Long Term Capital Gain Tax on Shares – Equity Shares & Equity Mutual Funds

Up to FY 2018-19, Long Term Capital Gain (LTCG) on the sale of shares and securities on which Securities Transaction Tax (STT) is paid was exempt under Sec 10(38) of the Income Tax Act. However, under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A was introduced to levy 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds and units of business trust in excess of Rs. 1 lac for a financial year. Sec 112A was applicable from FY 2018-19 (AY 2019-20) onwards.

What is Long Term Capital Gain?

The profit or loss on the sale of a capital asset held for more than the specified holding period is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).

Based on the period of holding, here is a summary of Capital Gain on the sale of Capital Assets. Eg: If the listed equity share of a domestic company is sold after 12 months of purchase, the profit or loss is Long Term Capital Gain or Long Term Capital Loss.

Capital Asset Period of Holding
Equity Shares of Domestic Company listed on a recognized stock exchange 12 months
Equity Shares of Domestic Company not listed on a recognized stock exchange 24 months
Equity Shares of Foreign Company whether listed or not 24 months
Equity-oriented Mutual Funds or ETFs (Exchange Traded Funds) 12 months
Debt-oriented Mutual Funds or ETFs (Exchange Traded Funds) 36 months
Debentures or Bonds listed on a recognized stock exchange 12 months
Debentures or Bonds not listed on a recognized stock exchange 36 months
Immovable Property such as land, building or house property 24 months
Movable Property such as jewelry, car, painting, work of art 36 months
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Grandfathering Rule

Traders who would have invested into equity markets with a view to earning tax-free income in the form of Long Term Capital Gains would now have to pay tax as per the new rule. The announcement of 10% LTCG was made on 1st February 2018. Thus, an investor who was holding an investment in equity shares and equity mutual funds as on 31/01/2018, should not be required to pay tax on entire capital gains. Hence, to ensure that LTCG earned up to 31st January 2018 should not be taxed, the Capital Gains earned up to 31/01/2018 would be grandfathered using a formula.

For equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition should be calculated as follows:

  1. Lower of Fair Market Value as on 31/01/2018 or the Actual Selling Price
  2. Step 1 or Actual Cost Price whichever is higher

Section 112A – Calculation of Long Term Capital Gain Tax on Shares

The budget was announced on 01/02/2018 and so the provisions for tax on LTCG are different based on the date of purchase.

Particulars

Up to 31/01/18 01/02/18 Onwards
Date of Purchase Shares bought on or before 31/01/2018 Shares bought on or after 01/02/2018
STCG (sold within 365 days) STCG @ 15% STCG @ 15%
LTCG (sold after 365 days) SP = price at which shares are sold SP = price at which shares are sold
CP = Follow these steps:

Higher of the following:

(i) Price as on 31.01.18 or Actual Selling Price whichever is less

(ii) Actual Cost
CP = price at which shares are bought
LTCG = SP – CP LTCG = SP – CP
Tax = 10% (LTCG – Rs.1,00,000) Tax = 10% (LTCG – Rs.1,00,000)

Examples for Grandfathering Rule

  Case I Case II
Purchase Date  1st Jan 2018 10th Feb 2018
Purchase Value 2,00,000 2,00,000
Sell Date  10th Jan 2020 10th Jan 2020
Sale Value 3,50,000 3,50,000
Grandfathering rule applicable Yes No
Actual Cost * 2,40,000 ** 2,00,000
LTCG
= Sale Value – Actual Cost
1,10,000 1,50,000
Exempt Exempt up to INR 1 Lakh Exempt up to INR 1 Lakh
Tax Liability 1,10,000 – 1,00,000= 10,000 * 10%
= 1,000
1,50,000 – 1,00,000= 50,000 * 10%
= 5,000

*Note: Actual Cost is the Cost of Acquisition to calculate capital gains 

**Calculation of Actual Cost using FMV (Case I)

  Condition Amount (INR) Qualifying Amount
Step 1 Lower of:

Actual Selling Price
or
FMV on 31st Jan 2018
Lower of:

3,50,000 or 2,40,000  

2,40,000
Step 2 Higher of:

Value in Step 1
or
Purchase Value
Higher of:

2,40,000 or 2,00,000

2,40,000
  Actual Cost   2,40,000

Income Tax on Long Term Capital Gain

The tax rate of a capital asset is determined on the basis of the nature of capital gain i.e. LTCG or STCG.

Capital Asset STT LTCG STCG
Listed equity share of a domestic company Yes 10% in excess of INR 1 lac u/s 112A 15% u/s 111A
Listed equity share of a domestic company No 10% without indexation slab rate
Unlisted equity share of a domestic company No 20% with indexation slab rate
Listed equity share of a foreign company Yes / No 10% without indexation slab rate
Unlisted equity share of a foreign company Yes / No 20% with indexation slab rate
Equity Mutual Fund or ETF Yes 10% in excess of INR 1 lac u/s 112A 15% u/s 111A
Debt Mutual Fund or ETF No 20% with indexation slab rate
Listed Debentures or Bonds No 10% without indexation slab rate
Unlisted Debentures or Bonds No 20% without indexation slab rate
Land, Building, House Property, Car, Jewellery, Paintings, Art of Work NA 20% with indexation slab rate

Long Term Capital Gain Tax on Shares – Equity Shares and Equity Mutual Funds

Date of Purchase Date of Sale Tax Treatment
On or before 31/01/2018 On or before 31/01/2018 Exempt u/s 10(38)
On or before 31/01/2018 Between 31/01/2018 and 01/04/2018 Exempt u/s 10(38)
On or before 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
* LTCG up to 31/01/2018 exempt
* LTCG after 31/01/2018 – Tax at 10% in excess of Rs. 1 lac
On or after 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
Tax at 10% in excess of Rs. 1 lac
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Exemption from LTCG

The taxpayer having income from the sale of a long term capital asset can claim an exemption under Section 54 to 54GB of the Income Tax Act if he/she fulfills the conditions.

A taxpayer can claim the exemption by reinvesting the proceeds from the sale into a specified capital asset. Such exemption would lower the capital gains and save taxes on the same. However, the taxpayer must hold the new asset for the specified period as per the relevant section. However, if he/she sells the asset before the specified time period, he/she must report it as an income in the relevant financial year and pay tax at the applicable rate.

The taxpayer has an option to open an account under the Capital Gains Account Scheme and park the sale proceeds in it till the time they invest in the specified asset to claim the Capital Gains exemption.

FAQs

Is LTCG taxable now?

Yes. Under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A was introduced to levy 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds and units of business trust in excess of Rs. 1 lac for a financial year. Sec 112A was applicable to FY 2018-19 (AY 2019-20) onwards.

What rate is LTCG taxable at?

LTCG is taxable at a flat 10% on income that is exceeding Rs. 1lk. Therefore, it is exempt up to Rs. 1lk.

Is STCG exempt?

No. Hence, STCG is taxable at a flat rate of 15% without any exemption.

ESOPs Taxation in the hands of an Employee

What are ESOPs?

ESOP (Employee Stock Ownership Plan) is an Employee Benefit Plan provided by the company/employer. ESOP allows an employee to buy a stock of their company at a below-market price. It also offers ownership interest to employees. ESOPs can be issued in as Direct Stock, Profit-Sharing Plans or Bonus. ESOPs is the three-step process:

  1. The company/employer decides to issue shares,
  2. The employee decides to exercise/buy issued shares,
  3. The employee decides to sell shares.

Before granting ESOPs to employees, an employer needs to follow Rules and Regulations relating to ESOPs are as per the Companies Act 2013.

An employee needs to understand ESOP taxation before exercising the option. ESOPs are taxed twice in the hands of an employee:

  • At the time of exercising right i.e purchasing the shares,
  • At the time of selling the shares.

