While share trading has grown significantly one needs to know how to treat the income earned from sale of shares. It is imperative to understand the classification of income, since the tax treatment of speculative gain, capital gains, business income are completely different.
Income from sale of shares is classified and taxed in the following manner:
A. Gain on sale of shares (STT paid) held for 12 months or more shall qualify as Long Term Capital gain which is exempt from taxation. Also, there is no provision for carry forward and set-off of long term capital loss.
B. Gain on sale of shares (STT paid) held for less than 12 months shall qualify as Short Term Capital Gain liable to be taxed @ 15%. Short-term capital loss can be set-off with short term capital gains only.
C. Gains from sale of shared held for trading purposes is considered as business income, taxable at slab rates of 10/20/30%, irrespective of the period of holding.
D. One who deals in the F&O market is considered as a trader and profits from trading in the F&O market are considered as business income, taxable at slab rates of 10/20/30%.
E. Income from intraday trading in shares is treated as speculative business income as the transaction is settled without delivery. Income from speculative transactions is taxed at slab rates of 10/20/30%. Loss from speculative transactions can be set-off only with speculative gains.
A trader’s gain from shares will be business income and that of an investor will be capital gain. The classification of income from sale of securities as business income or capital gains has been a matter of litigation. Indian jurisprudence have laid down the principle that any purchase of shares made with the motive of earning profit is to be considered as business income, whereas investments made with the intent of earning income through dividends will generate capital gain and shall be taxed accordingly. What matters is the intention of an individual whether he holds for a longer period of time to accumulate profits which constitutes the capital gain or does trading to earn profit which will be treated as business income.
Owing to the subjectivity on the issue, the assessing officers tend to re-characterise the surplus as business income, which caused undue hardship to the genuine retail investor. Where capital gain is re-characterised as business income, the gains may be taxed at the highest rate of 30%, whereas short-term capital gains is taxable at 15% and long-term capital gain is exempt form tax.
A high-level committee, led by Justice (Retired) R V Easwar, has recommended that annual gains of less than R5 lakh made on sale of shares held for 12 months or less shall be treated as short-term capital gain taxable at the rate of 15% and the assessing officer shall not intervene with the classification of income. Gains on sale of shares held for more than one year and shown as capital asset shall be treated as long-term capital gain, which is exempt from taxation.
If the Budget 2016 gives effect to the recommendations, it shall be a huge relief to the retails investors. It shall reinstate retail investors’ confidence by bringing certainty on taxability, reduce avoidable litigation and also increase the retail money volume flowing into the stock market.
The writer is managing partner, Nangia & Co