Income Tax on Equity Share Trading

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. Further, when an investor applies for an IPO i.e. Initial Public Offering, and receives shares, income on sale of such shares is treated as capital gains.

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 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:

• Significant Trading Activity
  • When the trader has done significant share trading activity with regular trading in shares and securities or in futures and options during the year, the income from such activity is classified as Business Income.
  • When the volume of trading transactions is less and it is not a regular activity, the income from such activity is classified as Capital Gains
• Intention of Taxpayer
  • If the intention of the taxpayer is to resale shares and securities to earn profits, the income is classified as a Business Income
  • If the intention of the taxpayer is to invest for long term appreciation and earn interest and dividends, the income is classified as Capital Gains

Clarification from CBDT Circular

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

• In the case of listed shares and securities, it is the choice of the taxpayer to report income as Capital Gains or Business Income
  • If the taxpayer treats listed shares and securities as stock-in-trade irrespective of the period of holding, income would be treated as Business Income
  • If the taxpayer treats listed shares and securities held for more than 12 months as an investment, income would be treated as Capital Gains. However, the only condition is to follow the same method continuously in subsequent years as well unless there is a major change in the circumstances.
• In all other cases, the income head would be decided on the basis of significant trading activity and the intention of the taxpayer to hold it as stock or investment
• In the case of unlisted shares and securities, income should be treated as capital gains irrespective of the period of holding

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:

• If the purchase or sale of securities was linked to the usual trade or business of the taxpayer or it was an occasional independent activity
• Whether the purchase of shares and securities was with an intention of resale at a profit or for long term appreciation and earning interest/dividends
• Whether the volume of transactions in the financial year is significant
• If there were continuous and regular trading transactions during the financial year
• The holding period of shares and securities traded by the taxpayer
• Time devoted to trading and its impact on the livelihood of the taxpayer

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.

• Long Term Capital Gain (LTCG) u/s 112A: Any gain arising on the sale of Long Term Capital Asset is considered Long Term Capital Gain. Listed securities held for more than 12 months are considered Long Term Capital Assets.
• Short Term Capital Gain (STCG) u/s 111A: Any gain arising on the sale of Short Term Capital Asset is considered as Short Term Capital Gain. Listed securities held for up to 12 months are considered as Short Term Capital Assets.

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

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

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

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

• ITR Form: Equity Trader should file ITR-2 on Income Tax Website if they treat the income as Capital Gains. However, if they treat the income as Non-Speculative Business Income, the equity trader should file ITR-3 and prepare financial statements.

• Due Date
  • Up to FY 2019-20
    31st July is the due date for equity traders to whom Tax Audit is not applicable
    30th September is the due date for equity traders to whom Tax Audit is applicable
  • FY 2020-21 Onwards
    31st July is the due date for equity traders to whom Tax Audit is not applicable
    31st October is the due date for equity traders to whom Tax Audit is applicable

• Tax Audit: If the trader treats the income as Business Income, the equity trader should check if a tax audit under Sec 44AB is applicable.

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.

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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

• If the taxpayer has incurred a loss or the profit is less than 6% of Trading Turnover and total income is more than the basic exemption limit, a Tax Audit is applicable.
• If the taxpayer has a profit of more than or equal to 6% of Trading Turnover, Tax Audit is not applicable.

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

• If the taxpayer has incurred loss or the profit is less than 6% of Trading Turnover, the Tax Audit is applicable.
• If the taxpayer has a profit of more than or equal to 6% of Trading Turnover and has not opted for the Presumptive Taxation Scheme under Sec 44AD, Tax Audit is applicable.
• When the taxpayer has a profit of more than or equal to 6% of Trading Turnover and has opted for the Presumptive Taxation Scheme under Sec 44AD, Tax Audit is not applicable.

Trading Turnover more than INR 10 Cr

• Tax Audit is applicable irrespective of the profit or loss.

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 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

• Equity traders can set off Short Term Capital Loss (STCL) against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). He/she can carry forward the remaining loss for 8 years and set off against STCG and LTCG only.
• Equity Trader can set off the long-term losses against LTCG only. They can carry forward the remaining loss for 8 years and set off against LTCG only.

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.

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