Hence it is important to understand the tax implications of ESOPs before filing ITR of that financial year.

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Prerequisites of ESOPs

Following are the prerequisite of ESOP:

  • An employer has the right to decide who can avail ESOP,
  • An employee needs to go through the pre-defined vesting period ie., an employee has to work for the company until a part or the entire stock options could be exercised,
  • The company/employer grants ESOPs to its employees for a Specified Number of Shares of the company at a Pre-determined Price after the option period (a certain number of years).  

Employer: Contributions to the ESOP are tax-deductible as they are made to repay the loan amount. Both principal and interest are tax-deductible. But once ESOPs are executed, the employer/company needs a proper administration including the third-party administration, trustee, valuation, legal costs. Hence it will be the burden of ongoing cost for a company/employer.

Benefits of ESOPs

The purpose of ESOP is to give benefit to both the Employer/Company and Employee. Startup eco-systems widely use ESOPs.

Following are the benefits of ESOP to the Employer/Company:

  • For attracting and retaining high-quality employees,
  • Making employees stakeholders of the company,
  • The company can avoid cash compensation as a reward, thus saving on immediate cash outflow.

Following are the benefits of ESOP to an Employee:

  • The benefit of acquiring the shares of the company at the nominal rate, and sell them (after a defined tenure set by his employer) and make a profit,
  • Compensation of hard work in the form of ownership interest in the company.

Tax Implications of ESOPs

It is important to understand the tax implications of ESOPs in India before the employer considers implementing an ESOP scheme.

Employee: ESOPs are taxed at the following two times:

  1. At the time of Exercising ESOP: It is considered as a Prerequisite under Salary Income Head. Hence when an employee exercises his option, the difference between Fair Market Value (FMV) as on date of exercise and the exercise price is taxable as a prerequisite.
  2. At the time of Selling: It is considered as Capital Gain. An employee might sell his/her shares after buying them. In case he/she sells these shares at a price higher than FMV on the exercise date, he/she would be liable for capital gains tax.

ESOPs Taxation on Purchase of Shares

When an employee buys the shares of a company, it is treated as Perquisite. The shares are credited to a Demat Account of an employee once shares are purchased. Following are the tax implications when you buy the shares:

  • Perquisite is the difference between the Fair Market Value (FMV) and exercised price/buy price.
  • Perquisite is a part of taxable salary and taxed under the Salary Income Head.
  • It will be taxed in the year in which ESOP is exercised by an employee. An employer/company will deduct TDS on the same.
  • Form 16 issued by an employer/company will reflect the prerequisite amount and TDS on the same.

Example: Neha works in a startup in India. During FY 2019-20 her company announces ESOPs for all the current employees. Neha decides to exercise her option to buy the shares of the company. Under this scheme, Neha received 2000 shares at INR. 20 per share. The FMV of the shares is INR. 65 per share. Following are the tax implication on the above transaction:

Purchase Price: INR. 20

FMV: INR. 65

Perquisite: INR 45 (65-20)

Taxable Perquisite Amount: INR. 90,000 (2000X65)

Now the company will treat INR. 90,000 as a taxable salary of Neha and will deduct TDS on the same. While filing her ITR Neha needs to show INR. 90,000 as Perquisites under Salary Income Head.

In Budget 2020 FM announced to defer TDS or tax payment on shares allotted by the startups to their employees under ESOPs. This means an employee of startup who are exercising their ESOPs may have to pay tax at a later date. Employees will be paying tax at the time of exit from the company or selling the shares or for a period of 5 years whichever is earlier.
Tip
In Budget 2020 FM announced to defer TDS or tax payment on shares allotted by the startups to their employees under ESOPs. This means an employee of startup who are exercising their ESOPs may have to pay tax at a later date. Employees will be paying tax at the time of exit from the company or selling the shares or for a period of 5 years whichever is earlier.

ESOP Taxation on Sale of Shares

When an employee sells the shares, it is treated as Capital Gains. Following factors are considered for calculating Capital Gain Income:

  1. The Period of Holding: In case of ESOPs period of holding is from the exercise date up to the date of sale. Short Term or Long Term Capital Gain is determined by taking into account the period of holding.
  2. Taxable Amount: The difference between Sale Price and FMV on the exercise date is taxed as Capital Gains.

The tax treatment is different depending on whether the company is listed on the stock exchange or not.

Tax Treatment on sale of Listed Shares

  • Long Term Capital Gains(LTCG): Taxed at a special rate of 10%. (Shares held for more than 12 months).
  • Short Term Capital Gains(STCG): Taxed at a special rate of 15%.(Shares held for less than 12 months).

Tax Treatment on Sale of Unlisted Shares

  • Long Term Capital Gains(LTCG): Taxed at a special rate of 20% with Indexation (Shares held for more than 24 months).
  • Short Term Capital Gains(STCG): Taxed at applicable slab rate (Shares held for less than 24 months).

Example: Arya is a salaried individual. She works for a startup(listed Company) She received 2000 shares from her company under the ESOPs scheme in FY 2018-19. And she sales the shares on 20/01/2020. Following are the information to keep in mind:

Date of Purchasing Shares/Exercising the ESOPs: 25/02/2019

FMV as on 25/02/2019: INR. 50

Sales Price as on 20/01/2020: INR. 75

In the above case, the following will be the taxability:

Period Of Holding: 25/02/2019 to 20/01/2020 i.e, less than 12 months (Listed Company). Hence there will be Short Term Capital Gains.

Taxable Amount: INR. 50,000 [2000X25(75-50)]

Tax Rate: 15%. Since this is STCG from shares of Listed Company it is taxable at a special rate of 15%.

Tax Amount: INR. 7,500 (50000 X15/100)

FAQs

Under which head of Income-tax is ESOP taxable and which ITR is to be filed?

-When an employee buys the shares of a company, it is treated as Perquisite. And thus taxable under the head Salary. In this case, the taxpayer is required to file ITR-1.
-When an employee sells the shares, it is treated as Capital Gains and thus taxable under Capital Gain head. In this case, the taxpayer is required to file ITR-2.

How do I report employee stock options on tax return?

Since you’ll have to exercise your option through your employer, your employer will usually report the amount of your income as ordinary wages or salary and the income will be included when you file your tax return on Income Tax Portal.

What happens when you leave an ESOP?

If you quit or are laid off, the ESOP distributions are deferred for six years . Once those six years pass, you may receive the value of your ESOP shares in either one lump sum, or in basically equal payments made over five years. 

Set Off and Carry Forward of Losses under Income Tax Act

Set-Off Losses under Income Tax means adjusting the loss against the taxable income earned; after that, the amount of loss remaining can be carried forward to future years. Therefore, the carry forward of losses can be set off against future incomes. The Income Tax Act has, however, specified rules to set off and carry forward of losses under each head of income. The taxpayer cannot carry forward losses to future years if the income tax return for the year in which loss is incurred is not filed on the Income Tax Website within the due date as per Sec 139(1). However, loss under the head Income from House Property can be carried forward even if the return is filed after the due date.

Set Off Losses

Intra-Head Set Off

A taxpayer who has incurred losses during any year from a particular income head is allowed to adjust such losses against income from any other source falling under the same income head. Hence, the adjusting of loss from a source under a particular income head against income from any other source under the same income head is called Intra Head adjustment.

