How to treat sale of shares: as Capital gain or Business Income

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By Hiral Vakil on March 8, 2019

Over the years, the treatment on sale of shares has been the matter of dispute. Whether to treat such gain/loss from sale of shares as Capital Gain or Business Income. What should be classified as significant share trading activity has lead to uncertainty and a lot of litigation. Because taxpayers had an option to choose between two options, they received notices from department and ended up explaining why they chose a particular option.

Tax Treatment:

Lets try and understand how it works. In case you have 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 activity. And you are required to file ITR-4 and your income from shares will be shown under the head “Income from business and profession”. The benefit of treating it as business and profession income is that you are allowed to claim expenses incurred for earning such business income. The income from such Business and Profession is chargeable at normal Slab Rate.

If taxpayer treats income from sale of shares as Capital Gains, any long term capital gain from shares and securities (which are applicable to Securities Transaction Tax) are exempt from tax and no expenses are deductible. In case of short term capital gain it is taxed at 15%. The taxpayer is required to file ITR-2.

New Clarification from CBDT

A circular has been issued by the CBDT on 29th Feb, 2016 which offers taxpayers a choice on how they want to treat such 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 only.

  • If taxpayer opts to treat listed shares and securities as stock-in-trade, the income arising from transfer of such shares/securities will be treated as business income. Irrespective of the period of holding.
  • In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if taxpayer opts to treat the income arising from the transfer as capital gain. However, this stand once taken by the taxpayer in a particular assessment year, shall remain applicable in subsequent assessment year also.
  • In all other cases, the nature of transaction shall continue to be decided on the concept of ‘significant trading activity’ and the intention of the taxpayer to hold shares as ‘stock’ or as ‘investment’.

This will help prevent unnecessary questioning from Assessing Officers regarding the classification of income. Hence, taxpayer can file Income Tax Return according to his choice and follow the same over the upcoming years.

Frequently Asked Questions

1. How to treat income from F&O trading

Income from trading in Futures and Options is considered to be income from Business and Profession. So any trader who trades in F&O has to file ITR-4 with details of profit and loss account and balance sheet. Please keep in mind that F&O trading income is not considered speculative income. It is to be treated as income from normal business.