1. Gains from Equity Shares
a. Short-term capital gains and losses
If equity shares listed on a stock exchange are sold within 12 months of purchase, the seller may make short term capital gain or incur short-term capital loss.
The seller makes short-term capital gain when shares are sold at a price higher than the purchase price.
Calculation of Short-term capital gain = Sale price(less) Expenses on Sale (less) Purchase price
b. Long-term capital gains and losses
If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make long-term capital gain or incur long-term capital loss.
Before the introduction of budget 2018, long-term capital gain made on sale of equity shares or equity-oriented units of mutual fund was exempt from tax under Section 10(38)
As per the provisions of the Financial Budget of 2018, if a seller makes long term capital gain of more than Rs. 1 lakh on sale of equity shares or equity-oriented units of mutual fund, the gain made will attract a capital gains tax of 10% long-term capital gains tax. Also, the benefit of indexation will not be available to the seller. These provisions apply to transfers made on or after 1 April 2018.
2. Taxation of Gains from Equity Shares
a. Tax on short-term capital gains
Short term capital gains are taxable at 15%. What if your tax slab rate is 10% or 20% or 30%? Special rate of tax of 15% is applicable to short term capital gains, irrespective of your tax slab. Also, if your total taxable income excluding short term gains is below taxable income i.e Rs 2.5 lakh – you can adjust this shortfall against your short term gains. Remaining short term gains shall be then taxed at 15% + 4% cess on it.
b. Tax on long-term capital gains
Long term capital gain on equity shares listed on a stock exchange are not taxable up to the limit of Rs 1 lakh.
As per the amendments in budget 2018, the long term capital gain of more than Rs 1 lakh on the sale of equity shares or equity-oriented units of the mutual fund will attract a capital gains tax of 10% and the benefit of indexation will not be available to the seller.These provisions apply to transfers made on or after 1 April 2018.
3. Loss from Equity Shares
a. Short-term capital loss
Any short term capital loss from sale of equity shares can be set off against short term or long term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for a period of 8 years and adjusted against any short term or long term capital gains made during these 8 years.
It is worthy to note that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an Income Tax Return is a must for carrying forward these losses.
b. Long-term capital loss
Long term capital loss from equity shares until Budget 2018 was considered to be a dead loss – It can neither be adjusted nor carried forward. This is because Long Term Capital gains from listed equity shares were exempt. Similarly, losses from them were neither allowed to be set off nor carried forward.
After the Budget 2018 has amended the law to tax such gains made in excess of Rs 1 lakh @ 10%, the government has also notified that any losses arising from such listed equity shares, mutual funds etc would be allowed to be carried forward. The income tax department has vide its FAQs issued dated 4 February 2018, inter alia clarified that long term capital loss from a transfer made on or after 1 April 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act. Therefore, the long term capital loss can be set-off against any other long term capital gain and unabsorbed long term capital loss can be carried forward to subsequent eight years for set-off against long term gains.
4. Securities Transaction Tax (STT)
STT is applicable on all equity shares which are sold or bought on a stock exchange. The above tax implications are only applicable for shares which are listed on a stock exchange. Any sale/purchase which happens on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.
5. Guidance for treating share sale as business income
Certain taxpayers treat gains or losses from the sale of shares as ‘income from business’, while certain others treat it as ‘Capital gains’. Whether your gains/losses from sale of shares should be treated as business income or be taxed under capital gains, has been a matter of much debate. In case of significant share trading activity (e.g. if you are a day trader with lots of activity or if you trade regularly in Futures and Options), usually your income is classified as income from business. In such a case you are required to file an ITR-3 and your income from share trading is shown under ‘income from business & profession’.
Calculation of income from business v. capital gains
When you treat the sale of shares as business income, you are allowed to reduce expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year, and consequently be charged at tax slab rates.
If you treat your income as capital gains, expenses incurred on transfer are deductible. Also, long term gains from equity above Rs 1 lakh annually are taxable, while short term gains are taxed at 15%.
What should be classified as significant share trading activity though has lead to uncertainty and a lot of litigation? Taxpayers receive notices from the tax department and end up spending a lot of time and energy explaining why they chose a particular tax treatment for the sale of shares.
New clarification from CBDT
Taxpayers have now been offered a choice of how they want to treat such income. Once they choose, they must however continue the same method in subsequent years too, unless there is a major change in circumstances of the case. Do note that the choice has been made applicable only to listed shares or securities.
With a view to reducing litigation in such matters, CBDT has issued the following instructions (CBDT circular no 6/2016 dated 29th February 2016)–
If the taxpayer himself opts to treat his listed shares as stock-in-trade, the income shall be treated as business income. Irrespective of the period of holding of listed shares. The AO shall accept this stand chosen by the taxpayer.
If the taxpayer opts to treat the income as capital gains, the AO shall not put it to dispute. This is applicable for listed shares held for a period of more than 12 months. However, this stand once taken by a taxpayer in a particular assessment year shall be applicable in subsequent assessment years also. And the taxpayer will not be allowed to take a different stand in subsequent years.
In all other cases, the nature of transaction (whether capital gains or business income) shall continue to be decided basis the concept of ‘significant trading activity’ and the intention of the taxpayer to hold shares as ‘stock’ or as ‘investment’.
The above guidance would prevent unnecessary questioning from Assessing Officers regarding the classification of income.
How to treat sale of unlisted shares in this context
However, in case of sale of unlisted shares for which no formal market exists for trading, the department has given its view. Income arising from transfer of unlisted shares would be taxed under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.
(As per CBDT circular Folio No.225/12/2016/ITA.1I dated the 2nd of May, 2016 )