Restrictions to keep in mind while making Inter Head Adjustment of Loss

  • Loss from speculative business cannot be set off against any income other than
    income from speculative business. However, non-speculative business loss can be
    set off against income from speculative business.
  • Long-term capital loss cannot be set off against any income other than income
    from long-term capital gain. However, short-term capital loss can be set off
    against long-term or short-term capital gain.
  • No loss can be set off against income from winnings from lotteries, crossword
    puzzles, race including horse race, card game, and any other game of any sort or
    from gambling or betting of any form or nature.
  • Loss from the business of owning and maintaining race horses cannot be set off
    against any income other than income from the business of owning and
    maintaining race horses.
  • Loss from business specified under section 35AD cannot be set off against any
    other income except income from specified business (section 35AD is applicable
    in respect of certain specified businesses like setting up a cold chain facility,
    setting up and operating warehousing facility for storage of agricultural produce,
    developing and building a housing projects, etc.).

Inter-Head Set Off

Inter Head adjustments are made post Intra Head adjustments. If a taxpayer has incurred loss in any year under one head of income and is also having income from another income head, then he/she can adjust the loss from one income head against the other income head. This is called Inter Head adjustment.

Restrictions to be kept in mind while making Inter Head Adjustment of Loss

  • Before making inter-head adjustment, the taxpayer has to first make intra-head
    adjustment.
  • Loss from speculative business cannot be set off against any other income.
    However, non-speculative business loss can be set off against income from
    speculative business.
  • Loss under head “Capital gains” cannot be set off against income under other
    heads of income.
  • No loss can be set off against income from winnings from lotteries, crossword
    puzzles, race including horse race, card game, and any other game of any sort or
    from gambling or betting of any form or nature.
  • Loss from the business of owning and maintaining race horses cannot be set off
    against any other income.
  • Loss from business specified under section 35AD cannot be set off against any
    other income (section 35AD is applicable in respect of certain specified
    businesses like setting up a cold chain facility, setting up and operating
    warehousing facility for storage of agricultural produce, developing and building
    housing projects, etc.)
  • Loss from business and profession cannot be set off against income chargeable to
    tax under the head “Salaries”.
  • With effect from the assessment year 2018-19, loss under the head “house
    property” shall be allowed to be set-off against any other head of income only to
    the extent of Rs. 2,00,000 for any assessment year.
  • However, unabsorbed loss shall be allowed to be carried forward for set-off in
    subsequent years as per the existing provisions of section 71B. (Provisions
    relating to carry forward of loss from house property is discussed later.)

For Example

Non-Speculative Business Loss: INR 5,00,000
Speculative Business Income: INR 1,00,000
House Property Income: INR 2,50,000

Solution

Non-Speculative Business Loss should be set off in the following order:

  1. Speculative Business Income (Intra-head set off) – INR 1,00,000
  2. House Property Income (Inter-head set off) – INR 2,50,000
  3. Carry Forward Loss to future years – INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)

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Carry Forward of Loss

Once the taxpayer adjusts losses using intra-head set off and inter-head set off rules, then the taxpayer can carry forward the remaining losses to future years. The carry forward loss can be adjusted against future incomes. Therefore, any Loss under any head of income except House Property Loss cannot be carried forward to future years if the ITR has not been filed within the due date as per Sec 139(1). Below is the table with rules to carry forward loss and set off against future incomes.

For Example

  • FY 2018-19 (AY 2019-20)
    Non-Speculative Business Loss: INR 5,00,000
    Speculative Business Income: INR 1,00,000
    House Property Income: INR 2,50,000
  • FY 2019-20 (AY 2020-21)
    Speculative Business Income: INR 30,000
    Non-Speculative Business Income: INR 1,40,000

Solution

  • FY 2018-19 (AY 2019-20)
    Non-Speculative Business Loss should be set off in the following order:
    1. Speculative Business Income (Intra-head set off) – INR 1,00,000
    2. House Property Income (Inter-head set off) – INR 2,50,000
    3. Carry Forward Loss to future years – INR 1,50,000 (5,00,000-1,00,000-2,50,000)
  • FY 2019-20 (AY 2020-21)
    Non-Speculative Business Loss should be set off in the following order:
    1. Carry Forward Loss – INR 1,50,000
    2. Non-Speculative Business Income – INR 1,40,000
    3. Speculative Business Income – INR 10,000

Carry Forward and Set Off of Business Loss other than Loss from Speculative Business

If loss of any business or profession, apart from that of speculative business cannot be adjusted in the year in which it is incurred, then the adjustment loss can be carried forward for making adjustment in the next year. However, such loss can only be adjusted against income charged to tax under the income from business and profession.

Taxpayer can only carry forward their loss if they have filed their return before the due date of filing the ITR u/s 139(1). Losses in this case can be carried forward for 8 years. Loss from business specified under section 35AD cannot be set off against any other
income except income from specified business.

Loss from the business of owning and maintaining race horses cannot be set off against
any income other than income from the business of owning and maintaining race horses.
Such loss can be carried forward only for a period of 4 years.

Carry Forward and Set Off of House Property Loss

Taxpayers can carry forward loss incurred under the head income from house property if they are unable to adjust these losses in the current year. Losses from this income head can only be adjusted against income from the same head, or, income from house property. These losses can be carried forward for 8 years.

Carry Forward and Set Off of Capital Loss

Losses from the income head – capital gains can only be adjusted against the income head capital gains. However, long term capital loss can be adjusted only against long term capital gains, yet, short term capital loss can be adjusted against long term capital gains as well as short term capital gains. These losses can be carried forward for 8 years.

Treatment of Loss as per New Tax Regime

With the introduction of Section 115BAC in Budget 2020, there were few changes in the treatment of losses as follows:

  1. House Property Loss: As per the new income tax regime, only current year losses from house property can be set off against income from house property and not against any other Income.

    Moreover, losses from income from house property cannot be carried forward in the new income tax regime.
  2. Setting-Off Business/Profession Loss: In the case of a business income, an individual/ HUF cannot set off the brought forward business loss or unabsorbed depreciation and cannot carry forward these B&P losses and unabsorbed depreciation if they relate to deductions/exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC.

    In simple terms, you can carry forward short-term & long-term capital losses, derivatives trading losses in the new tax regime. Since, only the losses relating to deductions & exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC cannot be set off or carried forward, for eg: House property losses, additional depreciation, etc.

    The image below gives a clear understanding of the treatment of losses in the new and old tax regime.

FAQs

I have incurred losses under equity intraday trading. Can I adjust it against F&O trading income?

Loss from equity intraday trading is a speculative business loss. Speculative loss can be set off against Speculative Profits only. Thus, it cannot be adjusted against F&O trading income. However, you can carry forward the loss for 4 years and adjust it against speculative profits in future.

I have incurred losses of Rs. 10 lacs from F&O trading. I also have an Interest Income of Rs. 2 lacs and Salary Income of Rs. 6 lacs. Can I adjust F&O trading loss with salary income and interest income?

Loss from F&O trading is a non-speculative business loss. Non-Speculative Loss can be set off against any income except Salary Income in the current year. Thus, you can adjust non-speculative loss against interest income (2 lacs) but not salary income. However, you can carry forward the remaining loss (8 lacs) for 8 years and adjust it against business & profession income (speculative and non-speculative) in future.

I have not filed Income Tax Return before the due date of filing the return. Can I file the ITR to carry forward loss to future years?

You cannot carry forward loss to future years if the income tax return for the year in which loss is incurred is not filed within the due date as per Sec 139(1). However, if you have incurred loss under head house property, you can carry forward the loss even if the return is filed after the due date.

Tax on Equity Share Trading

If you have invested in Equity trading you need to file your ITR and pay tax on this income. Trading in equity shares and stocks have become very easy due to the availability of online trading platforms. Therefore, under Income Tax, trading in equity share can be categorized into two types:

  1. Delivery Trading (Capital Gains or Non-Speculative Business Income)
  2. Intraday Trading (Speculative Business Income)

Equity Delivery Trading means buying an equity share, hence you need to take its delivery and sell it on a different trading day. The ownership of the share is then transferred to the trader and it is delivered to the trader’s Demat account. The profit or loss from equity delivery trading may be considered as Capital Gains or Non-Speculative Business Income.

