Equity Profit: Capital Gain or Business Income?

We have been seeing the prices of almost shares rapidly skyrocketing and touching new 52-week high. Many investors are, now contemplating to book their profit on such shares so as to limit their losses. While selling such shares, most investors get confused as their investments have to be treated as capital assets or business income for tax purposes. Generally, every investor tends to claim his profit treated as short term or long-term gain or loss to minimize his tax liability. If shares are held for a period of more than 12 months, the shares qualify as long-term capital assets hence its gain from sale of equity shares on a stock exchange are exempted. Whereas the short-term capital gains on sale of equity shares on the stock exchange is eligible for a concessional rate of taxation of 15.45% under Section 111A. However, these tax criterions would not be applicable to all taxpayers in respect of profit could be either short-term or long term. Thus, the issue is all about the characterization of income and the applicable tax rate in case of a share transaction. We feel that that tax officer may misuse the clause, as most of share purchases are made for profit motive and not for earning income from dividend. Such investors may be regarded as their profit from trading in shares attracting income tax at 30.9% and not an investor realizing capital gains. Thus, the intention of this post is to clarify these ambiguities and may be considered as a persuasive guidance, but it is not conclusive.

Intention of the taxpayer

Whilst tax treatment on selling of shares, firstly to find out the intention of the taxpayer at the time of purchase of the shares. This can be found out from the treatment it gives to such purchase in his demat account. Whether it is treated as stock-in-trade or investment? Whether shown in opening/closing stock or shown separately as investment or non-trading asset? Whether he has borrowed money to purchase and paid interest thereon? In this case, the taxpayer may engage in two different activities of sale and purchase of shares. The first set of transactions involved investment in shares in which the taxpayer takes delivery of the shares. The second set of transactions representing purely jobbing without delivery involved dealing in shares for the purpose of quick profit. The taxpayer may thus both an investor as well as a trader and while the income from investment in shares for considerable time to accumulate wealth is to be said as capital gains hence it qualifies concessional rate of income tax, the income from intraday trading activity for the purpose of quick gain is to be said as business income and it attracts at 30.9% irrespective of any tax bracket of the taxpayer. To put it simply, what matters is the intention of an individual whether he holds for a longer period of time to accumulate profits which constitutes the capital gain or does trading to earn profit day to day which constitutes the same to be treated as the business income.

Income assessed as Capital Gain

Where the tax payer held shares from seven to eleven months, earned dividend and entered into a few transactions of sale of such shares during relevant year even though he is carried on the activity of buying and selling of shares in a systematic and regular manner with high frequency and volumes, repetitive purchases and sales of the same scrips throughout the year, income arising from sale of shares would be taxable as short-term capital gain. Even though taxpayer-company’s main business is investment in shares & securities, shares could also not be treated as business assets but income from sale of shares of the taxpayer is also liable to capital gains. Hence, as per current provisions of income-tax laws, any long-term capital gains months arising on equity shares held beyond 12 months, listed on Indian stock exchange, sold through a stock-broker are fully exempt from income tax. Most of these concerns can be handled effectively using the WhatsApp API. In case of short term capital gains on equity shares sold on stock exchanges in India are taxed at a flat rate of 15%. It is also interesting to note that even in cases where the applicable slab tax rate is 10%, the taxpayer will still have to pay tax of 15% on such short-term capital gains. This rate still will be 15% even in case the slab rate applicable to relevant taxpayer is 30%. In case your other income excluding these short-term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit while calculating your tax liability.

Conclusion

Every taxpayer should be very careful in characterization of income from share trading as capital gain or Business income because this characterization will affect the tax liability of the taxpayer to a great extent. Suppose if you wrongly characterize your Long term Capital gain of Rs 100,000 as business income attracting income-tax at 30.9% amounting to Rs.30,900 while assuming you belong to highest Tax bracket whereas the long term capital gains from shares are exempted provided STT paid. Thus you may end up paying extra tax. It is for the taxpayer to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the taxpayer is able to discharge the primary onus and could prima facie show that particular item is held as investment or say, stock-in-trade then onus would shift to revenue to prove that apparent is not real.

Hope the article has eased your confusion about the taxability and the rate of tax on sale of shares. Your feedback and queries are welcome.

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