Tax Liability for People Who Regularly Trade in Equity Shares

Over a long period of time, there has been a constant debate over whether regular trading in shares should amount to an individual being taxed as ‘Business Income’ or ‘Income from Capital Gains’.

In case of capital gains arising from equities sold in a recognized stock exchange, the gains are either Long-term which is exempt under Sec. 10(38) or Short-term, taxed @15.45% flat.

However, if these gains are classified under ‘Profits and Gains from Business or Profession’, the exemption on long-term capital gains and concession on short-term gains is lost, and entire profit is taxed under the individual tax slab of the individual. Only, the STT paid is allowed as deduction from business income.

The CBDT has issued various circulars over time, which has only added to confusion. Moreover, the Income Tax Act does not define the term “investor” or “trader”.

The parameters considered for categorizing these transactions are frequency of trades, the time period of the holding, whether the purchase is made solely with the intention of resale at a profit or for long-term appreciation and/or earning dividend and interest, and whether the scale of activity is substantial.

But in the absence of a specific definition, the categorization of a particular assessee would depend upon the circumstances of each case which has given considerable leeway to Income Tax officials.

The best judge in these matters should be the profession of the investor, if he is a salaried employee, or professional or having business other than shares, then gains in shares could be considered under Capital Gains. Because there is no quantification to the rule of number of transactions or amount, these may vary on individual basis.

For those into ‘day trading’ where buy & sell transactions are settled during the same day without any delivery, and then such gains could be taxed as income from Business.

Take a scenario, where one has investment in shares, and if the price rises, then one would naturally book profits and invests proceeds in other shares.   If the cycle repeats, than it does not mean, that share trading is the profession of the individual as it goes against the law of investment.

Thus, it would be wise if Income Tax Act clearly specifies the methodology of classification of share income into business income or capital gains, otherwise the window of doubt would be wide open for the authorities to play with.

Amit Agarwal is a web geek, solo entrepreneur and loves making things on the Internet. Google recently awarded him the Google Developer Expert and Google Cloud Champion title for his work on Google Workspace and Google Apps Script.

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