Taxation on Income from Trading in Shares

As we know Income from salary, business and house property are taxed under various heads, Income/loss from sale of equity shares is taxed under the head “Capital Gains”.

Gains From Equity Shares

1. Short Term Capital Gain and losses:

When the equity shares listed on a Stock exchange are sold within 12 months of its purchase,the seller may earn Short term capital gain or incur Short term capital loss.

Calculation of Short-term capital gain = Sale price (minus) Expenses on Sale (minus)Purchase price  

2. Long Term Capital Gain and losses:

When the equity shares listed on a Stock exchange are sold after 12months of purchase,the seller may earn Long term capital gain or incur Long term capital loss.

Taxation Of gains From Equity Shares

1.  Tax on STCG (Short Term Capital Gain):

 Short term capital gains are taxable at the rate of 15% irrespective of your tax slab. Also if your total taxable incomeexcluding short term gains is less than the taxable income then you can adjust this shortfall against your short term gains. Remaining short term capital gains shall then be taxed at 15%+4%cess.

2. Tax on LTCG (Long Term Capital Gain):

Long term capital gain on equity shares listed on stock exchange is not taxable upto the limit of INR 1Lac.

LTCG of more than INR 1Lac on sale of equity shares or equity-oriented units of the mutual fund will attract a capital gains tax of 10% and the benefit of indexation will not be available to the seller.

Loss From Equity Shares

1. Short Term Capital Loss:

Any STCG from sale of equity shares can be set off against short or long termcapital gain from any capital asset.If the loss is not set off entirely,it can be carried forward for a period of 8 years and adjusted against any long term or short term capital gains made during these 8 years.

2. Long Term Capital Loss:

Any losses arising from listed equity shares, mutual funds etc would be allowed to be carried forward and set off in accordance with amendments made in the Act in 2018.As per these amendments, Long term capital loss can be set off against long term capital gain and unabsorbed long term capital loss can be carried forward to subsequent 8 years for set off against long term capital gains.

Securities Transaction Tax(STT)

STT is applicable on all equity shares which are sold or bought on a Stock Exchange.STT is levied on equity,derivates, and unit of equity oriented mutual fund.Provisions of collection of STT are quite similar to TCS or TDS.STT is required to be collected by the recognized mutual fund or the person authorized in case of every mutual fund or the lead merchant banker in case of an Initial Public Offer ,as the case may be and subsequently payable to the Government on or before 7th of the following  month.

Levy Of Securities Transaction Tax (STT)

*Please refer Rule 3 of Securities Transaction Tax Rules, 2004 for the manner of determining value of taxable equity or Equity oriented mutual fund transactions.

Debate On Sale Of Shares As Business Income VS Capital Gains

Some of the taxpayers treat gains or losses from the sale of shares as ‘Income from Business’, while others treat it as ‘Capital gains’. In case of significant share trading activity (e.g. if you are a day trader with lots of activity or if you trade regularly in Futures and Options), usually your income is classified as Income from Business.

As per CBDT, If the taxpayer himself opts to treat his listed shares as stock-in-trade, the income shall be treated as business income, irrespective of the period of holding of listed shares. 

 If the taxpayer opts to treat the income as capital gains then that is also acceptable. This is applicable for listed shares held for a period of more than 12 months. However, this stand once taken by a taxpayer in a particular 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 shares as ‘stock’ or as ‘investment’.

WRITTEN BY

CA PALAK S JAIN