Dalal Street Investment Journal

Taxation For Income From Equities & MFs

How is income from equities or mutual funds classified for the purpose of taxation? What are a taxpayer’s liabilities in respect of such income? Read on to learn more.

Q) I am informed that the Income Tax department treats gains from the sale of shares and mutual fund units as Business Income and accordingly imposes higher taxes as compared to capital gains. What difference will it make to my tax liabilities, if I have income from the sale of shares/mutual funds?

-Dwijen Rajkhowa

Reply –

The income from trading in the stock market and on sale of mutual fund units may be classified as any of the following:

Speculation Business Gain/Loss

Non-Speculation Business Gain/Loss

Short-term Capital Gain/Loss

Long-term Capital Gain/Loss

Speculation Business Gain/Loss:

Non-Speculation Business Gain/Loss

Non-Speculation Business Gain is to be also included in the total income and is taxed at the normal rates of tax. However, a Non-Speculation Business Loss can be set off against any other Non- Speculation Business Gain or Speculation Business Gain or any other head of income (other than Income from Salaries) in the same financial year. In case a Non-Speculation Business Losses cannot be set off as aforesaid in a financial year, the same may be carried forward and set off against income from Speculation Business Gains in subsequent years. However, unabsorbed Non-speculation Business Losses can be carried forward for eight assessment years only. If the same cannot be set off during the eight assessment years, the said Non-Speculation Business Loss lapses.

Note that income from futures and options are considered as Non-Speculation Business income.

Short-Term Capital Gain/Loss:

Short-Term Capital Gain in respect of capital assets other than securities in respect of which Securities Transaction Tax (STT) is paid on sale, is to be also included in the total income and is taxed at the normal rates of tax. A Short-Term Capital Loss can be set off against any Income from Capital Gains, i.e. either Long-Term Capital Gains (other than LTCG which is exempt on payment of STT) or Short-Term Capital Gains in the same financial year. In case such a loss cannot be set off in the financial year, the same can be carried forward for a period of eight years and set off against taxable Income from Capital Gains, whether Short-Term or Long-Term. Short-Term Capital Gain on securities in respect of which STT is paid is taxed at the specified rate of tax.

Long-Term Capital Gain/Loss:

Long-Term Capital Gain on transfer of securities, other than securities in respect of which STT is paid on sale, is taxed at a specific rate of tax, i.e. 20 per cent. Surcharge/Education Cess/Higher Education Cess will be added as applicable. Long-Term Capital Gain on transfer of securities in respect of which STT is paid on sale is totally exempt and not taxable.

Long-Term Capital Loss (other than in respect of sale of securities on which STT is paid on sale and Long-Term Capital Gain on which is exempt) can be set off against Long-Term Capital Gains only in the same financial year. If such a Long- Term Capital Loss cannot be set off against any other Long-Term Capital Loss in that financial year, the same will be carried forward for eight assessment years and set off against taxable Long-Term Capital Gains. On the expiry of eight assessment years, the unabsorbed Long-Term Capital Loss, if any, shall lapse. Long-Term Capital Loss in respect of sale of securities on which STT is paid can neither be set off against any income nor carried forward.