Income Tax on Share Trading Activities in India

Income from Share Trading: Business Income or Capital Gain?

Most of Indian Taxpayers irrespective of their earnings are indulged in Share trading because it is seen as a quickest way of earning handsome money. Also trading becomes easy with the rapid development in technology. Thus it becomes necessary to know the taxation on the earning from share trading.

Income Tax on Share Trading in IndiaBefore going into the taxation part, first it is important to understand what type of share trading activity you are indulged in:

  • Investing
  • Trading (For better understanding, I have bifurcated share traders into two categories: Intraday Trader and Normal Trader )

Identifying of transactions as trading transaction or as investment is not an easy task. To alleviate this difficulty CBDT had issued Circular No.4/2007 dated 15.06.2007 which was in continuation of the Instruction No. 1827 issued by CBDT on 31.08.1989.

CBDT in its circular has taken views of the Hon. Supreme Court in CIT (Central), Calcutta Vs. Associated Industrial Development Co. (P) Ltd. (82 ITR 586) and C.I.T., Bombay Vs. H. Holck Larsen (160 ITR 67) and the Ruling made by the Authority for Advance Rulings in the case of Fidelity North Star Fund and others – 288 ITR 641.

In the above case, Authority for Advance Ruling laid down the principles for deciding a transaction in shares, to be classified as trading activity or an investment activity.

The significant nature of transactions, the manner of maintaining books of accounts, the enormity and ratio between purchase and sales and the holding period would furnish a good guide to determine the nature of transactions.

Ordinarily the purchase and sale of shares with a motive of earning profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in share of a company is to derive income by way of dividend etc. then the profits accruing by change in investment (by sale of shares) will yield capital gain and not revenue receipt.

The circular also recognizes the possibility of tax payer to have two portfolios, i.e. an investment portfolio comprising of securities which are to be treated as capital assets and trading portfolio comprising of stock-in-trade which are to be treated as trading assets. When an assessee has two portfolios, he may have income under both heads, i.e. capital gain as well as business income.

In the light of this circular we shall understand how the income from share transactions is to be taxed as capital gain or business income.

Income Tax in Case you are an Investor

If you do not frequently buy and sell shares than all the gains from share trading is to be assessed as capital gains and the dividend received shall be assessed as Income from other sources [currently exempt under section 10(34)].

If you have held shares for more than 12 months before selling then the gains earned shall be treated as long term capital gains which are to be taxed at the rate of 20% u/s 112. In case you have sold the shares through recognized stock exchange by paying STT (security transaction tax) than this LTCG is exempt u/s 10(38) and no tax shall be payable. On the other hand if the shares are sold off market then 20% tax becomes payable on the gains earned.

To prove the gain as long term capital gain, you can attach the contract notes for the buy/sell trades and the DEMAT statement which shows the credit/debit of shares, if required.

In case you have sold shares within 12 months of buying then the gains earned shall be treated as short term capital gains which are to be taxed at the rate of 15% u/s 111A.

In case there is long term or short term losses, the same can be carried forward for 8 years. The short term capital loss can be set-off either against short term or long term capital gains from any source but long term capital loss can only be set-off against long term capital gains from any sources.

Also remember that long term capital losses occur for shares where STT is paid cannot be carried forward for future set-off.

Remember, an investor cannot claim any expenses such as internet charges, rent etc. All the gains earned is net income of the investor and tax is payable on this amount.

Income Tax in Case you are a Normal Trader, not Intraday trader

Normal Trader means a person who does trading in shares but not on day to day basis as intraday trader. Normal Traders buy shares, take delivery and then sell it to book profit or gain.

Normal Trader can also be categorized as an Investor but there is one major difference between normal trader and an investor i.e. Normal Trader holding period of shares is always short-term while holding period of shares in case of an investor could be long-term as well as short-term. Apart from this difference, both normal trader and an investor are same in all aspects. Both take delivery before selling but a point to remember is that in case normal trader who shows shares under stock-in-trade shall always be assessed under the head of Income from Business even he takes delivery of shares.

Taxation of the Normal Trader is also same as an Investor i.e. gains shall be assessed as Short term capital gains which are taxed at the rate of 15% u/s 111A.

Income Tax in Case you are an Intraday Trader

Taxation on the profits earned from Intraday trade is the most asked question by any trader since income tax in this case is not clear as under which head it should go and what tax rate should be taken to ascertain the tax liability.

Section 43(5) of the Income Tax Act, 1961, defines Speculative transaction as a transaction in which a contract for purchase or sale of a commodity including stocks and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or scrip.

Any profit or gain earned from day trading is called Speculative Income (either Speculative Profit or Speculative Loss). Any person, engaged in intraday trading is automatically treated as someone who is trading in shares as business, thus his income shall be assessed as Income earned from Business and Profession and tax rate shall be same as any other business activity.

Speculative losses can be carried forward for the next 4 years provided taxpayer has declared the same while filing the tax return and net off only against any speculative profits over the next 4 years.

Income Tax in case of Derivative Trading

Derivative trading embraces Futures and Options trading on the various stock, commodity and currency exchanges in India.

All derivatives trading activities done through recognized exchange are not considered as speculative income like in intraday trading.  Hence any profit or loss arising from derivative trading is treated as arising from business activity. In case of trader who trades in derivatives and also buy shares and receive delivery, can claim short-term capital gain for money made in shares for which he receives delivery in his DP and claim income/loss from derivatives trading as business income/loss.

Summary:

1. Purchase and sale of shares where deliveries have been affected

  • The profit/loss is assessable as Capital Gains if shares are held as capital assets i.e. investments.
  • The profit/loss is assessable as Business Income if shares are held as stock-in-trade.

