Business Income from Share Trading - How it differs from Income from Capital Gain?

The practice of share trading has surged significantly in the preceding decade due to the rise in the stock market and the rapid applications of technology.

As per the CDSL and NSDL data, the number of active investment accounts in India stands at over 10.4 million.

Many people view share investment and trading as a quick way to make money. We are all aware that salary, rental income, and business revenue are all subject to taxation. But what about revenues from stock sales or purchases? Many people spend their time purchasing and selling for a profit, but it is unclear how their earnings are taxed. Furthermore, there is a rampant debate over whether the revenue generated by exchanging shares should be classified as a business income or as a capital gain.

It is vital to understand the difference between both forms of earnings as it completely impacts a taxpayer's liability. The tax treatment of income sourced from capital gains and business income is quite different.

According to the relevant provisions of the Income Tax Act, 1961, any share purchase with the goal of profit gets regarded as a part of business income. In comparison, acquisitions with the intent of earning income through dividends get considered as a capital gain.

The distinction is significant because business revenue (or loss) is 100 per cent adjusted while counting the overall revenue. However, the income from capital gains (or losses) gets adjusted subject to different set-off conditions.

In other words, you would want to declare business losses and capital gains to reduce your tax liability. Income from Capital gains may be a preferable choice in some situations, but reporting such gains as business earnings may be a better option in some others.

Our team shall highlight some indispensable facts to help you understand how to treat income from the sale of stocks or other securities. To establish if the profits are of a business nature or have a capital gain character, one must evaluate the following factors. This section will discuss how to handle revenue from trading in shares and the relevant tax repercussions.

Treatment of share trading earnings as capital gains or business income

Some taxpayers can classify profit or loss generated from stock sale as 'income from business or profession,' while others classify them as 'income from capital gains.' There persist wide discussions on whether your profits/losses from selling shares can be regarded as company income or an income from capital gains.

The interval of occurrence of income also helps to determine the tax treatment. Generally, if a person earns money through the sale of shares at regular intervals, it should be considered as business revenue since he cannot claim that he is selling the invested shares, and the shares are not kept as stock in trade. As a result, people who deal in intraday trade must report the income from such share trading as income from business. There is also the notion of "speculating business," which implies that if a person engages in the speculation of securities and earns an income from it, such income is taxable as speculation business earnings.

Whether a particular holding of shares is for investment or part of the stock-in-trade is a matter within the assessee's knowledge. He should, in normal circumstances, be able to produce evidence from his records as to whether it has maintained any distinction between shares that are held as stock-in-trade and those which are retained as an investment.

When you regard the transactions of shares sold as business income, you can deduct expenditures paid in obtaining that revenue. In such situations, the gains would get included in your gross total income generated during the fiscal year and, as a result, taxed at slab rates in case you are an individual taxpayer. Transfer expenditures are deductible if you classify them as income from capital gains. Long-term profits from equities exceeding INR 1 lakh per year are taxable, whereas short-term gains (STCG) are chargeable for tax at 15%. However, what constitutes considerable activities of share trading has resulted in ambiguity and a great deal of litigation.

Many a time, taxpayers wind-up spreading out a significant amount of energy and time explaining the selection of a certain tax treatment for the dealings in shares during a given period.

Important aspects from the new CBDT clarification

Taxpayers now possess the option of how they can approach such income. They must, however, continue to use the same technique in the following years unless there is a significant change in the case's circumstances. Please keep in mind that the option is only available for the listed securities or shares.

The CBDT has issued below directions (CBDT circular number 6/2016, on February 29, 2016). It has given taxpayers the option to treat and report their revenue from the sale of shares as income from business or capital gains.

If the person keeps hold of listed shares as stock in trade, then income earned from those stocks are considered as business earnings. Regardless of the length of time the taxpayers hold a given share; the AO must accept the taxpayer's preferred position. If the taxpayer chooses to classify it as income from capital gains, the Assessing Officer will not contest it. This regulation applies to listed shares held for a tenure of more than 12 months.

In this case, how should the sale of unlisted shares be treated?

The department has provided its opinion in the context of the selling of unlisted shares for which there is no official market for trading. Income derived from the transfer of unlisted shares should be taxed under the heading 'Capital Gain', regardless of holding duration, to avoid litigation / disputes and maintain a consistent approach.

Tax rates in effect

If the taxpayer declares their income under the heading capital gains, the taxability changes as follows:

Long Term Capital Gain

where equity shares marketed or listed on a stock market are disposed of within a year (12 months) after the acquisition, the seller may realize a long-term capital gain (LTCG) or incur a long-term capital loss.

One can find exemption under section 10(38) of the Income Tax Act for long term capital gain up to Rs 10,00,000. Income beyond this threshold gets taxed at 10%.

Short Term Capital Gain

If a stock exchange-traded equity share is sold within 12 months of acquisition, the seller may realize a short-term capital gain (STCG) or incur a short-term capital loss. Gain is chargeable to tax at 15%.

You may have query that my income tax band rate is 10% or 20%, or 30% then what will be tax rate for STCG? The answer is short-term capital gains are taxed at a special rate of 15%, regardless of your tax bracket. Also, if in case total taxable income excluding short-term capital gains (STCG) of a person is less than INR 2.5 lakh, you can offset this deficit using short-term profits. The rest leftover short-term gains will then be levied tax at 15% plus any applicable cess.

The scenario of taxability, length of holding, and other factors change depending on the circumstances and kind of the securities held by an assessee. It is up to the taxpayer or assessee to properly justify their income, and an option has already been made available to listed securities holders. The contrast between business income and income from capital gains gets frequently cited as a source of worry among taxpayers. Seeking the help of tax experts can prove beneficial for you in such cases.

Bid adieu to your Tax woes with tax guidance from Gotaxfile!

At GoTaxfile, you find immediate access to a global team of Tax Consultants and CAs. We stand for something essential that distinguishes us because we believe in transparency and doing things accurately with the proper set of skills! We're not simply dealing with statistics. Our ambition is to use smart technology to simplify and expedite the process to empower entrepreneurs. We enable them to focus on their entrepreneurial goals while we give the assistance they require. Seek our tax consultation today and witness the difference!