CA. Ajay Khandelwal
Here we are discussing about Income Tax on Shares Trading of Listed Companies, related to equity shares. Such income may be of two types, viz, Business Income and Capital Gains Income.
A. Business Income from Equity Shares
Dealing in shares as day trading or intra-day without taking delivery of the shares, is covered under speculation. Section 43(5) defines speculative transaction to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. So, this income will be taxable under Business Head. There is no special tax rate for speculation income and normal tax rates will apply.
B. Capital Gains Income from Equity Shares
If shares are sold after taking delivery, then such income will be taxable under the head Capital Gains. There may be a Short Term Capital Gain (STCG) or Long Term Capital Gain (LTCG) for each scrip sold, based on period of holding.
Short Term Capital Gain (STCG)
Where a scrip is sold within 12 months (1 year) of purchase, the gain will be called Short Term Capital Gain. Section 111A provides for special tax rate of 15% for such STCG.
Long Term Capital Gain (LTCG)
If a scrip is sold after 12 months (1 year) of purchase, the gain arising thereon will be called Long Term Capital Gain. Section 112A provides that such income in excess of Rs. 1 lac, will be taxable at special rate of 10%. So, long term capital gain on equity shares is exempt upto Rs. 1 lac and remaining only will be taxable. However, the benefit of indexation is not allowed on such LTCG.
Specific provision if shares subjected to LTCG were purchased on or before 31.01.2018
In such case, the highest price of that scrip on 31.01.2018, can be taken as the cost of that scrip instead of actual cost. But, it can’t exceed the sale price. This may help in reducing taxable LTCG. So, the actual cost or the highest price on 31.01.2018, whichever is higher, can be taken as cost.
However, there is practical problem in filing ITR in such cases, as the details of each scrip which was purchased before 31.01.2018 has to be filled in ITR. This becomes a cumbersome job if the number of such scrips are more.
No Tax if overall Income is below Basic Exemption Limit
There will be no income tax on equity shares trading, if the overall income (including such STCG/LTCG/Speculation) is below basic exemption limit. For example, if STCG on equity shares is Rs. 200000/- and other income is Rs. 40000/-, there will be no tax as the overall income is below Rs. 250000/-.
Taxability of Dividend
Dividends received on listed equity shares are now taxable from AY 2021-22 (financial year 2020-21). TDS @10% will be deducted u/s 194 by the company paying dividend if the dividend amount exceeds Rs. 5000/-.
Deductions under Chapter VI-A
Deductions under Chapter VI-A covering sections 80C to 80U are not allowed from such long term or short term capital gains as these are subjected to special rate of tax.
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Disclaimer : The above post has been prepared to share the scope and implications of the provisions of the Income Tax Act, 1961. Though every effort has been made to avoid errors or omissions in this document yet any error or omission may creep in. So, it is notified that I shall not be responsible for any damage or loss to any one, of any kind, in any manner therefrom. I shall also not be liable or responsible for any loss or damage to any one in any matter due to difference of opinion or interpretation in respect of the text. On the contrary it is suggested that to avoid any doubt the user should cross check the correct law and the contents with the notified / gazetted materials.