Taxation aspects on gains earned from listed shares and mutual funds

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The Covid-19 pandemic, job losses and work from home culture turned many people towards the stock market. It might be the first time for these investors to report the gains and losses earned in the stock market in their tax returns. Even if these people felt easy to make investments in the stock market but they always find it complicated to understand its tax treatment. It is important to know how the gains arising from listed equity shares and mutual funds are reported in the ITR.

The first question which comes to the mind of investors is the head in which the income earned from stocks has to be reported. There is always confusion about whether gain arising from the sale of securities should be reported as business income or capital gains. Securities can be held either as capital assets or as stock-in-trade/trading assets or both. If the taxpayer himself treats listed shares as stock-in-trade, the income arising from such transfer would be treated as business income. If the listed shares are held for more than 12 months, the income arising from their sale can be treated as capital gains. However, this stand, once taken in a particular year, shall remain applicable in subsequent years also and the taxpayers shall not be allowed to adopt a contrary stand in this regard in subsequent years.

ITR forms

The rate of tax and the disclosure in ITR varies depending on whether it is business income or capital gains. The business income earned from trading in stocks shall be reported in Form ITR-3. If income from securities is disclosed as business income then the taxpayer needs to maintain books of accounts. The expenses incurred, wholly and exclusively, for earning such income, i.e., brokerage, STT, fees, telephone expenses, and consultation charges can be deducted from this income.

The income from capital gains shall be reported in Form ITR-2. There is also confusion whether gains or losses arising from such transactions under capital gains shall be reported separately or in aggregate. The CBDT has clarified that the scrip-wise details in the return of income are required to be filled up only for the reporting of the long-term capital gains for these shares which are eligible for the benefit of grandfathering i.e. shares acquired on or before 31-01-2018. The scrip-wise details are not required in income tax return forms for computation of gains that are not eligible for grandfathering.

If the securities are offered for tax under the head capital gains, it has to be classified into long-term or short-term. The listed shares and units of equity-oriented funds sold after holding for more than 12 months, income shall qualify as long-term capital gains. For units of mutual funds other than equity-oriented funds, the period of holding has to be more than 36 months to qualify as long-term.

The long-term capital gains, arising from the sale of listed shares and units of an equity-oriented mutual fund, is exempt from tax up to Rs 1 lakh and after which it is chargeable to tax at the concessional rate of 10% without the benefit of indexation. Long-term capital gains arising from units of mutual funds, other than equity-oriented funds, is taxable at the rate of 20% and in this respect of indexation benefit can be claimed.

Short-term capital gains arising from the sale of listed shares and units of an equity-oriented mutual fund are taxable at the special rate of 15%. Short-term capital gains arising from units of mutual funds (other than equity-oriented funds) are taxable at the slab rates applicable to the assessee.

What you should know

If you have incurred capital loss during the year, it can be carried forward for eight assessment years and set off against the relevant capital gains of the subsequent year. The unabsorbed business loss can also be carried forward up to 8 assessment years. It can be set off only against the business income in subsequent years. Such losses can only be carried forward only if the return of income is filed on or before the due date, otherwise, the right to carry forward and set-off is lost.

(The writer is a chartered accountant and direct tax leader at Coherent Advisors. Views expressed are personal)