How Are Stock Market Gains Taxed And How To Declare Them In Your ITR?

The stock market was at an all-time high in financial year 2021 and many investors may have booked their profits during the year. While we all keep in mind the taxation aspect of incomes such as from salary, rent and businesses, we often ignore the taxation of gains made from trading on the stock market. These gains will also need to be included in the income tax return (ITR) you need to file by December 31, 2021 for assessment year 2021-22 (FY2020-21).

Here is how trading gains are taxed and how to declare such income in your ITR form. Trading gains in the context of shares ordinarily refers to gains made on the sale or purchase of shares, usually on a recurring basis.

How Are Trading Gains Taxed?

As per the Income-tax Act, 1961, the taxability of gains arising on the sale of shares depends upon several factors such as the period of holding and volume of transactions. If the shares are held by the taxpayer for investment purpose, then it would be treated as a capital asset and would be taxable as capital gains. However, if the shares are usually bought and sold in a relatively shorter period of time on a recurring basis, it could be taxable as business income.

Where the gains are taxed as capital gains, they are further classified into short-term or long-term capital gains (STCG and LTCG) based on the period of holding. Accordingly, if such shares are held for a period of more than one year (two years for unlisted shares), the same would be categorised as long-term, otherwise short-term. “LTCG from unlisted shares are taxed at 20 per cent under Section 112 of the Income-tax Act, whereas STCG are taxed at applicable slab rates of the investors. However, if shares are listed then it would be taxed at a concessional rate of 15 per cent/10 per cent under Sections 111A/112A, respectively (for LTCG and STCG). Business income is taxed as per the slab rate applicable on the individual,” says Sandeep Sehgal, director, AKM Global, a tax and consulting firm.

There should be proper classification of short-term or long-term based on the period of holding.

Remember that STCG is taxable at a flat rate of 15 per cent. “A special rate of tax of 15 per cent is applicable to STCG, irrespective of your tax slab,” says Archit Gupta, founder and CEO, ClearTax, a tax portal.

Before the introduction of Budget 2018, LTCG on the sale of equity shares or equity-oriented units of mutual funds were exempt from tax. “The Financial Budget of 2018 took away this exemption. Henceforth, if a seller makes LTCG of more than Rs 1 lakh on the sale of equity shares or equity-oriented units of a mutual fund, the gain will attract LTCG tax of 10 per cent (plus applicable cess). Also, the benefit of indexation will not be available to the seller. These provisions will apply to transfers made on or after 1 April 2018,” adds Gupta.

Ensure you take the benefit of indexation, if eligible, while calculating the cost of acquisition of shares. “Deduct the brokerage expenses incurred, if any, from the full value of consideration and those as cost if paid at the time of the purchase of shares. If some shares are held for investment purpose and not meant to be taxed as business income, then ideally a taxpayer should have sufficient justification and appropriate classification of the same,” says Sehgal.

How To Declare Trading Gains In Your ITR?

Capital gains arising on the transfer of shares are to be declared under the Capital Gain Schedule in the ITR form, maintaining the proper classification between short-term or long-term. “The details of capital gains are not to be reported under ITR-1/ITR-4 so a taxpayer will need to use ITR-2 for the purpose. For reporting business income, a taxpayer will need to use ITR-3 or ITR-4, if presumptive scheme of taxation is opted for,” adds Sehgal.