How are Trading Income and Capital gains taxed in Income Tax Act, 1961?
STCG (Short-Term Capital Gain) from listed Security Trading: When a listed security is held for less than 1 year, shall be treated as short term capital asset. Gain/Loss arising out of it is Short Term Capital Gain/Loss. STCG from listed security is taxed @ 15% flat, even you are at lower slab rate. And STT paid cannot be claimed as expenses.
LTCG (Long Term Capital Gain) from listed Security Trading: When a listed security is held for more than 1 year, shall be treated as long term capital asset. Gain/Loss arising out of it is Long Term Capital Gain/Loss.LTCG out of listed security is taxed @ 10% flat, after giving deduction up to Rs. 1 Lakh. And STT paid be claimed as expenses unlike STCG.
Listed Security Trading as Profit & Gain from Business & Profession: Profit from trading will be calculated as slab-wise rate and all expenses incidental to trading cab be claimed including STT.
What law says about treatment of profit from security trading asTrading income or Capital Gain?
As per Circular No.4/2007, Dated 15-6-2007,gives clear indication that, assesses can chose to treat trading income eitherBusiness Income or Capital Gain.and Assessing Officers shall take into consideration several factors (like, Volume of transaction, holding period, hedging against positions held etc.). And it quotes “it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.”
In addition to this, in Circular No. 149/287/2005-TPL, laid down 15 principles to be considered toseparate trading income or capital gain:
i.Whether the purchase and sale of securities was allied to his usual trade or business was incidental to it or was an occasional independent activity.
ii. If purchase is made solely with the intention of resale at a profit or for long termappreciation and/or for earning dividends and interest.
iii. Scale of activity
iv. Transaction was continuous and regular.
v. Used own funds or borrowings.
vi. Objects in the MOA/AOA in the case of a corporate assessee.
vii. Typical holding period.
viii. Ratio of sales to purchases and holding
ix. The time devoted to the activity and the extent to which it is the means of livelihood.
x. Nature of treatment in the books of Account.
xi. Whether the securities purchased or sold are listed or unlisted.
xii. Whether investment is in sister/related concerns or independent companies.
xiii. Whether transaction is by promoters of the company.
xiv. Total number of stocks dealt in.
xv. Whether money has been paid or received or whether these are only book entries.
It clearly shows there is nohard and fast rules. However,principles being applied shall be consistent year on year.
Then how and when to decide income as Capital Gain/Trading income?
Better to show as LTCG in case of
- When profit earned from sale of Listed stock held more than a year, better to show as LTCG, since assessee gets 1Lakh exemption and taxed @ 10% above Rs.1 lakh, which will be below the effective tax rate most of the times.
Better to show as STCG in case of
- When effective tax rate, on slab basis, is not more than 15% including such trading profit.
- When Assessee expect there will be more profit in coming years, better to choose as STCG, because of consistency to followed in reporting.
Better to show as Business income in case of
- When assess has no other income like salary, Income from house property etc, which takes part in Slab-wise calculation of tax liability.
- When effective tax rate is less than 15% including trading income and it continues to be in same range future.
- When trading cost is much higher especially STT and profit comes to negative if STT considered,
- And when Trading turnover is substantial (at least Rs.50 lakh a year) and it constitute major part of assessee income.
Conclusion
Whatever the circumstances, when assessee’s effective income is less than 15%, he can save up toRs15-20thousand as tax after choosing it as business income. And it may bring unnecessary tension of notices from the department as AO has space for dispute. If effective tax rate is more than 15% anyway, it is good to choose trading income as STCG. Hence it is advised to choose trading income as STCG rather than business income, even when assessee can reap the benefit of lower slab rates. Choosing STCG will be a prudent option in long run.
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