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Income Tax on Equity Share Trading

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Sakshi Shah

Business Income
Capital Gains
Equity Trading
Income Tax Rates
ITR-2
Tax Audit
Last updated on June 17th, 2022

Trading in equity shares and stocks has become very easy due to the availability of online trading platforms. Equity trading includes means buying and selling of various financial instruments such as delivery stocks, intraday, futures, options, etc. If you are trading in equity, you need to file your ITR and pay tax on this income. There can be two forms of equity share trading i.e. Equity Delivery Trading and Equity Intraday Trading.

What is Equity Trading – Intraday, Delivery, Futures & Options?

What is Equity Delivery Trading?

When a trader buys an equity share from the stock market and retains it for more than a day, it is called Equity Delivery Trading. It is called delivery trading because the intention of this purchase is to hold the share for a time long enough for the ownership to be transferred to the buyer. In this case, the share is delivered to the trader’s Demat account. The intention is to earn short/long-term capital gains. Equity Delivery Trading is considered as either Capital Gains or Non-Speculative Business Income.

What is Equity Intraday Trading?

When a trader buys an equity share and sells it on the same day, it is called Equity Intraday Trading. The intention is to earn profits from the fluctuation of prices in a single day. In the case of Equity Intraday Trading, there is no delivery of shares and therefore ownership is not transferred. For Income Tax, Equity Intraday Trading is considered a Speculative Business Income since trading is done without the delivery of shares and with an intention to earn quick profits. The trader must pay tax on intraday trading at slab rates.

What is Equity F&O Trading?

When a trader buys or sells futures or options of an underlying asset i.e. equity share, it is known as equity F&O trading. Income from equity F&O trading is a non-speculative business income as per income tax.

How to treat sale of shares as Capital Gains or Business Income

The profit or loss from equity and mutual fund trading may be considered as Capital Gains income or Business Income. The taxability of both heads of income is different. Thus, the treatment of profit or loss on the sale of equity shares or equity mutual funds has been a matter of dispute between the equity traders and the income tax department.

Primary factors to classify treatment of income on the sale of shares and securities:

Clarification from CBDT Circular

With an intention to reduce litigations and disputes and to maintain a uniform approach, the CBDT proposed the following:

CBDT Guidelines for Assessing Officers

For the Assessing Officer i.e. A.O. to determine whether the taxpayer is a trader or investor, here are a few guidelines:

Can a taxpayer treat income on the sale of shares as both Capital Gains & Business Income?

In the CBDT Circular, Circular no. 4/2007, dated 15.06.2007, it mentioned that it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio that comprises securities that are treated as capital assets and a trading portfolio that comprises securities that are treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e. capital gains as well as business income. However, the taxpayer should be able to produce evidence from their records to maintain a distinction between shares held as stock in trade and shares held as an investment.

Income Heads for Equity Share Trading

Equity Trading as Capital Gains Income

A trader who does trading in listed shares and securities with an intention to invest, the profit or loss is considered as Capital Gains Income.

Equity Trading as Non-Speculative Business Income

A trader who does significant trading activity and trading income is the only source of income, the profit or loss is considered a Non-Speculative Business Income. The trader can claim expenses incurred for earning such business income and needs to file ITR-3.

Income Tax on Equity Share Trading

The rate of Income Tax on trading in equity shares depends on the income head. If it is considered a Non-Speculative Business Income, it is taxed at income tax slab rates. However, if treated as Capital Gains Income, below are the tax rates.

Income Tax on Equity treated as Capital Gains Income

  Type of Security Period of Holding Long Term Capital Gain (LTCG) Short Term Capital Gain (STCG)
Domestic Company Listed Equity Share (STT paid) 12 months 10% in excess of Rs. 1,00,000 under Section 112A 15% under Section 111A
Listed Equity Share (STT not paid) 12 months 10% without Indexation Slab Rates
Unlisted Equity Share (STT not paid) 24 months 20% with Indexation Slab Rates
Foreign Company Listed Equity Share 24 months 10% without Indexation Slab Rates
Unlisted Equity Share 24 months 20% with Indexation Slab Rates

Income Tax on Equity treated as Non-Speculative Business Income

Non-Speculative Business Income is taxable at slab rates.

Slab Rates if Equity Trader opts for Old Tax Regime

Taxable Income (INR) Slab Rate
Up to 2,50,000 NIL
2,50,001 to 5,00,000 5%
5,00,001 to 10,00,000 20%
More than 10,00,000 30%

Note: Surcharge is liable for the total income as per the prescribed surcharge slab rates. Cess is liable at 4% on (basic tax + surcharge).

Slab Rates if Equity Trader opts for New Tax Regime

Taxable Income (INR) Slab Rate
Up to 2,50,000 NIL
2,50,001 to 5,00,000 5%
5,00,001 to 7,50,000 10%
7,50,001 to 10,00,000 15%
10,00,001 to 12,50,000 20%
12,50,001 to 15,00,000 25%
More than 15,00,000 30%

ITR Form, Due Date, and Tax Audit Applicability for Equity Traders

Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
Explore

Turnover Calculation for Equity Trading

To determine whether the Tax Audit is applicable or not, we must calculate Trading Turnover when equity trading is treated as a business income. It is important to note that tax liability does not depend on Turnover.