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Tax Heads For Equity Share Trading

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): Any gain arising on the sale of Long Term Capital Asset is considered as LTCG. Any shares/ stocks held for more than 12 months are considered Long Term Capital Assets.
  • Short Term Capital Gain (STCG): Any gain arising on the sale of Short Term Capital Asset is considered as Short Term Capital Gain. Any shares/ stocks held for less than 12 months are considered as Short Term Capital Assets.


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 as 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

The rate of Income Tax on trading in equity share depends on the income head. If it is considered as 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.

Treated as Capital Gains Income

  Type of Security Period of Holding LTCG Short Term Capital Gain
Domestic Company Listed Equity Share (STT paid) 12 months 10% in excess of Rs. 1,00,000 under Sec 112A 15% under Sec 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

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

  • ITR Form: Trader should file ITR-2 on Income Tax Website if income is treated as Capital Gains. However, if income is considered as Non-Speculative Business Income, trader should file ITR-3 and prepare financial statements.
  • Due Date
    • Up to FY 2019-20
      31st July – for traders to whom Tax Audit is not applicable
      30th September – for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July – for traders to whom Tax Audit is not applicable
      31st October – for traders to whom Tax Audit is applicable
FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 10th January 2021. If tax audit is applicable the due date to submit the audit report is 15th January 2021 and ITR filing when tax audit is applicable is 15th February 2021
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FY 2019-20: Due Date to file Income Tax Return in case tax audit is not applicable is 10th January 2021. If tax audit is applicable the due date to submit the audit report is 15th January 2021 and ITR filing when tax audit is applicable is 15th February 2021
  • Tax Audit: If the income is treated as Business Income, the trader should check if 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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Carry Forward Loss for Equity Trading

  • Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and LTCG. The remaining loss can be carried forward for 8 years and set off against STCG and LTCG only.
  • The long term losses can be set off against LTCG only. The remaining loss can be carried forward for 8 years and set off against LTCG only.

Let’s take an example to understand it better

For example, Mr. Ajay is a salaried individual and has done some share trading in the FY 2019-20. His total salary income for a year is INR 8,70,000. And has a Short Term Capital Loss of INR 30000 and LTCG of INR 2,50,000.

Now in the above example, Ajay needs to file ITR-2 for FY 2019-19. And his total income and tax liability will be as follows:

Particulars Amount Amount
Salary Income   870000
Capital Gains    
Short Term Capital Loss 30000  
LTCG 250000  
Less: Exemption u/s 112A (100000)  
Taxable LTCG 150000  
Total Capital Gains after set-off of losses (taxed @10%)   120000
Total Taxable Income   990000
Tax at slab rate 86500  
Tax at special rate 12000  
Total Income Tax   98500
Health & Education Cess @4%   3940
Total Tax Liability   102440

FAQs

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

Since you have only capital gains income you need to file ITR-2.

What is Tax Loss Harvesting?

It means to realize(by selling your loss-making investments) your unrealized losses before the end of the financial year in order to reduce your tax liability.

Can I open multiple trading accounts?

Yes. An Individual can have as many trading accounts as they want. You can also link the same bank account with different trading accounts. However, you can’t have multiple accounts linked with the same broker.

Documents required for Income Tax Return filing in India

Income Tax Return or ITR forms are different on the basis of income sources. Specific documents of the taxpayer are required to file ITR.
Other documents required may differ based on the income situation. These documents are not required to be submitted to the IT Department while filing the Income Tax Return. Since ITR is an annexure-less form. However, if a taxpayer receives a notice from the ITD such documents may be required to be submitted.

List of Basic Documents required for filing the Income Tax Return – ITR

Following are the basic documents mandatory to file an ITR in India:

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Documents Required for Different Income Heads

Salary Income/ Pension Income

Following documents are required from taxpayer having salary/ pension income:

  • Form 16
  • Salary Slips (If form 16 is not available)
  • Pension Statement / Passbook

House Property Income

The following documents are required to determine when rental income is earned by a taxpayer or there is a home loan. These documents will help determine the correct deduction and Income from House Property.

  • Property Address
  • Rent Agreement
  • Co-ownership details in case of co-owned property
  • Municipal Tax Receipts
  • Form 16A if TDS is deducted on rental income
  • Home loan repayment certificate/ Interest Certificate from the bank
  • Pre-Construction Interest Details
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Capital Gains Income

When an individual sells any movable or immovable property a Capital Gain arises. It also includes the sale of shares and securities.

  • Sales and Purchase deed, stamp duty valuation in case of sale of the land/ building
  • Details of Improvement cost.
  • Details of expenses incurred on the transfer of capital assets
  • Proof of cost of the asset, cost of improvement and sales receipts in case of movable assets
  • Details of investment made to claim exemptions
  • Capital Gains Deposit Account details if any
  • For shares & securities- Trading statement/ Stock Ledger/ Contact Notes
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Business and Professional Income

Following are the documents required to file the return if you are earning any income from Business and Profession during the year:

  • Balance Sheet and Profit & Loss Statement
  • Bank Account Statement/ Passbook
  • Supporting documents for expenses incurred
  • Cash Register
  • Any other documents required to maintain the books of accounts of the business & profession
  • Audit Report in case the profit from the business is less than 8% of the Total Turnover.
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Income from Other Source

Any income which does not fall under any of the above heads of income, in that case, it will come under the head Income From Other Source.

  • Total Interest income earned from savings/ current account
  • Interest certificate from deposits/ Bonds/ NSC
  • PPF Account Statement/ Passbook
  • Dividend Warrants/ counterfoils
  • Proof of details of receipt of any other incomes
  • Rent Agreement in case of let out machinery
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Documents Required for Tax Saving Investments (Section 80)

One can invest in some of the tax-saving investment schemes to save taxes and claim a tax deduction. Following are the documents that come in handy for tax saving investment made:

  • ELSS/ ULIP/ NSC investment details
  • PPF account passbook/ statement
  • Life/Medical Insurance Receipts
  • Details of Tax Saving FD
  • National Pension Scheme investment details
  • Senior Citizen Saving scheme investment details
  • Donation Receipts
  • Children Tuition Fees Paid Receipts
  • Repayment Certificate for home loan/ education loan
  • Certificate from specified medical authorities in case of disability
  • Receipts/proof of any other tax saving investment/contributions

Documents Required for Foreign Income and Foreign Investments

  • Details of foreign income and taxes deducted on the same
  • Details of Assets held outside India including the foreign bank accounts.
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FAQs

What is the list of documents required for filing basic ITR?

The basic list of documents required to file ITR is as follows:
PAN (Permanent Account Number)   
Aadhar Number
Form 26AS
Bank Account Details
Challan of any advance tax or self-assessment tax (if paid during the year)
Details of the original return (if filing a revised return)

What is Form 16?

It is a certificate of TDS on salary. Every employer issues Form 16 to an employee after the end of a Financial year. Employees usually receive Form 16 before 31st May of the next financial year. It contains details of income earned and the taxes deducted. Furthermore, Form 16 is divided into two parts: Form 16 Part A and Form 16 Part B.

What is Form 26AS?

It is a consolidated Tax Credit Statement which provides the following details to a taxpayer:

1. Details of taxes deducted from the taxpayer’s income.
​2. Details of taxes collected from taxpayer’s payments.
3. Advance Taxes, Self Assessment Taxes, and Regular Assessment
4. Taxes paid by the taxpayers.
5. Details of the refund received during the year.
6. Details of any high-value transactions (for eg. Shares, Mutual Funds, etc.).

Exempt Income under Income Tax

What is Exempt Income?

