Guidance on treating Share trading as a Business Income

Income from share trading can be treated as income from Capital Gains as well as Income from Business/ Profession. There has always been an ambiguity about this topic. Share trading can be done as a full-time business as well as an investment option. In recent times there has been an increasing trend of Investment in shares and IPO and trading in the market.

If there is a momentous share trading activity (including trading in Futures and Options), usually the income from such transactions is treated as Income from Business. Hence ITR 3 form is used to file your Income Tax Return. Thus all the expenses incurred in the process of earning this income, (for example internet charges, brokerage, telephone expenses, and Demat account charges) are treated as business expenses and are deductible. Income is added to the total income and is taxed according to the normal Tax Slabs of Total taxable Income. 

When the income to be treated as Business Income or Capital gain is totally at the discrepancy of the taxpayer. New clarification from the CBDT informs that once the taxpayer chooses one head of income for taxability of Income from share trading, he has to adhere to the same head every year. The heads of income used should be the same every year and should not be changed subsequently unless there is some distinguished change in circumstances. If the taxpayer himself treats the shares as stock in trade, the income shall be treated as Business Income, irrespective of the period of holding. Intraday stock trading is also treated as Business Income as the intention of the taxpayer is to make profits from the volatility of the market and not to invest long term to reap benefits of growth. This speculative business is treated as a diverse business apart from the normal business of the tax-payer. This is so because as per Section 73, loss from speculative business can be set off only against the profits of Speculative business and can be carried forward for four consecutive assessment years.

Alternatively, if the income from share trading is less than 2 crore, then income can be taxed on a presumptive basis at the rate of 6% of turnover (8% of turnover if an electronic clearing system is not used). In such cases, ITR 4 form will be used for filing the income tax return. Interest income and Dividend Income will be reported under the head “Income from Other sources” in such cases.

The main criterion which decides whether to tax the income from share trading as Business Income or Income from Capital Gains depends on the “significant trading activity” and the rationale of the taxpayer to hold the shares as stock or as an investment. Also, long-term gains from equity above Rs 1 lakh annually are taxable, while short-term gains are taxed at 15%.

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