DUMMY

Taxation On Sale Of Listed Equity Shares & Equity Oriented Mutual Funds

 

In Equity Trading with respect to Listed Shares, Investors mainly do either of these below mentioned things or all of them like:

1. Buying and selling shares on the same day
2. Buying shares & holding them for a certain time period 
3. Doing Futures and Options Trading.

 

In this article, we will discuss about tax implications relating to point (1) and (2) above.

 

CLASSIFICATION UNDER THE RELEVANT HEAD & TAX RATES

 

 

 

Intention is very important for the classification because if you are keeping it as an investment, it is treated as “capital assets” & therefore, any gains accruing through it is classified under the head “capital gains”. Under capital gains, you have to further see if you have to classify them as “short term” or “long term” which depends on the holding period. 

 

If you hold them for less than 12 months before selling, listed equity shares and equity oriented mutual funds are treated as “short term capital assets” and the gains are classified as “short term capital gains” while if you hold them for more than 12 months and then sell, they are treated as “long term capital assets” and the gains are classified as “long term capital gains”. 

 

Having said that, in majority of the situations, it is beneficial for investors to classify them under the head “capital gains” as a special tax rate of 15% is applicable on short term capital gains and a tax rate of 10% is applicable on long term capital gains (after giving the exemption benefit of one lakh rupees of long term capital gain every financial year) which are much lower if compared with an investor/trader who falls into the tax slab of 30% as income from business/profession is taxable at slab rates of the taxpayer.

 

On these long-term capital assets, indexation benefit is not given while calculating gains.

 

Further, one cannot change the classification every year from business or profession to capital gains and vice-versa as per circular 06/2016. Any stance that an investor/trader has once taken cannot be changed in the subsequent years.

 

 

COMPUTATION OF BUY PRICE & SELL PRICE

 

Turnover computation in Intraday is different from an ordinary business. Like, when you sell 5 pens of Rs. 50, the turnover is Rs. 250 but turnover of intraday is not calculated in this manner.

Turnover of Intraday is calculated on the basis of “aggregate sum of absolute differences of positive and negative amounts”

Here is an easy example with two entries explaining the same

 

Turnover Calculation for "Intraday"
Particulars	Buy Value	Sell Value	Profit/Loss	Turnover
HDFCBANK	100,000.00	90,000.00	(10,000.00)	10,000.00
ITC	100,000.00	105,000.00	5,000.00	5,000.00
	2,00,000.00	195,000.00	(5,000.00)	15,000.00

 

 

Turnover in this case is calculated like any other normal transaction i.e. by multiplying total no. of shares sold with sale price per share. 

Purchase price too is calculated like any other normal transaction i.e. by multiplying total no. of shares bought with purchase price per share. 

 

 

Turnover in this case is calculated like any other normal transaction i.e. by multiplying total no. of shares sold with sale price per share. 

Purchase price too is calculated like any other normal transaction i.e. by multiplying total no. of shares bought with purchase price per share. 

Although, for all long term listed equity shares or equity oriented mutual funds bought up to 31^st January 2018, purchase price will be higher of actual cost of acquisition or fair market value as on 31^st January 2018 whichever is higher. This concept is called “grandfathering” brought in Finance act, 2018 

 

MAINTENANCE OF BOOKS OF ACCOUNTS

 

Preparation of books of accounts for an Individual/HUF becomes mandatory for a financial year if you meet any of the following conditions:

 

 

 

Note: The above limit of Rs. 25 Lakhs and Rs. 2.5 Lakhs should be read as “10 Lakhs” and Rs “1.2 Lakhs” respectively for persons other than Individual or HUF. 

 

 

Books of accounts need not be maintained irrespective of the turnover of the investor.

 

APPLICABILITY OF TAX AUDIT

 

 

There is a lot of confusion around getting books audited in a situation where the person shows a profit below 6%/8% of turnover or incurs a loss in F&O business but that’s far from reality.

Tax audit becomes mandatory only if any of the following condition is satisfied:

 

 

Note: Tax audit can be done only by a chartered accountant in practice.

 

Note: Many people have a confusion that if turnover is below 6%/8% or if there is a loss, tax audit is applicable but it is an incorrect understanding. The applicability would arise only if any one or both of the conditions are satisfied.

 

 

Audit is not required irrespective of the turnover of the investor. 

 

CLAIMING BENEFIT OF EXPENDITURE INCURRED

 

 

Yes, you can claim expenditure that you have incurred to carry on the business like broker commission, demat charges, depreciation on fixed assets that you use to carry on this business, rent (if you’re operating through a place where you pay rent), payment to professional consultants if you have taken their services, payment for any subscription which aids you in doing F&O business.

 

You cannot take benefit of any expenditure which is not relatable to doing business of intraday or trading in shares.

 

 

 

Expenditure which are wholly and exclusively incurred to carry out the transaction will be deductible except for securities transaction tax.

 

Also, any expense of indirect nature will not be allowed.

 

 

SET OFF AND CARRY FORWARD OF LOSSES

 

 

As discussed earlier, Intraday business is treated as a speculative business and the income tax law allows losses of speculative business to be set off only with gains of speculative business.

 

Further, losses of speculative business which are not set off are allowed to be carried forward for four assessment years only immediately following the assessment year in which the loss was first computed.