Whether you file your income tax return correctly, whether you include your details of trading in shares while filling income tax return. Many retail investors who have very small amount of capital gain or loss through trading ignore mentioning details in the income tax return. Previously due to unavailability of data on capital gains, the income tax department was not able to detect the non disclosure by the assesse.
Now A Formal Memorandum of Understanding (MoU) was signed between the Central Board of Direct Taxes (CBDT) and Securities and Exchange Board of India (SEBI), for exchange of data between the two organisations. This will facilitate sharing of data and information on automatic, regular, request and suo moto basis between the two authorities.
Also income tax department has specifically changed the its Income Tax Return form to include this information, department has added new sheet/Schedule 112A. Further the finance minister had also stated that the New Form 26AS shall include the information related to Capital Gain/Loss through the Data provided by the SEBI related to transactions made in equities and equity oriented schemes of respective PAN holders.
What Information do you need to enter in your Income Tax Return:-
The schedule requires the taxpayers to provide the following information, however the information required is completely optional at the end of the assesse but this step of IT Department has made it compulsory indirectly:
1. ISIN Code
2. Name of the Share/Unit (Auto populated if ISIN is provided)
3. No. of Shares/Units
4. Sale-price per Share/Unit
5. Cost of acquisition per Share/Unit
6. Fair Market Value per share/unit
7. Cost of improvement without indexation
8. Expenditure wholly and exclusively in connection with transfer
Taxation of Gains from Equity Shares
Tax on short-term capital gains
Short term capital gains are taxable at 15%. What if your tax slab rate is 10% or 20% or 30%? Special rate of tax of 15% is applicable to short term capital gains, irrespective of your tax slab. Also, if your total taxable income excluding short term gains is below taxable income i.e Rs 2.5 lakh – you can adjust this shortfall against your short term gains. Remaining short term gains shall be then taxed at 15% + 4% cess on it.
Tax on long-term capital gains
Long term capital gain on equity shares listed on a stock exchange are not taxable up to the limit of Rs 1 lakh.
As per the amendments in budget 2018, the long term capital gain of more than Rs 1 lakh on the 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. These provisions apply to transfers made on or after 1 April 2018.
Guidance for treating share sale as business income
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. 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. In such a case you are required to file an ITR-3 and your income from share trading is shown under ‘income from business & profession’.
Calculation of income from business v. capital gains
When you treat the sale of shares 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, and consequently be charged at tax slab rates.
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%.
What should be classified as significant share trading activity though has lead 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 particular tax treatment for the sale of shares.
Clarification from CBDT
Taxpayers have 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 shares or securities.
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. 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 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’.
The above guidance would prevent unnecessary questioning from Assessing Officers regarding the classification of income.
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.
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Disclaimer: – The information compiled are my personal observation, Experience and Interpretation of The Income Tax Act, 1961, further information is updated till the date of Publish of this document i.e. on 18th July,, 2020, any further changes due to subsequent notifications and Procedural updates shall accordingly be applied The Author and publisher disclaim any liability in connection with use of this information.
Chartered Accountant and Experienced Professional with a demonstrated history of working in the financial services industry.