News And Updates

Taxability of Income earned from Shares

One may have various sources of income, it could be in the form of salary, rental income, and business income.

It’s a mandate and equally important for anyone and everyone to make their income and it’s sourced accountable to the government.

But what about income from the sale or purchase of shares?

Income and Loss from sale of equity shares are covered under the head ‘Capital Gains’. That is further classified into two heads Short-term capital gains or losses and Long-term capital gain/losses.

Short-term Capital Gains (STCG)

If shares listed are sold within 12 months of purchase, the seller may make short term capital gain or suffer a short-term capital loss.

Tax on short-term capital gains:

Short term capital gains are taxable at 15% and apply to short term capital gains, irrespective of your tax slab.

If total income is exclusive of short term gains is below taxable income (i.e, Rs2.5 lakh) – you can adjust this against your short term gains.

Short-term Capital Loss

Any short term capital loss from the sale of equity shares can be set off against short term or long term capital gain from any capital asset.

If the loss is not set off, it can be carried forward for a period of 8 years and adjusted against any short term or long term capital gains made during these 8 years.

Note: That a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date, even if the total income earned per annum is less than the minimum taxable income.

Long-term Capital Gains (LTCG)

If shares listed are sold after 12 months of purchase, the seller may make a long-term capital gain or suffer a long-term capital loss.

As per the provisions of the Financial Budget of 2018, if a seller makes long term capital gain of more than Rs.1 lakh on the sale of equity shares or equity-oriented units of the mutual fund, the gain made will attract a capital gains tax of 10% long-term capital gains tax.

These provisions apply to transfers on or after 1 April 2018.

Tax on long-term capital gains:

Long term capital gains from shares are not taxable up to the limit of Rs1 lakh.

As per the amendments in budget 2018, the long-term capital gain of more than Rs1 lakh on sale 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, on or after 1 April 2018.

Long-term Capital Loss

Until Budget 2018 long-term capital loss was considered to be a dead loss – It can neither be adjusted nor carried forward.After Budget 2018 has amended the law to tax such gains made over Rs1 lakh will 10%, Also that any losses arising from such listed equity shares,etc would be allowed to be carried forward. 

Long term capital loss can be set-off against any long-term capital gain. Also, can be carried forward to the subsequent 8 years for set-off against long-term gains.

Note: Any sale/purchase which happens on a stock exchange is subject to STT (Securities Transaction Tax), which applies to all sale and purchase of shares on the stock exchange. These tax implications are only for shares on which STT is paid.

For the Sale of Shares as Business Income

In case you are an intraday trader with lots of activity or if you trade regularly your income will be classified as income from a business.

Income from such is required to be filed through share trading is shown under ‘income from business & profession’.

Calculation of income from Business v. Capital Gains

Treating income form shares as Business, allows you to reduce expenses incurred in earning such business income. In such cases, the profits gained would be added to your total income for the financial year, and consequently, be charged as per tax slab rates.

On the other hand, income as capital gains, expenses incurred on transfer are deductible. Also, long term gains of above Rs1 lakh annually are taxable, while short term gains are taxed at 15%.

Updates from CBDT (Central Board of Direct Taxes)

Following instructions (CBDT circular no 6/2016 dated 29th February 2016)–

If the taxpayer wants to treat his listed shares as stock-in-trade, the income shall be treated as business income. Irrespective of the period of holding of shares.

The Assessing Officer (AO) shall accept this stand chosen by the taxpayer.This is applicable only if shares are held for a period of more than 12 months.

However, once this stand is 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.

How to treat the sale of Unlisted Shares

As per CBDT circular Folio No.225/12/2016/ITA.1I dated the 2nd of May, 2016

Income arising from the transfer of unlisted shares would be taxed under the head ‘Capital Gain’, irrespective of the period of holding, to avoid disputes/litigation and to maintain a uniform approach.

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