Share Income: Decoding the Best Tax Classification for You  


Share Income: Decoding the Best Tax Classification for You


Query 1]

I am having Short Term Capital Gain (STCG) as well as Long Term (LTCG) from shares. Is it a business income or capital gain income? Which income is better – as a capital gain income or a business income? Kindly clarify. It will help me in selecting the tax regime every year. 


Income from delivery based share transactions may either be recognised as “Income from Business” or “Income from Capital Gain”. Before coming to the factors which are relevant in treating & determining the income either as a capital gain income or as a business income, let us first understand the tax implication in either case i.e., tax implications when the income is considered as business income & when it is considered as capital gain income:

One of the key difference in taxation of shares income as Capital Gain vis a vis Business Income is with regard to the rate of tax, as under:
a] If transactions are treated as Capital Gain:
If the share transaction done through stock exchange is considered as “Capital Gain Income” then –
(i) Long Term Capital Gain (LTCG) would be exempt up to Rs. 1 Lakh and only income exceeding Rs. 1 Lakh shall be taxable @ 10% U/s 112A;
(b) Short Term Capital Gain (STCG) would be taxable @ 15%.
b] If the transaction are treated as Business Income:
If treated as business income then the entire income would be taxable like other regular income of the taxpayer and tax liability would be in accordance with the applicable tax slab of the taxpayers.
On a standalone basis, one may see that the tax rate for “Capital Gain” income would be in the range of 10% to 15% whereas the tax rate would vary from 5% to 30% if the income is considered as “Business Income:.

If the income from share transactions is treated as Business Income then taxpayers can claim deduction towards expenses like salary, depreciation, telephone, interest, etc.  However, if such income is treated as capital gain then no such deduction shall be available as in such case only expenses incurred in connection with the transfer (like brokerage) is permissible.

Irrespective of the amount of sale/turnover, audit would not be compulsory if the income from share transactions is considered as “Capital Gain”. However, if the share transactions are considered as business then tax audit would be mandatory for
(i) individual/HUF/Firm if (a) the turnover exceeds Rs. 10 Crore or (b) if the turnover is not exceeding Rs. 3 Crore & income offered for taxation is less than 6% of turnover.
(ii) Other than persons covered by (i) above, if the turnover exceeds Rs. 10 Crore.

Tax impact varies significantly if there is a loss in the share transactions. If it is under the head “Capital Gain” then
a) LTCG Loss (LTCL) is allowed to be adjusted against LTCG only. Such LTCL cannot be adjusted against STCG or other heads of income of the taxpayers.
b) STCG Loss (STCL) is allowed to be adjusted against STCG or LTCG. Such STCL is not allowed to be adjusted against other heads of incomes of the taxpayers.
In short, if a taxpayer has incurred loss in shares transactions of say Rs. 50 Lakh & have profit in the business of say Rs. 30 Lakh then such taxpayer would be required to pay the tax on business income of Rs. 30 Lakh even though during the year, there is a net loss of Rs. 20 Lakh to the taxpayers. Seamless adjustment of loss against profit is not possible in case of loss under the head “Capital Gain”.

If the income from share transactions are considered under the head “Business Income” then the loss from such transactions can very well be adjusted against all other business incomes as well against other LTCG / STCG. In short, if a taxpayer has incurred loss in shares transactions of say Rs. 50 Lakh (which is considered as Business Income) & have profit in the other business of say Rs. 30 Lakh then such taxpayers would not be required to pay any tax as business income from one business can be adjusted against income of another business.

If the share transactions is considered as Business Income then the taxpayers have a choice to decide the mode of valuing the closing stock i.e., taxpayers may choose to value the closing stock at cost or market  price whichever is lower. In short, the loss due to fall in the value of the shares may be available if the income is considered under the head “Business Income”.
No such benefit of lower valuation is admissible in case the share transaction if it is treated as “capital gain” income. In such a case, closing stock of shares has to be taken at the cost value only.

6.DEDUCTION UNDER CHAPTER VI-A (i.e., Section 80C, 80G, 80D etc):
Deduction under section 80C (LIC, PPF, NSC etc), U/s 80G (Donation), Under Section 80D (Mediclaim), etc is not admissible against income which is chargeable to tax under the head “Income from Capital Gain” whereas there is no such restriction against business income. In short, if the income from shares transactions is considered as “Business Income”, deduction under Chapter VI-A would also be admissible.

If the income from shares transaction is taxable as “Income from Capital Gain” then the taxpayer is eligible for blanket exemption of Rs. 1 Lakh. Tax @ 10% is payable on an amount exceeding Rs. 1 Lakh. There is no such blanket exemption if the income from share transactions is offered for taxation under the head “Business Income”.

Do Taxpayers have a free choice for offering income as Business Income or Capital Gain Income?

Taxpayers may note that the taxpayers don’t have the free choice of choosing the mode of offering income as either a capital gain or as a business income. Even though the proper classification & categorization of income plays a vital role in determining the tax liability of the person, the choice has to be based on the facts of each and every individual case. The correct classification depends upon various subjective parameters & criteria, including –

1.Volume & Nature of transactions

2.Intention & Logic behind investments.

3.Holding period of shares

4.Investment of own funds or a borrowed fund.

5.Other business activities of the Taxpayers, etc./

Income from Share transactions would be categorized as business income if there are numerous & frequent transactions or if it is the main activity of the taxpayer or if trading is done with a view to earn instant profit, etc. Although the Courts and CBDT have established above principles to differentiate between business income and capital gain income, these principles are subjective and allow for some degree of planning and classification.

What is Better: Classifying income as Business Income or Capital Gain?
There is no one-size-fits-all answer to this question. The reply cannot be given in isolation. The answer would also depend upon not only on the basis of current year income but also on the basis of its subsequent year’s vision. The tax implications vary from person to person and there is enough scope of tax planning while doing transactions in the share market. Above discussion may guide the taxpayer for tax optimization.