I am a regular reader of Varsity, and I heard that CBDT has come out with a circular that removes the ambiguity in terms of showing your equity trades under capital gains or business (as explained in this chapter), especially when you are doing this actively.
Yep, amidst all the noise around budget we missed out on the very important circular released by CBDT on 29th Feb 2015.
As per the earlier circular from 2007 as explained in this chapter on Varsity, it said “If you buy shares with the intent of earning income through dividends you are an investor, and if you buy and sell shares with the intent to profit, you are a trader”. --- Yep quite ambiguous.
Since everyone buying stocks would be doing so expecting capital appreciation, most people technically wouldn't be an investor and couldn't claim benefit of zero long term capital gains tax. If you showed these as trades(business income) you have to pay taxes on any appreciation based on the regular income tax slab you fall in.This had led to so many litigations in the past.
Finally the income tax department has brought in clarity in classifying yourself as a trader or an investor through this CBDT circular, which states:
An individual can decide on his own to either show his stock investments as capital gains or as a business income irrespective of the period of holding the listed shares and securities. Whatever is the stance once taken, the taxpayer will have to continue with the same in the subsequent years.
We have updated the module on markets and taxation on Varsity.
So one ambiguity out of the picture, hopefully the IT department will soon clear out confusion around audit requirement for traders.
I am not sure if IT dept has clarified it fully, especially for short-term capital gains. They have cleverly worded it in such a way that they can dispute your claim in case of short-term trades.
Clause a says that the investor has the option to treat any trade as capital gains or business income.
"a) Where the assessee itself, irrespective of the period of holding the listed shares and
securities, opts to treat them as stock-in-trade, the income arising from transfer of
such shares/securities would be treated as its business income".
But clause b guarantees that they will NOT dispute your claim as Capital Gains ONLY in case of holding period more than 12 months.
"b) In respect of listed shares and securities held for a period of more than 12 months
immediately preceding the date of its transfer, if the assessee desires to treat the
income arising from the transfer thereof as Capital Gain, the same shall not be put
to dispute by the Assessing Officer."
It means Assessment Officers can still take you to litigation with regard to Short-Term Capital Gains.
Only business like any shop keeper.
More info SHARE MARKET TRADING
Still the ambiguity is there whether a trader can show his short term trades as capital gains. The new laws make it clear that we can show our long term equity profits as capital gains and also all our trading income from day trading or short term trading from equity and F&O as business income.
So, more clear laws are required from the IT for the short term capital gains.
As this is also at an disadvantage to those who fall in the higher tax bracket of 20% and 30% and trades the market as they will have to pay 20% or 30% tax on their short term equity gains as compared to 15% as levied on short term equity capital gains.
Refer these for more info -
Taxation for Investors at Zerodha.com
Income from Equity Trading - Business Income or Capital Gains at Justtrading.in
What happens in this scenario i am doing both investment in shares and also options trading… Am actually a equity investor but for few times try out fno options… How should i file return? Which form to use?
You will have to use ITR 4 to show option trading which is a business income. You can show equity investments under capital gains.
Please clarify me if my income not taxable and I book loss in both equity and option section so then
ITR 4 More here: http://zerodha.com/varsity/module/markets-and-taxation/
My bad 29th Feb
can someone who trades only futures , show his activity as an investment and get rid of audit requirements ?
Dear sir, how can we submit our ‘decision’ as to whether we are an investor or a trader?
F&O is considered as business, so can’t be shown as investment.
While filing the return show your equity investments under capital gains. It automatically means you are an investor.
Can I set off my previous year loss with this year’s profit…?
Yep, you can. Make sure to read through varsity
You’re very much right. I also think they have not made it clear for short term capital gains.