There is a common myth that if you are earning any income then you will have to pay tax on it. The more you earn, the more would be the tax liability. But it is not true. There exist certain types of income for which your tax liability is zero. Such incomes are known as Exempt Income u/s 10 of the Income Tax Act. Such income is different from Deduction under Income Tax. While exempted incomes are excluded from the total taxable income of a taxpayer, deductions are availed on taxable incomes.

Types of Exempt Income

  • Agriculture Income:
    • Any income earned by the taxpayer from agriculture activity is exempt from tax. However, the agriculture income must be included in the total income for the calculation of the applicable slab rate. Thus, it is indirectly taxed by taxing the non-agriculture income at higher tax slab rates.
  • Gift Received from Relatives: 
    • Any gift received by an individual from relatives is exempt from tax. Gift received on the marriage or by way of will is exempt. Monetary gift received from non-relative up to Rs. 50,000 is also exempt from tax.
  • Long Term Capital Gain: 
    • From FY 2018-19, LTCG up to INR 1,00,000 is exempt from tax. Earlier, the long-term capital gain on the sale of stocks and equity mutual funds was exempt from tax under section 10(38). This section is not applicable to debt mutual funds.
  • Interest on Securities: 
    • Income from securities in the form of interest, premium, etc from government-issued bonds, certificates, deposits are tax-free. For eg: Bonds issued by NHAI, IRFC, REC, etc.
  • Profit Share from Partnership Firm: 
    • Any share of profit from a partnership firm or LLP is exempt from tax in the hands of the partner. However, interest on capital and remuneration is taxable.
  • Provident Fund: 
    • Payment received from PF is exempt under Section 10. However, PF withdrawal is taxable for less than 5 years of service. In the case of EPF, the taxpayer can withdraw the balance subject to a few conditions.
  • Gratuity: 
    • Gratuity received by a government employee is totally exempt from tax. Whereas in the case of employees of a private organisation, it is exempt subject to certain conditions.
  • Commuted Pension: 
    • Commuted pension received by the government employee is fully exempt. However, for other employees, it is exempt subject to certain conditions.

Other Exempt Income

  • Life Insurance: 
    • The payment proceeds of a life insurance policy are exempt under section 10(10D). This includes a maturity amount as well as death claims.
  • Receipts From HUF: 
    • Any amount received out of family income is tax-free in the hands of a member. For example, a family owns an impartible estate. An amount received out of an income of family estate by the member of such HUF is tax-free in the hands of the member.
  • Scholarship and awards: 
    • Any type of scholarship or award granted to any deserving student to meet the cost of education is exempt from tax. The entire sum of money received as a scholarship gets that tax exemption.
  • Amount Received under VRS (Voluntary Retirement Service): 
    • When an employee receives an amount under the scheme of voluntary retirement as per Rule 2BA of the Income Tax Rules gets a tax exemption up to Rs. 5,00,000 from the amount received as voluntary retirement.
  • Allowance for Foreign Services: 
    • Any Indian resident rendering service outside India and receiving any allowances or prerequisite outside the country are exempt from income tax u/s 10(7) of the Act. Due to this section, any perquisite and allowances received by government servant while working outside India are tax-free.

Reporting Exempt Income in ITR

Taxpayers can declare their exempt income while filing for income tax every financial year. The taxpayer should report exempt income under the section ‘Exempt Income’ in the tab ‘Computation of Income and Tax’ of ITR-1 & ITR-4. You can add a row, select the nature of income from the dropdown list, add description and amount.

The taxpayer should report exempt income under Schedule EI i.e. Schedule Exempt Income of ITR-2 & ITR-3. The taxpayer should report the details under the specific row for Interest Income, Agriculture Income, Income not chargeable as per DTAA, other exempt income with a relevant option from the dropdown. The Exempt Income is separately reported and not added to the Gross Total Income.

Disclosure of Exempt Income for Salary and Non-Salary Allowances

For salary account holders, you need to make a disclosure of exempt income under Schedule S – Details of Income from Salary’ while filing income tax as per ITR-2. The various exemptions are:

  1. HRA – House Rent Allowance
  2. LTA – Leave Travel Allowance
  3. Leave Encashment Amount
  4. Pension Amount
  5. Gratuity Amount
  6. Any form of perquisites received
  7. Amount received from a Voluntary Retirement Scheme

For self-employed or non-salary account holders, there are certain incomes categorized under exempt income. They include dividends, agricultural income, interest on funds, capital gains which have to be disclosed under Schedule EI while filing income tax as per ITR-1.

FAQs

Is dividend income exempt from tax?

Earlier, the Dividend received from a Domestic Company was exempt from tax under Section 10(38). However, under Budget 2020, DDT was abolished thus making dividend a taxable income for a taxpayer. If dividend income exceeds INR 5,000, the company is liable to deduct TDS u/s 194 for dividend on equity shares and u/s 194K for dividend on equity mutual funds.

Is it mandatory to show exempt income in ITR?

Yes. You have to mention all your incomes while filing Income Tax Return, be it taxable or exempt. There is a separate tab to show exempt income in ITR. You need to mention the nature of exempt income and the amount of income received during the year.

Which ITR should I file if I have earned exempt income during a year?

You can file ITR-1 if you have earned only exempt income during a year. However, if you have earned agriculture income exceeding Rs. 5,000 then you should file ITR-2.

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

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:

  • 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.
  • But, 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.
  • However, 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.
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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.

Capital Gains and Taxes : A Complete Guide

What is Capital Gain?

Capital Gain is simply the profit or loss that arises when you transfer a Capital Asset. If you sell a Long Term Capital Asset, you will have Long Term Capital Gain and if you sell a Short Term Capital Asset, you will have a Short Term Capital Gain. If the result from sell is negative, you will have a capital loss. The Capital Gain will be chargeable to tax in the year in which the transfer of Capital assets takes place.

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What is a Capital Asset?

Capital Asset means any kind of property owned by you, whether or not connected with your business or profession. It includes movable assets, immovable assets, tangible/intangible assets, rights and choices in actions, etc.

Some of the examples of Capital Assets are House Property, land, building, goodwill, patent, trademark, rights, machinery, vehicles, jewelry, etc.

However, the following assets shall not be considered as Capital Assets:

  • ​Any stock in trade, consumables, or raw material held for the purpose of business or profession.
  • ​Any personal effects like clothes or furniture etc. Which is held for your personal use.
  • Agricultural land which is not situated within:
    • the jurisdiction of the municipality or cantonment board which has a population between 10,000 and 1,00,000.
    • 6 KMs of municipality or cantonment board which has a population between 1,00,000 and 10,00,000.
    • 8 KMs of municipality or cantonment board which has a population of more than 10,00,000.
  • Gold Bonds, Special Bearer Bonds & Gold Deposit Bonds issued by Government of India.

Meaning of Transfer

Any profit or gain that arises from the ‘transfer’ of a capital asset is a capital gain. Transfer includes:

  • Sale, exchange, relinquishment (Surrender) of the asset,
  • Extinguishment of any rights in the asset (reducing any right on asset).
  • Compulsory acquisition of an asset,
  • Conversion or treatment of any capital asset into or as stock in trade of a business
  • Maturity or redemption of zero coupon bonds
  • Any other transaction which allows to take or retain the possession of an immovable property in part performance of the contract as per sec 53A of the transfer of Property Act,
  • Any other transaction which has the effect of transferring or enabling the enjoyment of an immovable property whether by way of becoming a member, or acquiring shares in a cooperative society , company or any other association by way of any agreement or arrangement.

Note: If any capital asset is transferred by way of gift or will or inheritance, this shall not be treated as transfer. Further, if the asset transferred is not a capital asset, provisions of capital gain shall not apply.

What is Long Term and Short Term Capital Asset?

