All you need to know about Levy of Taxation on Listed Shares

Share trading is really popular in our country as a source to earn easy and quick money. Well, though it’s not that easy to make money in share market. It is neither all luck nor all knowledge, it is mix and match of both. Be it luck or knowledge, be it easy or difficult income is income when it comes to income tax. So, like all other incomes this income is also taxable. There are various rules and sections which guide us on computation of taxable income and amount of tax payable thereon. The income earned from shares is taxable either under the head Capital Gains or Business Income depending on certain factors. Today in this article our scope of discussion is taxation relating to listed shares.

Table of Contents

What is meaning of listed shares?

As per Income Tax Act, shares are covered under the definition of Capital Asset. It is not necessary that asset should be related to business of the assessee. The meaning of securities as per Act includes

  • Shares, scrip, stocks, bonds, debentures stocks or other marketable securities.
  • Government Securities, or any other instruments specified by government as securities.

 Listed shares means the shares that are listed on any recognized stock exchange in India.

What is the taxable income from sale of shares?

In common understanding that income/profit means excess of revenue over costs, in the same manner the income from shares is calculated as: –

Particulars Rs.
Full Value of Consideration (i.e., Sale Value of Shares)  XXXX
Less: – Any cost incurred for sale of such shares (e.g. brokerage, commission etc.) (XXXX)
Net Sales Consideration  XXXX
Less :- Cost of acquisition (XXXX)
 Value of Capital Gain/Loss XXXX

In case of shares the taxation of above computed income depends on the period of holding, i.e. whether it was a long term capital asset or short term capital asset, depends on how long the asset was held by the taxpayer.

  • Period of holding up to 12 months, it is treated as short term capital asset.
  • Period of holding is beyond 12 months, it is treated as long term capital asset.

What are rates of taxation?

The provisions regarding rate of taxation of listed shares are given under different sections for both short term and long term capital gain. We will be discussing both in detail one by one.

Long Term Capital Gain

The provisions for taxation of long term capital gain on the sale of listed shares are given u/s 112A. Previously before the Finance Act, 2018 the long term gain on the sale of listed securities was fully exempt from tax. However Finance Act, 2018 inserted section 112A. The provisions of Sec.112A are as follows:-

The long term capital gain will be taxable at the rate of 10% (concessional rate) if following conditions are met

  • The assets sold are equity shares, and
  • Securities Transaction Tax is paid both on acquisition and sale of such shares, and
  • The amount of such gain exceeds Rs.1,00,000/-

For the cases not covered under Sec.112A, in case of any listed securities the taxpayer will have following options

  • Tax at rate of 20%, without indexation benefit.
  • Tax at rate of 10%, with indexation benefit.

Note: Indexation benefit means that the cost of acquisition is increased with Cost Inflation Index of the year of transfer. Cost Inflation Index (CII) of every year is notified by government. Indexed Cost is calculated using the following formula-

Cost of acquisition × CII of the year of transfer of capital asset

CII of the year of acquisition

Clarification on Cost of Acquisition

Generally, cost of acquisition is the actual amount paid to acquire any asset, however in case of equity shares not covered u/s112A the cost of acquisition will be taken as follows-

  • Where the listed equity shares are purchased before 01.02.2018, the cost of acquisition will be higher of the two:-
  • Actual Cost of Acquisition

                OR

  • Lower of (1) and (2)
    • FMV of such shares as on 31.01.2018**( highest price quoted on that date/or on a preceding date when such shares were last traded)
    • Actual sales consideration on its transfer.

* Where stock is not listed on 31.01.2018, NAV(Net asset value of the share will be taken as FMV.

* Where shares were not listed on 31.01.2018, however becomes listed on date of transfer than the cost of indexation will be indexed with CII of FY2017-18, and will be deemed to be its FMV.

Short Term Capital Gains

Normally Short term Capital gains are taxable at the rate of tax applicable to the taxpayer.The provisions for taxation of short term capital gains arising out of the sale of equity shares are contained in Sec.111A. As per provisions of the section STCG on sale of equity shares will be taxable @15% if following conditions are met-

  • The sale is made through a recognized stock exchange, which implies that shares should be listed.
  • Securities Transaction tax is paid on sale of such shares.

Also w.e.f 2017-18, rate of 15% will be given even if STT is not paid provided following conditions are satisfied-

  • Transaction is undertaken on a recognized stock exchange located in any International Financial Service Centre, and
  • Consideration is paid in Foreign Currency.

Treatment of Loss on sale of Shares

We understood that gains arising out sale of shares are taxable at certain rates, but what if I make a loss, will my tax liability get reduced because of that loss, well the answer is yes. The provisions regarding carry forward and set-off losses are as follows-

  1. Short Term Capital Loss-
    • Short Term Loss can be carried forward for 8 subsequent years.
    • Such loss can be adjusted against any long term/ short term capital gain during these years.
    • Losses can be carried forward only if ITR is filed within due date.
  1. Long Term Capital Loss-
    • Before Finance Act, 2018 Long Term Capital loss arising out of sales of shares was redundant as income from such transactions was exempt itself.
    • Finance Act, 2018 introduced the tax rate of 10% has been levied on the sale of listed securities.
    • Long Term Capital loss will be allowed to carry forward and set-off against any long term capital gain for 8 subsequent years.
  1. Intra-day trading loss-
    In case of intraday trading, income will be treated as business income and will be taxed at normal rates applicable. 

    • The losses if any in case of intraday trading can be carried forward only for 4 assessment years.
    • Such losses can be set-off against only speculative gains/income.
    • Return should be filed within due date.

Other Important Points

  • Deductions under Chapter VI-A can be claimed against STCG. However same cannot be claimed against LTCG.
  • Resident Individual/HUF can adjust STCG/LTCG to basic exemption limit, once all other incomes are adjusted and balance will be taxed at specified rates.

Is this income Business Income/Capital Gains?

The income from share trading can be considered as business income or capital gain. For people whose significant transactions contain stock trading can treat it as a business income as the advantage of doing it is that the business expenses can be adjusted against income.

On the other hand if income is treated as capital gains, only the expenses related to transfer of shares can be adjusted also the rates of tax are fixed.

CBDT issued Circular No.6/2016 to clarify the issue. As per the Circular it was clarified that:-

  • If the assessee, itself wishes to treat the listed shares/ securities as stock in trade (irrespective of period of holding, then income arising from their sale will be treated as business income.
  • In case of listed shares and securities held for more than 12 months, if the assessee wishes to treat it as capital gains, then Assessing Officer will not put it in dispute. However, such stand once taken cannot be changed in the subsequent years by the assesse.
  • In all other cases, it will taxed as per applicable circulars.
  • These provisions will not be applicable where transaction does not seem genuine to Assessing Officer.
  • Further in case of unlisted shares, irrespective of period of holding it was clarified that same will be treated as Capital Gains only, to keep uniformity in approach.

Conclusion

So, long story short the taxation relating to listed shares is quite simple. The rates are 15% in case of STCG and 10% in case of LTCG, subject to conditions contained in respective sections. The provisions regarding Losses and carry forward- setoff are same irrespective of the fact that shares are listed or not. The treatment of income as business/capital gain can be decided on the basis of facts and circumstances. In the above discussion we have discussed at length the taxation relating to listed shares and we hope same will be useful while discharging your tax liabilities.

CategoryIncome Tax

CA Rishabh Maheshwari is an associate Chartered Accountant having expertise in conducting statutory and internal audits of large clients. He has also done a certified course on Concurrent audits of banks. He is responsible for coordination, planning, team leadership in connection with Audits and GST of Private and Public Companies with an experience of almost 3 years.

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