When it comes to income-tax, there are many laws which are open for interpretation, leading to several litigations. The treatment of capital gains made from the sale of securities and listed shares is one of such subjects, which typically get into litigation.
The litigations arise mainly due to the fact that the tax laws do not have clarity on whether to treat gains from sale of securities as a business income or capital gains.
Assessees could show them in both, depending on different situation. For example, a stock market trader could treat his gains as business income because it is his main source of income and also he can treat them as capital gains as he is making profit on his investment.
Such variations in the treatment of income/gains would naturally lead to tax officials suspecting the assessee’s real intentions and thus rejecting his treatment of the income.
In order to bring more clarity and consistency on the issue, the income-tax department has come out with a circular saying that in case of listed shares and securities held for a period of more than 12 months immediately preceding the date of its sale, if the assessee desires to treat the income arising from the sale as capital gain, the same could not be disputed by tax authorities.
However, there is a condition. Once the assessee decides to treat the income as capital gains or vice versa in one particular year, any such income in future would be treated same and the assessee cannot adopt a different stand with regards to such income in future.
The clarification in this regard by the tax department is based on the RV Easwar committee recommendations on simplification of tax laws. The circular, however, remains silent on the treatment of gains made from sale of securities held for less than 12 months. The Easwar panel has recommended that any gains up to Rs 5 lakh would be treated as capital gains. But the tax authorities have not accepted this proposal of the panel, leaving it open for interpretation.
The impact
Any gains made from sale of listed shares after holding it for 12 months or more is considered long-term capital gains and is tax-free. In case of fixed income securities such as bonds, debt mutual fund, long-term capital gains is taxed at 20 per cent after indexation.
However, if the income is treated as business income, the same would be taxed as per the income tax bracket that a person belongs to. When the income is treated as business income, the losses made on certain securities can, therefore, be treated as business loss and accordingly adjusted with the gain to reduce the tax liability.
In case of long-term capital loss from one security, the same can be adjusted against the gain in another. Remember that long-term capital loss from one security can be adjusted only against long-term capital gain in another. You cannot set off a long-term capital loss against short-term capital gain.
The clarity on treatment of gains from securities held for 12 months or more is a significant step towards reducing tax litigations in the future. However, the fact that the tax authorities have not come up with a similar clarification on short-term gains may still lead to many unwanted litigations.
This is true for those investors who indulge in short-term stocks and bonds trading. The trick to keep your tax standing sound is to be consistent with the treatment of the short-term gains.
If you were showing it as capital gains or vice versa, stick with the treatment in future as well. Remember short-term capital gains from equities is taxed at 15 per cent, but short-term capital gains from bonds and other debt securities are added to your income and taxed as per your tax bracket.
So, the discounted tax rate that you can avail by declaring income from sale of shares (held for less than 12 months) as capital gains is not available in case of gains made from non-equity securities like bonds and treasury bills.
(The writer is the CEO of BankBazaar .com)