If a Capital Asset is held by the assessee for more than 36 months prior to its sale, then it is a Long Term Capital Asset. On the other hand, Short Term Capital Asset means the asset held by an assessee for not more than 36 months prior to its sale.

However, in the following cases, the assets will be considered Short Term if they are held for 12 months or less instead of 36 months:

  • ​Equity or Preference shares
  • ​Debentures or Government securities
  • Units of UTI
  • Units of the equity-oriented mutual fund
  • Zero-coupon bonds

If the above mentioned assets are held for more than 12 months, they will be considered as Long Term Capital Assets.

As per the above discussion it is clear that different assets have different periods of holding to be called short term and long term. The table given below defines period of holding for different classes of asset in order to be classified as short term or long term:

Asset Period of holding Short Term / Long Term
Immovable property < 24 months Short Term
>24 months Long Term
Listed equity shares <12 months Short Term
>12 Months Long Term
Unlisted shares <24 months Short Term
>24 months Long Term
Equity Mutual funds <12 months Short Term
>12 months Long Term
Debt mutual funds <36 months Short Term
>36 months Long Term
Other assets <36 months Short Term
>36 months Long Term

Note: Determination of period of holding is important because it impacts the method of calculating Capital Gains and also the tax rates.

How to determine the holding period if the asset was gifted?

  • In case the asset was acquired as a gift, or through a will, succession or inheritance, the period of holding by the previous owner will also be included to determine the total holding period.
  • For eg., A gifted a watch to B on 01/12/2015. This watch was acquired by A on 01/12/2013. So for B, the total period of holding the watch will be from 01/12/2013 until the sale of the watch.
  • In case of bonus shares or right shares, the period of holding will be calculated from the date they were allotted.

Capital Gain Calculator

Calculation of Capital Gains is different in case of Long Term Capital Assets and Short Term Capital Assets. Here are some of the terms you need to know:

  • Full Value of Consideration: 
    • It is the amount received or to be received by the seller when he sells (transfers) the asset to the buyer. Capital Gain will be chargeable in the year in which the asset is transferred, even though consideration is received later on.
  • Cost of Acquisition: 
    • It is the purchase price at which the seller acquired the asset.
  • Cost of Improvement: 
    • It is an expense that is incurred to make any improvements or repairs or enhancements to the asset. Improvement costs will be considered only if they are incurred after 1st April 1981.
  • Indexation: 
    • It is derived with the help of the Cost Inflation Index. Cost Inflation Index is simply the measure of inflation and it is notified by the Central Government every year. Indexation is a technique to adjust income/payments by means of a price index, in order to maintain the purchasing power of the public due to inflation.
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How to Calculate Short Term Capital Gain Tax?

Particulars Amount
Take full value of Consideration XXXX
Less:​
Expenditure incurred exclusively in connection with the transfer.​​
Cost of Acquisition.
​Cost of Improvement.

​(XXX)

​​(XXX)​
(XXX)
Less: exemption under section 54B (XXX)
Short Term Capital Gain (1-2-3) XXXX

How to Calculate Long Term Capital Gain Tax?

Particulars Amount
Take full value of Consideration XXXX
Less:​
Expenditure incurred exclusively in connection with the transfer.
​​Index* Cost of Acquisition.
Index* Cost of Improvement.

(XXX)
​​
(XXX)
​(XXX)
Less: exemption under section 54, 54EC, 54F, 54B (XXX)
Long Term Capital Gain XXXX
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Can I claim any expenses as a deduction from the full value of consideration?

Expenses which are wholly and exclusively incurred in relation to the transfer of property, are allowed to be deducted from sales consideration. So here are different sales transactions and the allowable expenses for the same:

Sale of shares/stocks

  • ​Brokerage or sales commission
  • ​Securities Transaction Tax (STT) is not allowed as a deduction

Sale of House Property

  • ​Commission or brokerage paid to the property agent
  • ​Stamp duty paid on transfer of property
  • ​Any traveling expenditure incurred in order to complete the sales transaction may be allowed as a deduction
  • ​In case the property is transferred as a result of inheritance, any legal charges related to obtaining a succession certificate, executor fees, etc., may also be allowed as a deduction
  • ​In the case of compulsory acquisition, litigation expenses for claiming the enhanced compensation are allowed as a deduction

All these expenses are allowed as deduction only for the purpose of calculating the Capital Gains. Please note that these expenses are not allowed as a deduction from any other heads of income.

The cost of acquisition and cost of the improvement is also allowed as a deduction from the sales consideration.

Taxation on Long-term and Short-term Gains

Type of Capital Gain Tax Rate
Long Term Capital Gain (when Securities Transaction Tax is not applicable) 20% + Surcharge and Education Cess
Long Term Capital Gain (when Securities Transaction Tax is applicable) 10% over and above INR 1 lakh
Short Term Capital Gain (when Securities Transaction Tax is not applicable) Normal slab rate applicable to Individuals
Short Term Capital Gain (when Securities Transaction Tax is applicable) 15% + Surcharge and Education Cess

Taxability of gains from the sale of Equity and Debt mutual funds are different. Funds with more than 65% of the portfolio consisting of equities are called Equity Funds.

  Short Term Capital Gain Long Term Capital Gain
Debt Funds Normal slab rate applicable to Individuals 20% with Indexation + Surcharge and Education Cess
Equity Funds 15% + Surcharge and Education cess Exempt

Note: Unlike Equity mutual funds, debt funds have to be held for more than 36 months to qualify as Long Term Capital Assets.

Capital Gain Exemption

The Income Tax Act allows a total / partial exemption from Capital Gains under different sections. It is possible to avail of multiple Capital Gains Exemption under these sections. However, the aggregate amount of exemption cannot exceed the total amount of Capital Gain.

Section Type of Asset Sold Type of Asset Purchased Taxpayer Type
Section 54 House Property (LTCA) House Property Individual/HUF
Section 54F Any asset other than House Property (LTCA) House Property Individual/HUF
Section 54EC Land or Building or both (LTCA) Bonds of NHAI/REC Any Taxpayer
Section 54B Agricultural Land (LTCA/STCA) Agricultural Land Individual/HUF

Documents for Capital Gains

  • Income Tax Department (ITD) issues PAN. It is an alphanumeric ID of a taxpayer who is liable to pay taxes. PAN enables the department to link all transactions of the “Person” with his “Income”. Hence it is the most essential document while filing ITR.
  • Aadhaar (Aadhaar Card) a 12 digit unique identification number issued by the UIDAI (Unique Identification Authority of India). It is mandatory for Resident Individuals to provide details of Aadhaar while filing ITR.
  • Following details are required to calculated Capital Gains and file ITR:
    • Purchase date
    • Sale date
    • Period of holding the asset
    • Transaction or brokerage charges (if any)
  • Any salaried individual, whose TDS has been deducted from his salary by the employer, receives Form 16 from his/her employer. It is a detailed statement that shows the salary earned during a Financial Year along with deductions, exemptions, and tax deducted from the salary in that year.
  • Form 26AS is a consolidated Tax Credit Statement.  It provides the following details to a taxpayer.
    • ​Details of taxes deducted from the taxpayer’s income.
    • ​Details of taxes collected from taxpayer’s payments.
    • Advance Taxes, Self Assessment Taxes and Regular Assessment Taxes paid by the taxpayers.
    • Details of the refund received during the year.
    • Details of any high-value transactions (for eg. Shares, Mutual Funds, etc.).
  • A taxpayer can claim the deduction of certain Investments and expenses while filing ITR. Investments proofs are required to claim Chapter VI-A deductions. These investments reduce the net taxable income of a taxpayer.

FAQs

Can you apply tax losses against capital gains?

A capital loss can only be offset against any capital gains in the same income year or carried forward to offset against future capital gains. However it cannot be offset against income of a revenue nature.

