Every investor has lots of questions in mind about Income Tax Law for Capital Gain. The number of people buying and selling stocks in the capital market is increasing day by day. Also, the number of futures and options traders is increasing. Capital gains on sale of shares and dividends on taxable shares are taxable. Also, capital gains on futures market transactions are taxable. The tax to be paid on sale of shares depends on certain criteria.
Income Tax Law for Capital Gain of Different Types of Investment
There are two main types of shares under Income Tax Act. One is the shares of a company listed in the capital market and the other is the shares of a company not listed in the capital market, the shares of listed companies are traded in the capital market. Shares of unlisted companies are traded privately.
Trading in the capital market involves investing (long or short term), trading stocks and futures trading. Each of these types of tax rules are different. These transactions are mainly divided into two types:
Deliverable Shares
The confusion often arises in the minds of the taxpayers as to whether the transaction of sale or purchase of shares should be shown as ‘return on investment i.e. capital gain’ or ‘business income’. Taxation is different on both types of income and compliance is also different. Trading for the purpose of making a profit is considered as income of the business of the business and trading of a stock which is done for the purpose of gaining dividend and raising capital is considered as a source of income. The taxpayer should know from which source his income is taxable. The tax payable under ‘Capital Profits’ is at a discounted rate.
If the taxpayer is conducting the transaction as an industry-business, then all the provisions of the Income-tax Act for the income of ‘business-business’ apply to such transactions. In case of loss in such transaction, the provisions for deducting it from other income and carrying-forward for next year are different. Loss of industry business can be deducted from other business income or other income (excluding salary income).
Long-term capital loss can only be deducted from long-term capital gains. Short-term losses can be deducted from short-term or long-term capital gains. (Delivery of shares means shares held in your demat account for more than one day.)
Undelivered Shares
This includes ‘intraday’ and futures market transactions. The income from these transactions is calculated as the income of the business. This is because these transactions are done for profit only. As a result, all the provisions of the Income Tax Act applicable to ‘business’ income also apply to such transactions.
Income Tax for Intraday Trading
In an intraday transaction, the shares are sold on the same day as the purchase and its delivery means that it is not credited to your demat account. Therefore, it is taxable as speculative income. These returns have to be shown in the return under the heading of speculative income. If the speculative income is negative, then the loss cannot be deducted from the income of other industries. Such non-deductible losses can be carried forward for the next four years and can only be deducted from the speculative income. For this the return should be filed on time and this loss should be the way shown in the return.
Income Tax for Futures Market Trading
Even in this transaction, even if the shares are not delivered or paid, these transactions are not counted under the heading of speculative income. If the income is negative, that is, if there is a loss, then the loss can be deducted from other business income, speculative income or other income (excluding salary income). For this the return must be filed on time and this loss must be shown in the return.
Those who make such transactions are required to properly display their transactions in business income and capital gains income. Taxation and compliance are different for both. Accounts and audit provisions apply to business income. Taxpayers who make such transactions need to check these provisions. Estimated tax provisions also apply to this transaction. Failure to comply with these provisions may result in penalty.
Conclusion
Taxpayers who make such transactions are required to show these transactions under the appropriate heading in the return. The Income-tax department may send a notice to the taxpayer if it does not show in the transaction statement that it receives information about the taxpayer’s transactions through various channels.
Take a Look