Turnover for Equity Delivery Trading = Absolute Profit

Absolute Turnover means the sum of positive and negative differences. Trading Turnover Calculation can be either through scrip wise method or trade wise method.

Tax Audit for Equity Trading

If Equity Delivery Trading is treated as Business Income, below are the conditions to check the applicability of Tax Audit.

Trading Turnover up to INR 2 Cr

Trading Turnover more than INR 2 Cr and up to INR 10 Cr

Trading Turnover more than INR 10 Cr

Advance Tax for Equity Share Trading

A taxpayer whose tax liability on the total taxable income from all the sources during the financial year exceeds INR 10,000 is liable to pay Advance Tax. Income for Equity Share Trading is a non-speculative business income taxable at slab rates. Thus, the equity trader is liable to pay Advance Tax as follows:

Advance Tax for Equity Traders who do not opt for Presumptive Taxation

If Equity Traders do not opt for presumptive taxation under Section 44AD and have profits, they must pay Advance Tax in four installments as per the table below.

Advance Tax Liability Due Date
15% of Tax Liability On or before 15th June
45% of Tax Liability On or before 15th September
75% of Tax Liability On or before 15th December
100% of Tax Liability On or before 15th March

Advance Tax for Equity Traders who opt for Presumptive Taxation

If Equity Traders opt for presumptive taxation under Section 44AD and have profits, he/she must pay the entire amount of Advance Tax in a single installment on or before 15th March.

Carry Forward Loss for Equity Trading

Carry Forward Loss if Equity Trading treated as Capital Gains

Carry Forward Loss if Equity Trading treated as Business Income

The equity trader can claim and set off and carry forward the losses if a tax audit has been conducted by a professional chartered accountant in practice. They can carry forward the remaining loss to future years and set off against future profits to reduce the income tax liability.

Loss from Equity Trading is a Non-Speculative Business loss. In the current year, the trader can set off against any income except salary income. In future years, the trader can set off against business income (both speculative and non-speculative). The trader can carry forward the loss for 8 years.

If Equity Traders have opted for the new tax regime, they cannot set off the brought forward business loss against business incomes. Further, they cannot carry forward the business loss to future years.

FAQs

I have treated income from sale of shares as capital gains in ITR of previous year. Can I treat it as business income now?

As per the CBDT Circular, the treatment of income from the sale of shares should be consistent each year. The taxpayer shall not be allowed to adopt a contrary approach in subsequent years. Thus, if you have considered income from the sale of shares as Capital Gains in a year, you cannot treat it as Business Income in subsequent years.

Can I treat sale of equity shares as Business Income?

When the taxpayer has done a significant trading activity, you have an option to consider equity shares as stock-in-trade and treat income from trading as a Business Income. You can claim expenses incurred for earning such business income and the net income is chargeable at slab rates as per the Income Tax Act. The trader should file ITR-3 since income is considered a Business Income.

If I only have Mutual Fund Investment, which ITR do I need to file?

If you have income from the sale of mutual funds, you should report it as Capital Gains and file ITR-2. The nature of capital gain and its tax treatment shall depend upon the nature of the mutual fund and its period of holding…

Got Questions? Ask Away!

  1. Hi @Ravi_Kachhadiya,

    1. If the holding period for shares and securities is less than 1 year, it will be Short Term Capital Gains which will taxed at 15%. If the holding period for shares and securities is more than 1 year it will be considered as Long Term Capital Gains, which are taxed at 10% above INR 1 Lakh. Read more about Capital Gains and taxes here.

    2. Tax liability arises when income is accrued or arise during a financial year. Even when you do not withdraw any funds/profit from your Demat account, you are liable to pay tax on the sale of shares of securities. Depending on the nature of income, the taxability will be different.

  2. Avatar for d.r d.r says:

    If I make a profit or loss by shorting a stock (either by SLBM or other means) what are the applicable taxes?

  3. Hi @d.r, tax is applicable when you have realized gains the taxability comes into the picture. Intraday trading is treated as speculative business income from an income tax perspective and should be reported under the head income from business and profession when filing ITR 3.

    In case you have losses, you can set it off against any other speculative business income and carry forward the remaining loss.

    Hope this helps :slight_smile:

  4. Avatar for d.r d.r says:

    Hi, My question is a bit different in that I am not asking about selling, instead I am asking about shorting (not intraday shorting). Shorting is when someones borrows a stock and sells it, this can be done via SLBM (Securities lending and borrowing scheme). I want to know the taxation for a short held over a day or longer.

  5. Hey @d.r

    As per the Income tax laws and circular, any transfer in a scheme for lending of any securities under an agreement or arrangement, which the assessee has entered into with the borrower of such securities shall not be regarded as transfer and hence, no capital gain tax will be applicable for such transfer.

    Further, if any income arises except of transfer of securities shall be taxed under other incomes or business incomes depending upon nature of activities under SLBM.

    Hope, it helps!