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

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By Hiral Vakil on March 31, 2020

Profit or loss from equity trading and mutual funds trading may be considered as Capital Gains or Business Income. The taxability of both heads of income is different. Thus, the treatment of profit or loss on the sale of shares has been a matter of dispute between the equity traders and the income tax department. There have been multiple cases where the Assessing Officer has issued an income tax notice to the trader for a different treatment for the sale of equity shares or mutual funds.

Tax Treatment

Type Income Head Tax Rate
Equity Shares (Delivery) Capital Gains or Business Income LTCG – 10% in excess of Rs. 1 lac
STCG – 15%
Business Income – slab rate
Equity Mutual Funds Capital Gains or Business Income LTCG – 10% in excess of Rs. 1 lac
STCG – 15%
Business Income – slab rate
Debt Mutual Funds Capital Gains or Business Income LTCG – 10% without indexation or 20% with indexation
STCG – slab rate
Business Income – slab rate
Equity Intraday Business Income slab rate
Equity F&O Business Income slab rate
Commodity Trading Business Income slab rate
Currency Trading Business Income slab rate

Note: The option to choose between Capital Gains or Business Income is only in case of listed shares and securities.

Treatment as Business Income

When the trader has done significant share trading activity (e.g. regularly trade in shares and securities or in futures and options) during the year, your income from such activity is classified as Business Income. The trader can claim expenses incurred for earning such business income and needs to file ITR-3. The income from such Business and Profession is chargeable at slab rates as per the Income Tax Act.

Treatment as Capital Gains

When the trader has done trading in listed shares and securities with the intention to invest, the income from sale of shares is classified as Capital Gains. Long Term Capital Gain is chargeable to tax at 10% (exempt up to Rs. 1 lac). Short Term Capital Gain is taxed at 15%. Brokerage Expense can be claimed against the income and the taxpayer needs to file ITR-2.

The treatment of sale of listed shares and securities would affect the tax liability of the trader. Since there were no clear guidelines to classify such income, there were disputes and litigations between the trader and the income tax department. To resolve this issue, CBDT issued a clarification to define the guidelines based on which income from the sale of listed shares and securities can be classified.

New Clarification from CBDT

The criteria to differentiate between shares held as an investment or as a stock in trade. There are still disputes and litigations since the taxpayer finds it difficult to prove the intention of acquiring shares and securities. Since there is no universal principle to determine the nature of income, CBDT issued a circular on 29th Feb, 2016. The circular has laid down the following guidelines that the Assessing Officer must consider to treat the sale of listed shares and securities as Capital Gains or Business Income.

The only condition is to follow the same method continuously in subsequent years as well, unless there is a major change in the circumstances. This choice is applicable to Listed Shares and Securities only.

  • If the taxpayer opts to treat listed shares and securities as stock-in-trade, the income arising from the transfer of such shares/securities will be treated as Business Income.
  • If the taxpayer opts to treat listed shares and securities as an investment, the income arising from the transfer of such shares/securities will be treated as Capital Gains.
  • If the genuineness of the transaction is questionable, the above option is not available to the taxpayer and the Assessing Officer should consider the treatment of income after considering the provisions of the Income Tax Act.

Frequently Asked Questions

1. 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.

2. 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 as a Business Income.