During the current foreclosure, a large number of individual investors have become active online in the stock market, buying and selling stocks and, sometimes, derivatives, from the comfort of their own homes. This was reflected in the large number of individual brokerage and dematerialization accounts opened in recent months. Many of these investors make profits at small increases in price, typically hold stocks for a few days or weeks, and shrink their portfolios significantly. Many of them may feel that the Short Term Capital Gains (STCGs) they realize will be taxed at a concessional rate of 15%. This may not necessarily be the case, however.
It is only STCG for transactions in shares on the stock exchange or in capitalization UCITS which benefit from the concessional tax rate of 15%. Gains on derivative transactions are taxed at the normal individual bracket rate, in most cases 30% plus the applicable surcharge and tax.
In addition, to benefit from this concessional tax rate, income must be taxable as capital gains. ”For this, the holding of shares must be done as an investment and not as an investment. as a company’s stock-in-trade. If the shares are considered to be a trade stock, the income from the sale of those shares would constitute business income, which will be taxable at the normal rate. Mere classification by the taxpayer as capital gains does not necessarily mean that it be taxed only as capital gains.
A few years ago, the question of whether trading in shares constitutes a business or an investment activity was the subject of substantial litigation, with tax authorities seeking to tax all capital gains. (if the shares were held for more than a year or less). ) as business income. The controversy subsided substantially after the Central Direct Taxation Council (CBDT) clarified that if a taxpayer treated his gains on shares held for more than a year as long-term capital gains (LTCG), he was to be taxed as LTCG. It is only if these shares were classified by the taxpayer himself as trading shares that gains on the sale of those shares held for more than a year could be taxed as business income. Unfortunately, the clarification does not apply to shares held for one year or less, and litigation continues as to how gains in respect of such shares are taxed, whether as 15% STCG or as business income at the normal bracket rate.
Fortunately, in addition to the circulars from the CBDT, which established guidelines, the litigation over the past few years has been the subject of numerous judgments by high courts and the tribunal, setting the guidelines for determining whether income should be classified as capital gains or business income. In addition to taxpayers’ classification of stocks as a stock-in-trade or investment, other factors to consider include how long the stocks are held. the frequency of transactions, the volume of transactions relative to the total portfolio, whether the shares were acquired from borrowed funds, whether the same shares were bought and sold on a regular basis, the tax treatment of these gains in previous years, the the taxpayer’s occupation, the time devoted to such an activity, the infrastructure used for such an activity, etc. These factors and several others must be taken into account in order to assess the real intention of the taxpayer, whether it is to make a return on his funds over a longer period (therefore taxable as a capital gain), or to realize rapid profit by taking advantage of fluctuations in futures prices (therefore taxable as business income).
In the case of derivatives, unless there are very few and occasional derivative transactions or if the trading was conducted with the intention of hedging the physical holding of shares, the profit would normally be taxed as income from business at normal tax rates the intention in most cases is to profit from short-term price fluctuations.
Being classified as a business for tax purposes has its own consequences for tax compliance. If the turnover is less than 2 crore and profits are less than 6% of turnover, accounting books must be kept up to date and a tax audit is required, unless the taxpayer declares business income at 6% of turnover. cases under the presumption tax system. In cases which do not fall under the presumed tax regime, accounting books must be kept. In addition, a tax audit is required if the turnover exceeds 1 crore. If a tax audit is required for a year, the withholding tax deduction provisions apply to the individual taxpayer from the following year.
Each investor should therefore review their stock transactions and, based on their facts, take a call to find out whether it is a business or not. He must pay his taxes accordingly, and file his tax returns, after complying with the required requirements, according to his perception of his transactions in accordance with the applicable law.
Gautam Nayak is a chartered accountant
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