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

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Hiral Vakil

Business and Profession Income
Capital Gains
Income Heads
Last updated on October 14th, 2021

There has always been confusion around the treatment of income from the sale of shares. 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 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. Under this article, understand when to treat the sale of shares as Capital Gains or Business Income.

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Tax on Income from Sale of Shares

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 the case of listed shares and securities.

Treat sale of shares as Business Income

When the trader has done significant share trading activity (for example 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 Business and Profession is chargeable at slab rates as per the Income Tax Act.

Treat sale of shares as Capital Gains

When the trader has done trading in listed shares and securities with the intention to invest and hold, the income from sale of such 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 tax treatment of income from the 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.

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New Clarification from CBDT

The clarification was to determine 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 tax income from 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:

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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 as a Business Income.

I have invested only in Intraday and F&O, can I claim this as capital gains?

No. Considering the turnover for these investments is always a short period the intention of this assumption to be for non-investment purposes. Therefore, you would need to file ITR-3 for these trading activities.

What if the intent of the investment in unclear?

If the genuineness of the transaction is questionable, the option to choose is not available to the taxpayer. And therefore, the Assessing Officer will consider the treatment of income after considering the provisions of the Income Tax Act.

Got Questions? Ask Away!

  1. Hi @Saurabh_Ghosh

    1. The treatment of income from the trading activity will remain the same irrespective of company account or individual account. They are classified under the same income heads such as capital gains or business/profession and taxes are calculated accordingly.
      If your turnover is less INR 400 cr then the Income Tax slab rate is 25% for companies. For Individuals, the income tax liability is taxed at the applicable slab rates.
    1. To claim GST ITC, you need to have a GST registration and need to file a GST return. However, when filing your Income Tax Return, you can claim expenses directly related to your trading activity like electricity bills, internet expenses, etc.
      Keep in mind, if you are claiming GST ITC you cannot claim the GST amount in your expense.
      For eg: if the electricity bill is INR 1180 (180 being GST), and you are claiming the ITC on INR 180, you claim only INR 1000 as an expense when filing your ITR. In case you do not have GST registration, you can claim the total of INR 1180 when filing the ITR.
  2. @Saurabh_Ghosh,

    The GST Act specifically excludes Securities from the definition of Goods. So there is no requirement for traders to have GST registration.
    The GST paid on trading expenses such as brokerage, transaction costs, turnover fees, etc can still be claimed as an expense when filing the ITR.

  3. @Saurabh_Ghosh

    Since GST ITC claimed can only be used when you have GST liability. So it might make sense for a trader to claim ITC along with other expenses when filing the ITR.

    However, if you have GST payable then you can claim the ITC credit against that liability.

  4. @Saurabh_Ghosh,

    Right.
    Also, since Capital Market traders are not required to have GST registration.

  5. Hi @Saurabh_Ghosh,

    Unlike, F&O and intraday trading which are classified as business activity for income tax purposes, you cannot claim expenses like brokerage, internet expenses, legal and professional fees, etc for short-term and long-term capital gains. But an investor can claim, any transfer expenses except STT like brokerage, stamp duty, etc for capital gains, when filing ITR.

    However, the Income Tax Act has defined the particular sections under which exemptions can be claimed on capital gains earned. The intention of the exemption is to allow the taxpayer to invest in a new Capital Asset within a specified time limit without any tax burden.

  6. @Saurabh_Ghosh,

    There has always been this question and a debate around the treatment of gains from equity shares as business income or capital gains.
    The answer is derived from the taxpayer’s intent of the transaction. Here’s an article discussing when to treat the sale of shares as Capital Gains or Business Income

  7. Hi @Saurabh_Ghosh

    As per the clarification issued by CBDT, it is at the discretion of the assessee to treat Equity share trading as Business Income or Capital Gains.
    The only condition is to follow the same method continuously in subsequent years as well. The taxpayer shall not be allowed to adopt a contrary approach in subsequent years.

    After filing of ITR, you just need to wait for IT Department to process your ITR. You don’t need to give any confirmation letters or documents. However, if the IT Department asks for any clarifications, in that case, you need to submit a response by mentioning your intent and reasoning for the treatment.

    Hope this helps :slightly_smiling_face:

  8. Hi @Tamil_143

    You can claim all the expenses that are directly related to trading. So if these expenses are incurred while doing trading activities you can claim the same.
    So if you are working/trading from home and incurred such expenses you can proportionately claim the expenses. However, the onus is on you to prove that the expenses were incurred for the business/trading when asked by IT Department.

    You can refer to the below article for a detailed list of expenses you can claim.

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