Individuals are rushing to file Income Tax Returns (ITRs) for the financial year 2018-19 as August 31 deadline (after one-month extension given by the CBDT) nears. It is important to make correct disclosures in the ITR as incorrect disclosures may make your return defective. Investors are comfortable trading in the stock market but they find it complicated to decrypt its tax treatment. Here, we discuss how to report gains arising out of listed equity shares and mutual funds in the ITR.
Business income versus capital gains
It is important to disclose income under the correct head and in correct schedule. Thus, the first moot question is whether gains arising from sale of securities should be reported as business income or capital gains. It is an important riddle to solve as both of them have different tax treatment. As per CBDT guidelines, if assessee himself treats listed shares as stock-in-trade, the income arising from such transfer would be treated as business income.
If the listed shares are held for more than 12 months, the assessee can treat the income arising for their sale as capital gains. However, this stand, once taken in a particular year, shall remain applicable in subsequent years also and taxpayers shall not be allowed to adopt a contrary stand in this regard in subsequent years.
Period of holding
If investors opt to disclose income under the head capital gains, it has to be classified into long-term or short-term. If listed shares and units of equity-oriented funds are sold after 12 months, income shall qualify as long-term capital gains. For units of mutual funds other than equity-oriented funds, the period of holding has to be more than 36 months to qualify as long-term.
Long-term capital gains, arising from sale of listed shares and units of an equity-oriented mutual fund is exempt from tax up to Rs 1 lakh and after which it is chargeable to tax at the concessional rate of 10 per cent. However, in this case, the benefit of indexation is not available. Also, the tax deductions under sections 80C to 80U and rebate under section 87A cannot be claimed from such gains. Long-term capital gains arising from units of mutual funds, other than equity-oriented funds, is taxable at the rate of 20 per cent, but indexation benefit can be claimed (except from debt-based funds).
Short-term capital gains arising from sale of listed shares and units of an equity-oriented mutual fund are taxable at the special rate of 15 per cent. No deduction shall be available under sections 80C to 80U from such gains. Short-term capital gains arising from units of mutual funds (other than equity-oriented funds) are taxable at the slab rates applicable to the assessee.
Reporting in ITR
Income from capital gains can be reported in Form ITR-2 or ITR-3. As every transaction in securities is unique, gains or losses arising from such transaction should be reported separately or in aggregate. In this regard, the e-filing platform has issued a clarification that the taxpayer has an option to show scrip-wise details or the aggregate value of gain or loss in schedule CG.
Treatment of loss
Capital loss, whether short-term or long-term, cannot be set-off against income taxable under any other head. It can be set off only against long-term capital gains. It cannot be set-off against short-term capital gains. However, short-term capital loss can be set-off against both long-term or short-term capital gains. Unabsorbed capital loss can be carried forward for eight assessment years and set off against the relevant capital gains of the subsequent year, only if the return of income is filed on or before the due date.
In case of business loss, it can be set-off against the income taxable under any heads except salary income. The unabsorbed business loss can be carried forward up to eight assessment years. It can be set off only against the business income in subsequent years. Such loss can be carried forward only if return of income is filed on or before the due date, otherwise, the right to carry forward and set off is lost.
Books of accounts
If income from securities is disclosed as business income, the taxpayer needs to maintain prescribed books of accounts. Expenses incurred, wholly and exclusively, for earning such income, that is, brokerage, STT, fees, telephone expenses and consultation charges can be deducted from this income. If the turnover from business exceeds Rs 1 crore in any previous year, the taxpayer is required to get his accounts audited. Such business income needs to be reported in Form ITR-3.
(Naveen Wadhwa and Tarun Kumar are DGM - R&D, Taxmann.com)