Share Market Taxation: ITR Forms for Investors & Traders

Share market taxation refers to the taxes which imposed on the buying and selling of shares.

The participants in the share market are:

• Retail Investor: An individual who invest in the share for personal financial goals.

• Institutional Investors: Entities such as mutual funds, insurance companies who invest large sum of money on behalf of their clients.

• Stockbrokers: Authorized intermediaries who execute trade on behalf of their clients.

• Regulatory Bodies: Organizations like the Securities and Exchange Commission that regulate the stock market to ensure fair and transparent practices.

When investors sell shares, the resulting profit or loss is treated as capital gain. Depending on the holding period, it may classify as either Short Term Capital Gain or Long Term Capital Gain.

Types of Income From Share Market

• Capital Gain – Gains from selling assets like stocks, real estate, or mutual funds.
• Dividends – Company’s profit share paid to shareholders. These are taxed at the individual’s slab rate.
• Intraday Trading – It is classified as speculative business income. Taxed at the applicable slab rate.
• F&O Trading – It is classified as non-speculative business income which is taxed at the applicable slab rates.

Types of Gains

Short term capital gain or Loss

Short term capital gain or Loss occurs when an assessee sold shares within 12 months of purchase.

Long-term capital gain or Loss

Long-term capital gain or Loss occurs when an assessee hold shares for a period of more than 12 months from the date of acquisition.

Analysis of STCG and LTCG

Asset Type	Period of Holding STCG	Period of Holding LTCG
Listed equity shares	Less than 12 months	More than 12 months
Unlisted shares	Less than 24 months	More than 24 months
Immovable property (Land & Building)	Less than 24 months	More than 24 months
Equity Mutual funds	Less than 12 months	More than 12 months
Debt mutual funds	Less than 36 months	More than 36 months

Tax Rate on Shares

Short term capital gain or Loss

• 15% tax applicable on gains before 23rd July 2024.

• 20% tax after 23rd July 2024.

Long-term capital gain or Loss

• Before 23rd July 2024 : 10% on gains above Rs.1,25,000.

• After 23rd July 2024 : 12.5% on gains above Rs. 1,25,000.

Note:

• No deduction is available under Chapter VIA.

• Benefit of basic exemption limit is available.

Grandfathering Provision

The grandfathering provision refers to a special rule which was introduced in the Indian Income Tax in relation to the taxation of capital gains on the sale of shares or equity-oriented fund units (EOMF) that are subject to Securities Transaction Tax (STT).

Prior to 1st April 2018, in case of LTCG, when shares or EOMF were held for more than 12 months, were exempted from tax.

The Finance Act, 2018, proposed changes to this provision. It suggested the withdrawal of the exemption on LTCG and introduction of a concessional tax rate on LTCG from the sale of equity shares and EOMP effective April 1, 2018.

To address the taxation of gains accrued before the new provision came into effect, a grandfathering provision was introduced. According to this provision, for the transfers of shares or EOMF made until 31st January 2018, the cost of acquisition would be determined as the higher of the following:

The actual cost of the acquisition of the assets, or

The lower of the following:

• The fair market value of the shares as of 31st Jan 2018, or
• The actual sales consideration received upon transfer.

In simple term, grandfathering provision aims to provide relief to taxpayer who held shares or EOMF before the new tax regime was implemented in April 2018.

Loss Set Off Concept

• Short term capital Loss (STCL) can be set off against Short term capital gain (STCG) and long term capital gain (LTCG). Unused losses can be carried forward for 8 years.

• Long term capital Loss (LTCL) can only be set off against long term capital gain (LTCG). In this case also unused losses can be carried forward for 8 years.

• Intraday Loss against Intraday profit. Losses can be carried forward for 4 years.

• Future and Option can be set off against any income except salary and can be carried forward for 8 years.

Forms to Use for Share Market Gains

ITR-2

• This form is used if you are an investor earning capital gains from stocks, mutual funds, or other securities.

• Suitable for individuals/HUFs with no business income.

ITR-3

• This form is used if you are a trader treating stock market transactions as a business, reporting profits/losses under business income.

• Suitable for individuals/HUFs with trading activity.

Key Points To Remember

• Government Employees should avoid F&O and intraday transactions.

• Limit investment to Rs. 10 lakh in a single share for diversification and reduce risk.

• Buy back of shares is now taxable in the hands of the shareholder.

• Select correct ITR form based on the income to ensure accurate tax reporting and avoiding penalties.

Click here to know about Return for Non-Business Taxpayers with Multiple Incomes

FAQs