The share market offers myriad opportunities to gain significantly in the short term and long term. The Indian stock market has grown by more than 5% for the second month in a row, first in October and again in November 2022. The SENSEX (BSE30), which tracks 30 major companies listed on the Bombay Stock Exchange (BSE), reached an all-time high of 63,583 in December of 2022, and industry experts expect it to benefit stock market investors with more investment opportunities.
Individuals with good knowledge of fundamentals and technicalities can grab opportunities and make profits. The gains from share trading can be treated as capital gains or business income to fulfill tax liabilities.
Business Income from Share Market
The gains made in the share market from different trading activities can be classified as Capital Gains or Business Income. Many taxpayers consider their gains from shares for business income.
When can Gains from Shares be treated as Business Income?
Taxpayers need to consider the following factors to understand the classification of gains from share trading:
1. Significant Trading Activity
- Traders involved in significant trading activities of shares in the cash segment or future & options (F&O) segment can classify their gains from shares as Business Income. Significant Share Trading means a high trading volume of shares using online demat accounts along with trading accounts. Although there is no fixed cap for trading volume, it should not exceed Rs.1 crore in a financial year for a few stockbrokers.
- When the trading activities are irregular, the gains from shares are classified as Capital Gains. It can be a long-term or short-term capital gain on assets one holds in a demat account. If the average holding period of assets is shorter, gains from shares will be considered business income rather than capital gains. A futures & options (F&Os) trader is considered a short-term trader. Gains from equity F&O and intraday trading are considered Business Income.
2. The Taxpayer’s Intention
- If a taxpayer intends to hold shares for long-term benefits from value appreciation or dividend income, the gains from shares are classified as Capital Gains.
- If a taxpayer intends to trade shares using a trading account to earn short-term profits, the gains from share trading are classified as Business Income.
Corresponding Guidelines from CBDT
Investors can get more clarity on business income from shares with CBDT (Central Board of Direct Taxes) clarification under CBDT vide Circular No. 6/2016.
- Taxpayers who have classified equity holdings as stock-in-trade can treat gains from shares as business income.
- Taxpayers hold listed shares for more than 12 months to treat gains from shares as capital gains.
- In all other cases, trading activities and the taxpayer’s intention will decide the income head.
Investors should consider that gains from unlisted shares are treated as capital gains irrespective of the holding period as per CBDT circular No.225/12/2016/ITA.
Taxability of Gains from Shares as Business Income
Individuals who trade in the equity market must file Income Tax Returns (ITRs) and pay tax on the total income, including gains from shares. It is taxed as per the tax rate applied to the business income. They must file ITR 3 or ITR 4 to declare their profits from shares as a business income. Positively, taxpayers involved in share trading can write off their business expenses against the income from shares. The expenses incurred should be wholly and exclusively connected to business or professional income.
Thus, investors can earn business income from shares, depending on the interval of profit-making. If an individual makes profits from sales of shares at regular intervals, it should be treated as business income. It is the reason why intraday traders show their income from share trading under the head business income.