A lot of people trade and invest in stocks – some do it part-time as an investment and some do it full time as a business.
From the point of view of taxation – this leads to confusion on whether to treat such gains on sale of shares as Capital Gains or as a Business Income. The rate of tax is different for both Capital Gains and Business Income and therefore it is very crucial to determine whether such gains on sale of shares are classified as Business Income or Capital Gains.
In some cases – Capital Gains may turn out to be a better option and in some cases – disclosing such gains as Business Income may turn out to be a better option. To determine whether the gains are of business nature or Capital Gains – the following points shall be considered.
How to treat Income from Shares – Business Income or Capital Gains?
To reduce the confusions regarding classification of gains from shares as Business Income or Capital Gains, the CBDT vide Circular No. 6/2016 said that
- Where the assessee himself treats this as Stock-in-trade i.e. as Business Income
Where the assessee himself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as a business income.
- In respect of Listed Shares held for more than 12 months
In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer – if the assessee desires to treat such income on sale of Shares as Capital Gains – the same shall not be put to dispute by the Income Tax Officer. In other words, the assessee is allowed to treat shares which were held for more than 12 months as Long Term Capital Gains.
However, this stand, once taken by the assessee in a particular assessment year shall remain applicable in subsequent assessment years also and the taxpayer shall not be allowed to adopt a different/contrary stand in subsequent assessment years.
It has been clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gains/ Short Term Capital Loss or any sham transaction.
In case of Listed Shares held for less than 12 months & Unlisted Shares
In case of listed shares held for less than 12 months & unlisted shares – there are no clear guidelines on whether to treat such gains as income from capital gains or as income from business.
It would depend on the facts of the each case on whether such gains are classified as Business Income or Capital Gains. The following points shall be kept in mind while determining the classification of such gains:-
- Whether the purchase/ sale of securities was allied/incidental to his usual trade or business or it was an occasional activity.
- Whether the purchase was made solely with the intention of resale at a profit or for long term appreciation and/or earning dividends and interest.
- Whether the scale of activity is substantial
- Whether such transaction was entered into continuously and regularly during the assessment year.
- Holding period of securities bought and sold.
- Time devoted to the activity and the extent to which it is the means of a livelihood.
On the basis of the facts of the case and keeping in mind the above mentioned points – it would be decided whether such gains are to be considered as Business Income or as Capital Loss.
Other Relevant Points
- Gains arising from F&O Transactions and Intra-Day trading would be considered as Business Income.(Recommended Read: Tax on F&O Income)
- If these gains are classified as Long Term, then the Loss would also be classified as a Long Term Loss. Such loss is also referred to as a Capital Loss as it cannot be set-off against other incomes.
In case such income is treated as business income, the tax rate for Individuals would be as per the Income Tax Slab Rates.