductible.

What should be classified as significant security trading activity though has led to uncertainty and a lot of litigation? Taxpayers receive notices from the tax department and end up spending a lot of time and energy explaining why they chose a specific tax treatment for the sale of securities

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 securities.

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

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

If the taxpayer opts to treat the income as capital gains, the AO shall not put it to dispute. This is applicable for listed securities held for a period of more than 12 months. However, this stands once taken by a taxpayer in a specific assessment year shall be applicable in subsequent assessment years also. And the taxpayer will not be allowed to take a different stand in subsequent years.

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 securities as ‘stock’ or as ‘investment’.

How to treat sale of unlisted shares in this context?

However, 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 CBDT circular F.No.225/12/2016/ITA.II dated the 2nd of May 2016)

We shall discuss in detail the Taxation from Sale of Securities as “Capital Gains”

Capital gains taxation from sale of securities is based on two factors which have been discussed in detail-

  • Period of Holding
  • Nature of Securities

A. Period of Holding

It needs to be determined in order to find out whether the capital gain will be taxable as “Short Term” or “Long Term”.

Relevant Section- Section 2(42A) of the Income Tax Act, 1961

Type of Security Period of Holding Type of Capital Asset
Security (other than a unit) listed in a recognized stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 or a unit of an equity oriented fund or a zero coupon bond Not more than twelve months Short Term
Security (other than a unit) listed in a recognized stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 or a unit of an equity oriented fund or a zero coupon bond More than twelve months Long Term
Share of a company (not being a share listed in a recognized stock exchange in India), Not more than twenty-four months Short Term
Share of a company (not being a share listed in a recognized stock exchange in India), More than twenty-four months Long Term
Securities not included above like Options. Not more than thirty-six months Short Term
Securities not included above More than thirty-six months Long Term

B. Nature of Securities

It needs to be determined as there are specific tax treatments for securities falling under section 111A, 112 and 112A of the Income Tax Act, 1961 which have been discussed in detail as under. Nature of security means whether the security is a share, option, debt instrument or any other security by whatever name called.

Section 111A of the Income Tax Act, 1961

Capital gains”, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust and such transaction is chargeable to securities transaction tax, then such short-term capital gains shall be taxable at the rate of fifteen per cent.

Short Term Capital Gains other than those taxable u/s 111A of the Income Tax Act, 1961 shall be taxable as per the slab rate applicable to the assessee.

Section 112A of the Income Tax Act, 1961

Capital gains”, arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust and securities transaction tax has,

(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

then such long-term capital gains exceeding one lakh rupees shall be taxable at the rate of ten per cent.

However, the condition regarding chargeability of securities transaction tax in both the above cases shall not apply to a transfer undertaken on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

“Securities Transaction Tax” is applicable on all securities which are sold or bought on a stock exchange.

“International Financial Services Centre” shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.

“recognized stock exchange” shall have the meaning assigned to it in clause (ii) of the Explanation 1 to sub-section (5) of section 43.

Now, there arises a confusion as to whether securities listed outside India will get covered by the condition mentioned above which has been discussed below-

  • As per clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005), “International Financial Services Centre” means an International Financial Services Centre which has been approved by the Central Government under sub-section (1) of section 18.
  • As per sub-section (1) of section 18 of the SEZ Act, 2005, (1) The Central Government may approve the setting up of an International Financial Services Centre in a Special Economic Zone and may prescribe the requirements for setting up and operation of such Center:

Provided that the Central Government shall approve only one International Financial Services Centre in a Special Economic Zone.

1. The Central Government may, subject to such guidelines as may be framed by the Reserve Bank, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and such other concerned authorities, as it deems fit, prescribe the requirements for setting up and the terms and conditions of the operation of Units in an International Financial Services Centre.

2. As per clause (ii) of the Explanation 1 to sub-section (5) of section 43 of the I. Tax Act, “recognized stock exchange” means a recognized stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;

So, it is clear from the above explanation that the securities listed outside doesn’t fall under the transactions undertaken on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency.

As such, Section 111A and section 112A will not be levied in case of transfer of securities listed outside India and, also the period of holding to determine the “Type of Gain” in this case will be thirty-six months.

It is worthwhile to mention here that the maximum rate of surcharge from income chargeable to tax under section 111A and 112A shall be 15%. However, where other income of a person does not exceed INR 2 crores but after including the incomes as referred to in section 111A and 112A, the total income exceeds INR 2 crores then irrespective of the amount of other income, surcharge shall be levied at the rate of 15% on the amount of tax payable on both normal income as well as income referred to in section 111A and 112A.

Section 112 of the Income Tax Act, 1961

Capital gains”, arising from the transfer of a long-term capital asset in case of a resident Assessee, shall be taxable at the rate of twenty per cent.