How many years can you carry forward capital losses?

If you are not able to set off your entire capital loss in the same year, both Short Term and Long Term loss can be carried forward for 8 Assessment Years immediately following the Assessment Year in which the loss was computed.

In case I have sold a house that I had purchased 4 years ago, should I pay tax on any profits that I have earned?

If you sell a house, it comes under long-term capital assets. Therefore, any profit that is made is taxable under Capital Gains.

Which ITR Form should I file if I have only Income from Capital Gain?

There are different ITR forms based on the type and amount of income. “Individuals with income from salary and capital gains or only Capital Gains are required to fill ITR-2 on Income Tax Portal”

AY 2021-22 File ITR 2 Form for Income from Capital Gains

What is ITR 2 Form?

ITR 2 Form is the Income Tax Return form for all those individuals and HUFs who do not have any sort of Business or Professional Income. This means any individual having Salary, House Property, Capital Gains and Other Sources can file ITR 2.

Other important income tax documents include Form 16, Form 26ASForm 12BBForm 10BA and Form 15G/ 15H.

ITR 2 Form for Capital Gains Income
Download the ITR 2 Form for Capital Gains Income for AY 2021-22
Download
ITR 2 Form for Capital Gains Income
Download the ITR 2 Form for Capital Gains Income for AY 2021-22
Download

Up to FY 2018-19 (AY 2019-20), it was not mandatory to file Income Tax Return if the total income was less than the basic exemption limit. However, Budget 2019 inserted the seventh proviso to Section 139(1). As per this new provision, if a taxpayer has entered into high-value transactions, it is mandatory to file the ITR even if the total income does not exceed the basic exemption limit. The high-value transactions can be either of the following:

  1. If the taxpayer has deposited more than INR 1 Cr in a current account
  2. If the taxpayer has incurred foreign travel expense of more than INR 2 lacs
  3. Or, if the taxpayer has incurred electricity expense of more than INR 1 lac
File Your ITR for
Capital Gains

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Capital Gains

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ITR 2 Form Breakdown

The ITR 2 Form has 25 sections that are needed to be filled before reviewing and submitting the return after paying the tax and finally verifying the return. These sections are as follows:

  • Part A General 
  • Schedule Salary
  • Schedule House Property
  • Schedule Capital Gains 
  • Schedule 112A and Schedule-115AD(1)(iii) proviso
  • Schedule Other Sources
  • Schedule CYLA
  • Schedule BFLA
  • Schedule CFL
  • Schedule VI-A
  • Schedule 80G and Schedule 80GGA
  • Schedule AMT
  • Schedule AMTC
  • Schedule SPI
  • Schedule SI
  • Schedule EI
  • Schedule PTI
  • Schedule FSI
  • Schedule TR
  • Schedule FA
  • Schedule 5A
  • Schedule AL
  • Part B – Total Income (TI)
  • Tax Paid
  • Part B-TTI

Who can file ITR-2?

It can be filed by an individual or a Hindu Undivided Family (HUF) whose total income includes:

Further, it can be used where the income of another person is clubbed with a taxpayer’s income provided such income falls in any of the above categories.

Who can not file ITR-2?

  • An individual whose total income includes Business or Professional income.
  • A taxpayer earning income from Partnership Firm can not file ITR-2. For declaring these types of Income, you may file ITR-3 or ITR-4.

File ITR 2 Online using Income Tax Website

  1. General Information

    Fill in the general information which consists of your contact, personal information, filing status & bank details.

  2. Schedule Salary, House Property & Other Sources

    In Schedule Salary, you need to review, enter, edit details of your income from salary or pension, exempt allowances and deductions u/s 16.
    Under schedule house property, you need to review, enter & edit details relating to house property (self-occupied, let out, or deemed let out). The details include co-owner details, tenant details, rent, interest, pass through income etc.
    and, under schedule other sources, you need to review, enter and edit details of all your income from other sources, including (but not limited to) income charged at special rates, deductions u/s 57 and income involving race horses.

  3. Schedule Capital Gains

    Capital Gains arising from sale or transfer of different types of capital assets have been segregated. In a case where capital gains arises from sale or transfer of more than one capital asset, which are of same type, please make a consolidated computation of capital gains in respect of all such capital assets of same type. But in case of transfer of land / building, it is mandatory to enter the computation towards each land / building. In Schedule Capital Gains, you need to enter details of your short term and long term capital gains or Losses for all types of capital assets owned.

  4. Schedule 112A & Schedule 115AD(i)(iii) Proviso

    Under Schedule 112A, you need to review, enter and edit details about sale of equity shares of a company, an equity-oriented fund, or a unit of a business trust on which STT is paid.
    Schedule 115AD (1)(iii) proviso involves entering the same details as for Schedule 112A but is applicable to non-residents.

  5. Schedule Current Year’s Loss Adjustment (CYLA)

    In Schedule Current Year’s Loss Adjustment (CYLA), you will be able to view details of income after set-off of current year losses. The unabsorbed losses allowed to be carried forward out of this are taken to Schedule CFL for carry forward to future years.

  6. Schedule Brought Forward Loss Adjustment (BFLA)

    You can view the details of income after set-off of brought forward losses of earlier years.

  7. Schedule Carry Forward Loss

    You can view the details of losses to be carried forward to future years.

  8. Schedule VI-A

     you need to add and verify any deductions you need to claim under Section 80 – Parts B, C, CA, and D of the Income Tax Act.

  9. Schedule AMT

    You need to confirm the computation of Alternate Minimum Tax payable u/s 115JC.

  10. Schedule AMTC

    You need to add details of tax credits u/s 115JD.

  11. Schedule SPI

    You need to add the income of specified persons (e.g. spouse, minor child) that is includable or required to be clubbed with your income as per Section 64.

  12. Schedule EI

    You need to provide your details of exempt income i.e., income not to be included in total income or not chargeable to tax. The income types included in this schedule include interest, dividend, agricultural income, any other exempt income, income not chargeable to tax through DTAA and pass through income which is not chargeable to tax.

  13. Schedule SI

    You will be able to view the income that is chargeable to tax at special rates. The amount under various income types are taken from the amounts provided in the relevant Schedules i.e., Schedule OS, Schedule BFLA.

  14. Schedule PTI

    You need to provide details of pass through income received from business trust or investment fund as referred to in section 115UA or 115UB.

  15. Schedule Foreign Source Income (FSI)

    You need to report the details of income, which is accruing or arising from any source outside India. This schedule is available for residents only.

  16. Schedule TR

    You need to provide a summary of tax relief which is being claimed in India for taxes paid outside India in respect of each country. This schedule captures a summary of detailed information furnished in Schedule FSI.

  17. Schedule FA

    You need to provide details of foreign asset or income from any source outside India. This schedule need not be filled up if you are Not Ordinarily Resident or a Non-Resident.

  18. Schedule 5A & Schedule AL

    In Schedule 5A, you need to provide the information necessary for apportionment of income between husband and wife if you are governed by the system of community of property under the Portuguese Civil Code 1860.
    If your total income exceeds ₹50 lakh, it is mandatory to disclose the details of movable and immovable assets in Schedule AL along with liabilities incurred in relation to such assets. If you are a non-resident or resident but not ordinarily resident, only the details of assets located in India are to be mentioned.

  19. Tax Paid

    Under Part B, verify all the auto populated rows from the details that you had entered in the schedules. Verify the tax paid details from the previous financial year.

  20. Login to efiling portal

    Login to the income tax efiling portal, i.e, the IT Portal 2.0

  21. File Income Tax Return

    Click on eFile > Income Tax Returns > File Income Tax Return

  22. Assessment Year and Mode

    Select the appropriate assessment year and select the online mode and click on proceed.

