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Holding Period requirement long-term and short-term

For the purpose of capital gains the shares are divided into two categories: listed and unlisted. The shares which are listed on any stock exchange shall qualify as long term once the same have been held for more than twelve months. For other shares (including shares listed on foreign stock exchanges) unlisted shares the holding period requirement is more than 24 months.

Applicable tax rate for shares on which Security Transaction Tax has been paid

For the shares which are traded on the platform of stock exchange in India the brokers are required to collect Security Transaction Tax (STT). So any profit made on the listed equity shares sold through a broker will be fully tax free if held for more than twelve months. In case of profits made on equity shares held for 12 months or less and sold on Indian stock exchanges will be taxed at a flat rate of 15.45%. Please note that on such short term capital gains the benefits of deductions under chapter VIA like section 80 C, 80 CCD, 80D, 80E, 80 G, 80GG is not available. So in case you do not have any other income except these taxable short term capital gains, you will not be able to take the benefits of various items like contribution toward public provident fund, NSC, ELSS, mediclaim premium, NPS etc. However in case your other income excluding these short-term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit while calculating your tax liability.

Applicable tax rate in case no STT is paid

In case of profits made on non listed shares which were held for not more than 24 months or the listed shares on which STT was not paid and held for not more than 12 month, shall be treated like your other income and taxed at slab rate applicable to you. The long term capital gains made on such shares (listed shares held for more than 12 months and other shares held for more than 24 months) will be taxed at flat rate of 20.60%. However, in case of listed shares on which STT is not paid, you have the option to pay tax @ 10.30% without availing the benefit of indexation in case the tax liability @ 20.60 % on indexed long term capital gains is higher. It is important to note that in case the shares are not listed in India, this option of choosing between 10.30% unindexed and 20.60% indexed capital gains is not available. So in case you sell any shares which are listed on any foreign stock exchange, you will have to pay tax on long term capital gains @ 20.60% and on the short term capital gains at the slab rate applicable.
It, may also be noted that here also you cannot claim any deduction under Chapter VIA as discussed above in your long term capital gains. Likewise in case your other income excluding these long-term capital gains is less than basic exemption limit, you will be entitled to take the benefit of such shortfall in the basic exemption limit here also.

Taxation of trading transaction

The tax treatment for transactions in shares carried out by the day traders is different than those for investors. The day traders normally indulge in transaction of shares with an intention to square off the transaction without taking the delivery of the securities. For the purpose of income tax, these transactions are treated as speculative transactions and are treated differently. For profits made on such transaction, the same has to be offered as business income and added with other income and taxed at the slab rate. In case of a few transactions the profits can be shown under the head income from other sources. Before computing the taxable amount in respect of such squared off transactions you are allowed to adjust any loss incurred by you on similar transactions. However in case the net result of such transactions in  shares is net loss, you are allowed to set off such losses against other income of speculative nature only, where the transaction is squared off without taking delivery of the underlying shares/good. So any loss made by you on shares trading account can be adjusted against profits made by you for any commodity transactions.

The net speculative loss, however, is allowed to be carried forward and set off against any profit of speculative nature in four subsequent years. If the same cannot be set off during this period of four years, it will lapse. In case you enter into these transactions very frequently, you will have to get your accounts audited in case the aggregate of profits and loss without netting off exceeds the threshold of Rs. 1 Core in a year.

Also, if you are dealing in shares on delivery based then this may be either your business income or capital gain income depending upon number of factors. Also, it will not be counted as speculative business income as delivery is there.

Taxation of future and options

In case of derivative transactions of futures and options in shares, the seller and buyers generally settle the transactions with difference without taking delivery of the underlying shares, the same are still not treated as speculative and any profits/loss made on futures and options in shares will be treated as regular business income by virtue of special exclusion of such transactions from the definition of” speculative transaction”. In case of such transactions if the aggregate of these profits as well as loss (without netting off) exceeds Rs. 1 Crore, you will have to get your accounts audited. Any loss on such transactions can be set off against income from other sources except income from salaries.
(Balwant Jain is CA, CS and CFP. Presently working as Company Secretary with Bombay Oxygen Corporation Limited, View are his personal. He can be reached at [email protected], @jainbalwant)