Capital gains”, arising from the transfer of a long-term capital asset other than unlisted securities or shares of a company not being a company in which the public are substantially interested, in case of a non-resident assessee, shall be taxable at the rate of twenty per cent.

Capital gains”, arising from the transfer of a long-term capital asset being unlisted securities or shares of a company not being a company in which the public are substantially interested, in case of a non-resident Assessee, shall be taxable at the rate of ten per cent without indexation benefit and without applying the first provision to Section 48.

Further, the Assessee has the option to opt for the tax rate of twenty per cent with indexation or ten per cent without indexation benefit whichever is beneficial to the assesse arising from the transfer of a long-term capital asset, being listed securities (other than a unit) or zero coupon bond

Availability of Chapter VI A Deductions

Type of Capital Gains Availability of Chapter VI A Deductions
STCG u/s 111A Not Available
STCG other than those taxable u/s 111A Available
LTCG u/s 112A Not Available
LTCG u/s 112 Not Available

The above discussion has been summarized below-

Type of Security Period of Holding Type of Capital Asset Rate of Tax Availability of Chapter VI A Deductions
Equity share in a company or a unit of an equity oriented fund and such transaction is chargeable to securities transaction tax Not more than twelve months Short Term At the rate of 15 % (Section 111A of the Income Tax Act, 1961) Not Available
Equity share in a company or a unit of an equity oriented fund or a and securities transaction tax

(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund , been paid on transfer of such capital asset.

More than twelve months Long Term At the rate of 10% over and above INR 1 Lakhs (Section 112A of the Income Tax Act, 1961) Not Available
Unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 Not more than twelve months Short Term As per Slab Rates applicable to the Assessee Available
Unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 More than twelve months Long Term At the rate of 20% with indexation (Section 112 of the Income Tax Act, 1961) Not Available
Security (other than equity share) listed in a recognized stock exchange in India or a zero coupon bond Not more than twelve months Short Term As per Slab Rates applicable to the assessee Available
Security (other than equity share) listed in a recognized stock exchange in India or a zero coupon bond More than twelve months Long Term At the rate of 20 % with indexation or 10 % without indexation benefit at the option of the assessee( Proviso to Section 112 of the Income Tax Act, 1961) Not Available
Share of a company (not being a share listed in a recognized stock exchange in India), Not more than twenty four months Short Term As per Slab Rates applicable to the assessee Available
Share of a company (not being a share listed in a recognized stock exchange in India), More than twenty four months Long Term In case of Non-resident assessee, at the rate of 10 % without indexation benefit and without applying the first provision to Section 48

In case of Resident assessee, at the rate of 20% (Section 112 of the Income Tax Act, 1961)

Not Available
Unlisted securities other than shares of a company not being a company in which the public are substantially interested Not more than thirty six months Short Term As per Slab Rates applicable to the assessee Available
Unlisted securities other than shares of a company not being a company in which the public are substantially interested More than thirty six months Long Term In case of Non-resident assessee, at the rate of 10 % without indexation benefit and without applying the first provision to Section 48

In case of Resident assessee, at the rate of 20%

(Section 112 of the Income Tax Act, 1961)

Not Available
Units of a business trust and such transaction is chargeable to securities transaction tax Not more than thirty six months Short Term At the rate of 15 % (Section 111A of the Income Tax Act, 1961) Not Available
Units of a business trust and securities transaction tax has been paid on transfer of such capital asset.

 

More than thirty six months Long Term At the rate of 10% over and above INR 1 Lakhs (Section 112A of the Income Tax Act, 1961) Not Available
Securities not included above Not more than thirty six months Short Term As per Slab Rates applicable to the assessee Available
Securities not included above More than thirty six months Long Term At the rate of 20% with indexation (Section 112 of the Income Tax Act, 1961) Not Available

Gourav Goyal

About the Author

Author is Gourav Goyal, Gourav Goyal, working as Director – Assurance with Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm helping foreign companies in setting up business in India and complying with various tax laws applicable to foreign companies while establishing their business in India.  Gourav Goyal is a member of the Institute of Chartered Accountants of India (ICAI) since 2012. He has been conducting Statutory & Tax audit, Internal audit of large & medium scale Limited Companies, carrying out Bank Audits and providing services in the field of accounts, Income Tax & Company Law matters.

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Qualification: CA in Practice
Company: Neeraj Bhagat & Co.
Location: New Delhi, New Delhi, IN
Member Since: 28 Feb 2019 | Total Posts: 74
Neeraj Bhagat & Co. is helping foreign companies in opening up of Liaison/ Branch Office in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat is the founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered View Full Profile

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2 Comments

  1. Prof.K.Govindarajan says:

    Article is very useful But a reference to the old head on ‘Income from Interest on Securities’ would help a person to understand the present scenario better.

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