  23. ITR Form

    Select the appropriate ITR Form, in this case, ITR 2.

  24. Select the checkboxes

    Next, select the checkboxes applicable to your situation.

  25. Review and File ITR

    Finally, review all the details that you had entered previously and pay the tax dues (if any) and submit the return. Once you submit the return, proceed to everify it to complete the process.

Structure of ITR-2

Part/ Schedule Heading Fields
PART A- GENERAL Personal Information Name, Address, Date of Birth, PAN, contact details.
Filing Status Employer Category, Tax status, Residential status, Return filed under the section.
PART B-TI Computation of total income Total Income from all income sources, Losses of the current year set off, Gross Total Income, Deductions under Chapter VI-A.
PART B-TTI Computation of tax liability on total income The Bank Account details, Verification, and TRP details (if any) are to be provided. 
Schedule IT Details of Advance Tax and Self Assessment Tax Payments BSR code, Date of Deposit, Chalan number, Tax Paid
Schedule TDS TDS1: Details of Tax Deducted at Source from SALARY TAN of Employer, Employer Name, Tax Deducted, etc.
Schedule TDS TDS2: Details of Tax Deducted at sources from Income other than Salary (As per FORM 16A) & Details of tax deducted at source on sale of immovable property u/s 194IA (Form 26QB) TAN, Name of Deductor, Year of Deduction, Tax deducted, etc.
Schedule TCS Details of tax collected at source TAN of the collector, Name of Collector, Tax Collected, etc.
Schedule S Details of Income from Salary Name and PAN of the Employer, Address of the Employer, Salary, Perquisites, Allowance, etc.
Schedule HP Details of Income from House Property Details of House Property, Name and PAN of the Co-owners and Tenants, Details of Rent Income, Interest payable on Borrowed Capital, etc.
Schedule CG Capital Gains Details about the Short term and Long term Capital gains, Sales consideration, Cost of Acquisition, Deductions under Section 54,54B,54EC,54F,54GB.
Schedule OS Income from Other Sources A dividend, Interest, Rental income from machinery, Winnings from lotteries, Crossword puzzles, Races, Games.
Schedule CYLA Details of income after set­off of current year losses Details of current year losses and its Inter Headset off
Schedule BFLA Details of income after Set off of Brought Forward Losses of earlier years Details of brought forward losses set off against current year’s income, total brought forward losses set off.
Schedule CFL Details of Losses to be carried forward to the future years Total of earlier year losses, current year losses, Total of carried forward to future years.
Schedule VI-A Deductions under Chapter VI-A Deductions under section 80C, 80CCC, 80CCG, 80D, 80DDB, 80E, 80G, 80TTA.
80G Details of Donations Name of Donee, Address, City or District, State Code, PAN of Donee, Amount.
Schedule SPI The income of specified persons (spouse, minor child, etc.) included in the income of the assessee (income of the minor child, in excess of Rs. 1500 per child, to be included) Name and PAN of Person, Relationship, Nature of Income, Amount.
Schedule SI Income chargeable to income tax at special rates Description of Special Rate Income, Special Rate, Income, Taxable Income after adjusting min. chargeable to tax, Tax thereon.
Schedule EI Details of Exempt Income (Income not to be included in Total Income) Interest income, Dividend, Agricultural Income.
Schedule PTI Details of Income from Business Trust or Investment Fund  Details of Income earned from Business Trust or Investment Fund as per section 115UA, 115UB. 
Schedule FSI Details of Income from outside India and tax relief A country, Head of income, Income from outside India, Tax paid outside India, Tax payable in India, Relevant article of DTAA if relief is claimed u/s 90 or 90A
Schedule TR Summary of tax relief claimed for taxes paid outside India Details of tax relief claimed
Schedule 5A Information regarding the appointment of income between spouses governed by Portuguese Civil Code Name and PAN of a spouse, Income received under different heads, Amount appointed in the hands of the spouse, TDS details.
Schedule FA Details of Foreign Assets and Income from any source outside India Details of foreign bank accounts, financial interest in any entities, Immovable Properties, Other Capital Assets.
Schedule AL Details of Assets and Liabilities Details of an immovable asset, Details of a movable asset, Interest held in the asset of a firm or AOP.

Document Checklist

You should gather the following documents for a smooth process.

Essential documents:

  • PAN (Permanent Account Number)
  • Aadhaar Card
  • Bank account details
  • TDS certificates
  • Challan of taxes paid
  • Details of original return if filing revised return
  • Details of notice if filing in response to the notice

Documents on the basis of a type of Income:

  • Salary Income
  • House/Property Income
    • Co­owner details in case the property is co­owned,
    • Address of the property,
    • In case of house/property loan ­ Interest certificates/repayment certificate from a bank,
    • In case of let out property Rent agreement.
  • Other sources
    • Savings/current account statements/Passbook.
    • Interest certificates for deposits/bonds/NSC.
    • PPF account statement/Passbook.
    • Dividend warrants/counterfoils.
    • Rent agreement in case of let out machinery.
    • Details about receipts of any other income.
  • Capital Gains
    • For land/building ­ Sales & Purchase deeds, stamp duty valuation.
    • Details of improvement costs.
    • For securities ­ Contract notes/stock ledgers/trading statement.
    • For other capital assets ­ Cost of purchase, cost of improvement & sales receipts.
    • Details of expenses incurred on a transfer of capital assets.
    • Details of investments in order to claim exemptions.
    • Capital gains deposit account details if any.
  • If you’re eligible for any Section 80 Deductions, you may need to acquire the relevant documents from the list:
    • PPF account statement/Passbook.
    • Fixed deposit certificates/statements.
    • ELSS/ULIP/NSC investment details.
    • Life insurance premium receipts.
    • Medical insurance premium receipts.
    • House/property loan interest certificate/repayment statement.
    • Education loan interest certificate/repayment statement.
    • Tuition fees receipts.
    • Donation receipts.
Earned Capital Gain during the year?
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Sample ITR-2 Form for AY 2021-22

Income Tax Calendar
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Income Tax Calendar
Don't miss another Income Tax due date. Check out this amazing tax calendar for 2020 by Quicko.
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Major Changes in ITR 2 for AY 2021-22

  • Taxpayers are given the option to choose between the old tax regime and the new tax regime
  • Dividend Income has to be added with a quarterly breakdown for accurate calculation of Interest under Section 234C

Major Changes in ITR 2 for AY 2020-21

  • RNORs and non-resident individuals have to file their income ITR 2 even if the income is below INR 50 Lakh
  • Taxpayers must disclose:
    • Amount of cash deposits above INR 1 Crore in the current accounts with a bank,
    • Expenditure incurred above INR 2 Lakh on foreign travel, or,
    • Expenditure incurred above INR 1 Lakh on electricity
  • Resident individuals owning more than 1 house property must file ITR 2
  • Taxpayers having income from business and profession cannot file ITR 2
  • Type of company needs to be disclosed if the taxpayer is a director in a company or holds unlisted equity investments
  • A separate section 112A for the calculation of the long-term capital gains on the sale of equity shares or units of a business trust which are liable to STT.
Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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FAQs

Can NRI file ITR 2?

Yes, NRI can file ITR-2, if NRI is earning any salary income, rental income, capital gain income, or interest income.

Can I file ITR 2 in case of income from partnership firm?

No. If you are a partner in partnership firm/LLP then you need to file ITR-3. You need to enter details of the firm in which you are a partner and then add details of your income form that firm.

Can I file ITR 2 after the due date?

Yes, it can be filed after the due date. It will be considered a belated return. And late filing fees will be levied while filing a belated return.

Can I file ITR 2 if I have sold the house during the year?

Any consideration received from the sale of a property will be covered under the head income from Capital Gain. Hence you can file ITR-2 for reporting capital gain.