2. Purchase and sale of shares where deliveries have not been affected i.e. Intra-day trading (cash segment of share market)

  • The Profit/loss is assessable as Speculation Income

3. Purchase and sale of Derivatives/ Futures and Options i.e. without delivery

  • The Profit/loss is assessable as Business Income.

4. Purchase and sale of commodities in Future Markets i.e. without delivery (MCX India Ltd.)

  • The Profit/loss is assessable as Speculation income/loss.

5. Purchase and sale of commodities in Cash Market i.e. with delivery (MCX India Ltd.)

  • The Profit/loss is assessable as Business Income if commodities are held as stock-in-trade.
  • The Profit/loss is assessable as Capital Gains if commodities are held as capital assets i.e. investments.

6. Purchase and sale of currency futures at MCX Stock Exchange Ltd. and in NSE/BSE

  • The Profit/loss is assessable as Business Income.

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13 Responses to “Income Tax on Share Trading Activities in India”

  1. omsg77 omsg77
    February 14, 2014 at 11:52 am #

    Regarding the section “Income Tax in Case you are a Normal Trader, not Intraday trader” above, need help to understand below:
    1. Suppose one transacts 10 lakhs say 5 or 10 times a financial year making say 2.5 or 3 lakhs profit, will he be still ‘Normal investor’ category ?
    2. If one say transacts 2 or 3 lakhs say twice a month and is considered trader profile, will be still be ‘Normal investor’ and will be taxed at 15% ?
    3&4 . What is the consideration for senior citizens for above two scenarios?
    Thank You,
    PS: Stumbled on your blog recently..Quite informative so far. Thanks

  2. Sandy
    August 14, 2013 at 4:37 pm #

    I am an investor. My short+long term capital gains profit/loss statement shows the net profit/loss as gross profit+brokerage. Can I use this report for my IT
    calculation?

    Can I deduct STT, ST, Other charges like stamp duty while calculating my net profit. (All these charges are directly debited by the brokerage
    house.)

    Net profit until now was gross profit/loss + brokerage.

    • thesanyamjain
      August 17, 2013 at 12:00 am #

      If you treat trading as business then you are allowed to deduct expenses incurred but if you treat income earned from trading as income from other sources then it will be considered as speculative income and no expenses are to be allowed to be deducted.

  3. Saumya
    June 28, 2013 at 2:42 am #

    How to calculate turnover in case of trading in options.
    What sort of accounts books need to maintain.
    Do audit is necessary in case of loss in derivative trading.

    • thesanyamjain
      July 2, 2013 at 9:45 pm #

      The meaning of turnover for in case of transactions in Futures and Options of shares is not defined under the I-T Act. In case of derivative trading-Futures and Option- the difference on which the contract is
      purchased or sold is important. Although the value of contract is number of contract multiplied with the shares price, yet what is actually given or taken is differential amount in contract. For example if you purchase a future contract for Rs 105 for a share having a lot of 100,you pay nothing at the time of buying a contract, yet at the time of expiry if contract , you are either gainer or loser which is determined whether there is positive or negative difference. So , for the purpose of determining the turnover in case of future and options , for the purpose of 44AB , based on the guidance note of ICAI , following items should be considered to constitute turnover:-

      1.The total of positive and negative differences,plus
      2. Premium received on sale of options is also to be included in turnover,plus
      3. In respect of any reverse trades entered, the difference thereon But not the total value of contract.

      Audit is necessary if your turnover crosses Rs.1 crore, losses and profit does not have anything to do with the tax audit.

      • kelly
        July 14, 2013 at 5:12 pm #

        Nice article, Sanyam. Please clarify whether turnover has to be computed for short-term cash transactions as well. If yes, is it based on total of positive and negative differences for short-term trades or based on addition of total purchases and total sales during the year?

      • Ajay India
        July 28, 2013 at 4:27 pm #

        Nice article Sanyam. I have a doubt regarding audit for intraday trading (NOT F&O). My transaction is above 1cr ie buying and selling but aggregate of profit and loss is very less. Do i require audit for this intraday activity.

        Thanks,
        Ajay

        • thesanyamjain
          July 29, 2013 at 11:18 am #

          Yes, you have to get your accounts audited since threshold limit of tax audit is of turnover i.e. aggregate amount of sell and purchase not of profit and loss you make.

          • Ajay India
            July 29, 2013 at 4:19 pm #

            Thanks, but as per my understanding – turnover is aggregate of profit/loss and not total of sell/purchase. If that was the case, then anybody who day trades will comfortably exceed 1cr.
            Moreover, i am a salaried employee and salary is my main source of income. I used to trade on margin on my demat account.
            Please clarify these doubts as well..

          • thesanyamjain
            July 30, 2013 at 12:50 pm #

            Oops i gave reply for F&O.

            Since you are an intraday trader, both prft and loss is aggregated to calculate the turnover. Now if it exceeds the threshold limit you need to get your accounts audited.

  4. PRAFUL MEHTA
    June 27, 2013 at 10:17 am #

    ALL TRADING ACTIVITIES DONE THROUGH STOCK EXCHANGE THEN RESULTING INCOME OR LOSS IS NOT TREATED AS SPECULATIVE INCOME OR LOSS. THEN WHY IT SHOULD BE TRATED AS BUSINESS INCOME AND NOT SHORT OR LONG TERM CAPITAL GAIN OR LOSS UNDER SECTION 111 A HOPE YOUR VIEW.

    • thesanyamjain
      June 27, 2013 at 5:11 pm #

      There will be no allowance of expenses if you treat profit as a capital gain.

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