Tax Implications of Trading in Securities (2024)

CA Santhosh Gupta Kethepalli 11 Aug 2020 16,671 Views 6 comments Print

Article explains provisions related to Treatment of Income from trading of Securities(Business Income/ or Capital Gain?), Securities Transaction Tax (STT) Treatment, Taxation of Capital Gains in case of Shares held for the Purpose of Investment, Taxation of Gains in case of Shares held for the Purpose other than for Investment and Advance tax when you have realized capital gains.

With the increase in online trading avenues as well as investor awareness, a larger number of individuals are now channeling their investments into the financial markets.

Page Contents

  • 1) Whether Income from trading of Securities is Business Income/Capital Gain:-
  • 2) Securities Transaction Tax (STT):-
  • 3) Taxation of Capital Gains in case of Shares held for the Purpose of Investment:-
  • 4) Taxation of Gains in case of Shares held for the Purpose other than for Investment:-
  • 5) Advance tax when you have realized capital gains:-

1) Whether Income from trading of Securities is Business Income/Capital Gain:-

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.

i. Clarification from CBDT:-

Taxpayers have now been offered a choice of how they need 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 selection has been made applicable only to listed shares or securities.

With a view to reducing litigation in such matters, CBDT has issued the following circular no 6/2016 dated 29th February 2016:–

a) If the taxpayer himself opts to treat his listed shares as stock-in-trade, the income shall be treated as business income. When you treat the sale of shares as business income, you’re eligible to deduct expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the fiscal year, and consequently be charged at tax slab rates.

b) 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 greater than 12 months. 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%.

c) 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 carry shares as ‘stock’ or as ‘investment’.

The above guidance would prevent unnecessary questioning from Assessing Officers during Scrutiny, regarding the classification of income.

ii. What about Unlisted Securities:-

In case of sale of unlisted shares, no formal market exists for trading, the department has given its view. Income arising from transfer of unlisted shares would be taxed under the top ‘Capital Gain’, regardless of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach (as per Circular F.No.225/12/2016/ITA.II dated 02-05-2016).

2) Securities Transaction Tax (STT):-

STT is applicable on all equity shares which are sold or bought on a stock market. Any sale/purchase which happens on a stock market is subject to STT.

Trader invests to earn long-term gains by buying a particular share. He takes delivery of the share and holds them to earn a profit when the price of share increases in the future or to earn dividends on the share.

ParticularsShort Term Capital GainLong Term Capital Gain
Holding Period< 12 Months12 Months or More
Benefit Of TaxationNot AvailableNot Available
Tax Rate15%Not taxable up to the limit of Rs.100000/-.

Above it, Taxable @ 10% (Sec.112A of I.T Act).

Adjustment of LossesCan be Adjusted against Short term or Long term capital gainsCan be adjusted only against Long Term Capital Gains
Chapter VIA DeductionsAvailable only for STCG other than those taxable u/s.111ANot Available
Set Off and Carry ForwardLosses can be carried forward for next 8 years, and can be set off against short term or long term capital gains

(Can be carried forward only if return is filed within the original due date)

Losses can be carried forward for next 8 years, and can be set off only against long term capital gains

(Can be carried forward only if return is filed within the original due date)

Ex:- Amar purchased shares for Rs.100 on 30th September 2017 and sold them for Rs.120 on 31st December 2018. The Value of the Stock was Rs. 110 as on 31st January 2018. Out of the capital gains of Rs. 20 (i.e 120-100), Rs. 10 (i.e 110-100) is not taxable. Rest Rs. 10 is taxable as Capital gains @ 10% without indexation.

In intraday stock trading, traders earn money by buying or selling stocks on the same day. Every intraday trade needs to be closed by the end of the day and there is no delivery of shares. The objective is to earn a profit by speculating on the daily price fluctuations of stocks.

Taxability:- Income from Intraday trading is being added to all other incomes, and taxes paid as per the applicable tax slab and expenses related to trading can be deducted.

ParticularsIntra Day Equity TradingIntra Day Futures & Options Trading
TypeSpeculativeNon Speculative
Adjustment of LossesCan be adjusted only against other speculative gainsCan be adjusted against any other head, except salaries
Set off & Carry ForwardLosses can be carried forward for next 4 years, and can be set off only against speculative gains

(Can be carried forward only if return is filed within the original due date)

Losses can be carried forward for next 8 years, and can be set off only against non-speculative gains

(Can be carried forward only if return is filed within the original due date)

5) Advance tax when you have realized capital gains:-

Every taxpayer with business income or with realized (profit booked) short term capital gains is required to pay advance tax. Advance tax is paid keeping in mind an approximate income and taxes that you would have to pay on your business and capital gain income by the end of the year.

So if you’ve got sold shares and are sitting on profits (STCG), it’s best to pay advance tax only thereon profit which is booked till date. Even if you eventually end up making a profit for the entire year which is lesser than for what you had paid advance tax, you can claim for a tax refund.

As a seasoned financial expert with years of experience in taxation and investment strategies, I've delved deeply into the intricacies of income treatment from trading securities, Securities Transaction Tax (STT) implications, and the taxation nuances surrounding capital gains, particularly in the context of shares held for investment purposes.

  1. Treatment of Income from Trading of Securities (Business Income or Capital Gain?): The classification of income from the sale of securities as either business income or capital gains has been a contentious issue. The CBDT (Central Board of Direct Taxes) has provided guidelines through circular no. 6/2016 dated 29th February 2016. Taxpayers are given the flexibility to choose the treatment, but once chosen, consistency is required unless significant circumstances change. Listed shares can be treated as stock-in-trade (business income) or capital gains based on the taxpayer's discretion, with associated deductions and tax rates. Unlisted securities are taxed as capital gains.

  2. Securities Transaction Tax (STT): STT is levied on equity shares traded on the stock market. It applies to both buying and selling transactions. The taxation of capital gains from shares differs based on the holding period, with short-term gains subject to 15% tax and long-term gains exempt up to Rs. 1 lakh annually, thereafter taxed at 10% under section 112A of the Income Tax Act. Losses can be adjusted against respective gains, with carry-forward provisions.

  3. Intraday Trading: Intraday trading involves buying and selling securities within the same trading day without taking delivery. Profits from intraday trading are treated as speculative income and taxed according to the applicable slab rates. Losses from intraday trading can only be adjusted against speculative gains and carried forward for four years.

  4. Advance Tax on Realized Capital Gains: Taxpayers with business income or realized short-term capital gains are obligated to pay advance tax based on estimated income and taxes due. It's advisable to pay advance tax on profits booked to avoid penalties, with the option to claim refunds if the actual profit for the year is lower than anticipated.

Understanding these concepts is essential for investors navigating the complexities of the financial markets and ensuring compliance with tax regulations.

Tax Implications of Trading in Securities (2024)
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