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 business activity. In such a case you are required to file an ITR-4 and your income from share trading is shown under ‘income from business & profession’.
When treated as a business income, you are allowed to reduce expenses incurred in earning such business income. However, the income itself is charged at tax slab rates.
If you treat your income as capital gains, no expenses are deductible, also, long term gains from equity are exempt from tax 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 have been receiving notices from the tax department and end up spending a lot of time and energy explaining why they chose a particular stance.
New 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 SHARES.
With a view to reducing litigation in such matters, CBDT has issued the following instructions –
- 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 taxpayer will not be allowed to take 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’.
This will prevent unnecessary questioning from Assessing Officers regarding the classification of income. A very welcome move!
Basis CBDT circular no 6/16 dated 29th February, 2016
How to treat sale of unlisted shares in this context
For tax-treatment of income from 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 Folio No.225/12/2016/ITA.1I dated the 2nd of May, 2016 )