Taxation of transactions in Securities

The trend of Investment and trading in securities has increased over a period of time. Since many are drawn towards the theory of  “Higher the risk higher the returns”. Investors or traders in securities should keep in mind the tax aspect.

Basically dealing in shares is distinguished between Capital gains and Business income on the basis of various facts such as volume of transactions during the year, objective of taxpayer, nature of transactions etc.

For the sake of brevity, all the transactions in securities are re-classified in following 4 categories-

  1. Investment in shares or securities-

Here the very objective of the taxpayer is to buy the security, hold it for considerable time and concentrate on the returns in the long run. The securities are bought for the purpose of  investment rather than earning the gain on fluctuating prices.

The gain/loss on investments of a taxpayer are taxed as ‘Capital Gains’. They are bifurcated into short term & long term on the basis of period of holding as follows-

  • If the Securities (other than units of debt oriented fund) are:

a. Held for more than 12 months from the date of investment, the gain/loss on sale is called as Long term capital gain/loss.

b. Held up-to 12 months from the date of investment, the gain/loss on sale is called as Short term capital gain/loss.

Click here to know about “Capital Gains”.

  • If the Units of debt oriented fund are

a. Held for more than 36 months from the date of investment, the gain/loss on sale is called as Long term capital gain/loss.

b. Held up-to 36 months from the date of investment, the gain/loss on sale is called as Short term capital gain/loss.

Rate of tax as per the type of security is summarised as follows-

Particulars STT is paid STT not paid
Long term Short Term Long term Short Term
Without indexation With indexation
1. Listed Equity Shares Exempt 15% 10% 20% Slab Rate
2. Unlisted Equity Shares 20% Slab Rate
3. Listed Preference Shares 10% 20% Slab Rate
4. Unlisted Preference Shares 20% Slab Rate
5. Listed Debentures 10% Slab Rate
6. Unlisted Debentures 20% Slab Rate
7. Equity Oriented Units Exempt 15% 10% 20% Slab Rate
8. Debt Oriented Units 10% 20% Slab Rate
9. Government Securities 10% 20% Normal
  1. Trading in Shares or Securities-

The term Trade refers to buying and selling any goods or commodity. A taxpayer who regularly buys and sells the shares or securities is treated as a share trader and hence the profits/losses from his share trading are taxed under ‘Profits and gains from Business or Profession’. Here, the actual delivery of the securities is placed hence the gains/losses are treated as ‘Non-speculation Business Income’ taxable at normal slab rates.

Further, as per section 44AB of the Income-tax Act, in case of business income where the value of turnover during the financial year exceeds Rs. 1 crore, then taxpayer is required to get his books of accounts audited by a Chartered Accountant.  (Turnover refers to the aggregate of sales value from all the contract notes during the year.)

In case the turnover during the year does not exceeds Rs. 1 crore or where the taxpayer has incurred loss from share trading, and the total income of the taxpayer exceeds the basic exemption limit, then as per section 44AD of the Act the taxpayer is required to show profits of atleast 8% of the total turnover. The taxpayer may at his will show any profits exceeding 8% limit. And where the taxpayer does not want to show the profits of atleast 8% of the turnover then he is required to get his books of accounts audited by a Chartered Accountant.

The losses, if any, pertaining to a financial year could be set-off against any other income except salary income in the same financial year. Further, the balance losses could be carried forward to the next 8 financial years available to be set off only against business income.

  1. Day Trading-

Day trading refers to dealing in securities where buying and selling are done on a same working day. It is also called as ‘Intraday Trading’. As the name suggests, gains/losses from the day trading are taxable under ‘‘Profits and gains from Business or Profession’. In this case the contracts are settled otherwise than by placing actual delivery and hence the gains/losses are treated as ‘Speculation Business Income’ taxable at normal slab rates.

Further, in case of above income if the value of turnover during the financial year exceeds Rs. 1 crore, then taxpayer is required to get his books of accounts audited by a Chartered Accountant U/s. 44AB of the Act.

The definition of the turnover is not provided in the Income-tax Act, however as per the guidance note of ICAI regarding derivative transactions, the turnover is the summation of all the differences in the contracts considering profits and losses both.

In case the turnover during the year does not exceeds Rs. 1 crore or where the taxpayer has incurred loss from share trading, and the total income of the taxpayer exceeds the basic exemption limit, then same provisions of section 44AD shall be applicable. Taxpayer need to show profits of atleast 8% of the turnover otherwise audit provisions will get attracted.

The losses, if any, pertaining to a financial year could be set-off only against speculation business income earned during in the same financial year. Further, the balance losses could be carried forward to the next 4 financial years and available to be set off only against speculation business income.

  1. Transaction in derivatives-

Transactions in derivatives includes Futures and Options of currency, commodity trading etc. The tax treatment of transactions in derivatives is same as that of security transactions i.e. Capital Gains or Income from Business. However derivative contracts are somehow complex since the maturity of the same ranges generally between one month to six months.

If the volume of derivative transactions entered during the year is marginal then gains/losses are  taxable under ‘Capital Gains’. Whereas if the transactions entered during the year are voluminous then gains/losses taxable under ‘‘Profits and gains from Business or Profession’.

The same provisions for audit U/s. 44AB are applicable if the turnover exceeds Rs. 1 crore. And provisions of presumptive taxation of section 44AD are applicable if it does not exceeds Rs. 1 crore.

Though the dealings in security are risky, the taxpayer, with adequate knowledge, experience and intuitions can maximize his wealth. The taxpayer should also keep in mind the tax consequences of every security transactions in order to save his cash flows. 

Summary
Article Name
Taxation of transactions in Securities
Description
The trend of Investment and trading in securities has increased over a period of time. Since many are drawn towards the theory of “Higher the risk higher the returns”. Investors or traders in securities should keep in mind the tax aspect. Basically dealing in shares is distinguished between Capital gains and Business income on the basis of various facts such as volume of transactions during the year, objective of taxpayer, nature of transactions etc. For the sake of brevity, all the transactions in securities are re-classified in following 4 categories-
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myITreturn
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