Important Keyword: Capital Gains, HUF, Income Heads, ITR Form, ITR-2.
Table of Contents
What is ITR-2 Form?
ITR-2 Form serves as the Income Tax Return form for individuals and HUFs who lack any business or professional income. This means individuals with salary, house property, capital gains, and other sources of income can file ITR-2.
Important Income Tax Documents:
Form 16: For salary income
Form 26AS: Tax Credit Statement
Form 12BB: Statement showing particulars of perquisites, other fringe benefits or amenities, and profits in lieu of salary with value thereof
Form 10BA: Declaration to claim deduction under section 80GG
Form 15G/15H: Declaration to avoid tax deduction at source on interest income
Mandatory ITR Filing:
Until FY 2018-19 (AY 2019-20), filing Income Tax Return wasn’t compulsory if the total income was below the basic exemption limit. However, Budget 2019 introduced a new provision under Section 139(1), mandating ITR filing if a taxpayer engages in high-value transactions. These transactions include:
The ITR-2 Form comprises 25 sections, including Part A General, Schedule Salary, Schedule House Property, Schedule Capital Gains, and others. These sections must be filled before reviewing, paying tax, and submitting the return.
Who Can File ITR-2?
ITR-2 can be filed by individuals or HUFs whose total income includes:
Salary/pension income
Income from multiple house properties
Capital gains income
Income from other sources (including lottery winnings and income from racehorses)
Agriculture income exceeding INR 5,000
Foreign assets/foreign income
Additionally, it can be used when another person’s income is clubbed with the taxpayer’s income falling under any of the above categories.
Who Cannot File ITR-2?
Individuals with total income including business or professional income cannot file ITR-2. Likewise, taxpayers earning income from a partnership firm must file ITR-3 or ITR-4 to declare such income.
File ITR-2 Online using Income Tax Website
General Information Fill in the general information which consists of your contact, personal information, filing status & bank details.
Schedule Salary, House Property & Other Sources In Schedule Salary, you need to review, enter, edit details of your income from salary or pension, exempt allowances and deductions u/s 16. Under schedule house property, you need to review, enter & edit details relating to house property (self-occupied, let out, or deemed let out). The details include co-owner details, tenant details, rent, interest, pass through income etc. and, under schedule other sources, you need to review, enter and edit details of all your income from other sources, including (but not limited to) income charged at special rates, deductions u/s 57 and income involving race horses.
Schedule Capital Gains Capital Gains arising from sale or transfer of different types of capital assets have been segregated. In a case where capital gains arises from sale or transfer of more than one capital asset, which are of same type, please make a consolidated computation of capital gains in respect of all such capital assets of same type. But in case of transfer of land / building, it is mandatory to enter the computation towards each land / building. In Schedule Capital Gains, you need to enter details of your short term and long term capital gains or Losses for all types of capital assets owned.
Schedule 112A & Schedule 115AD(i)(iii) Proviso Under Schedule 112A, you need to review, enter and edit details about sale of equity shares of a company, an equity-oriented fund, or a unit of a business trust on which STT is paid. Schedule 115AD (1)(iii) proviso involves entering the same details as for Schedule 112A but is applicable to non-residents
Schedule Current Year’s Loss Adjustment (CYLA) In Schedule Current Year’s Loss Adjustment (CYLA), you will be able to view details of income after set-off of current year losses. The unabsorbed losses allowed to be carried forward out of this are taken to Schedule CFL for carry forward to future years.
Schedule Brought Forward Loss Adjustment (BFLA) You can view the details of income after set-off of brought forward losses of earlier years.
Schedule Carry Forward Loss You can view the details of losses to be carried forward to future years.
Schedule VI-A you need to add and verify any deductions you need to claim under Section 80 – Parts B, C, CA, and D of the Income Tax Act
Schedule AMT You need to confirm the computation of Alternate Minimum Tax payable u/s 115JC.
Schedule AMTC You need to add details of tax credits u/s 115JD.
Schedule SPI You need to add the income of specified persons (e.g. spouse, minor child) that is includable or required to be clubbed with your income as per Section 64.
Schedule EI You need to provide your details of exempt income i.e., income not to be included in total income or not chargeable to tax. The income types included in this schedule include interest, dividend, agricultural income, any other exempt income, income not chargeable to tax through DTAA and pass through income which is not chargeable to tax.
Schedule SI You will be able to view the income that is chargeable to tax at special rates. The amount under various income types are taken from the amounts provided in the relevant Schedules i.e., Schedule OS, Schedule BFLA.
Schedule PTI You need to provide details of pass through income received from business trust or investment fund as referred to in section 115UA or 115UB.
Schedule Foreign Source Income (FSI) You need to report the details of income, which is accruing or arising from any source outside India. This schedule is available for residents only.
Schedule TR You need to provide a summary of tax relief which is being claimed in India for taxes paid outside India in respect of each country. This schedule captures a summary of detailed information furnished in Schedule FSI.
Schedule FA You need to provide details of foreign asset or income from any source outside India. This schedule need not be filled up if you are Not Ordinarily Resident or a Non-Resident.
Schedule 5A & Schedule AL In Schedule 5A, you need to provide the information necessary for apportionment of income between husband and wife if you are governed by the system of community of property under the Portuguese Civil Code 1860. If your total income exceeds ₹50 lakh, it is mandatory to disclose the details of movable and immovable assets in Schedule AL along with liabilities incurred in relation to such assets. If you are a non-resident or resident but not ordinarily resident, only the details of assets located in India are to be mentioned.
Tax Paid Under Part B, verify all the auto populated rows from the details that you had entered in the schedules. Verify the tax paid details from the previous financial year.
File Income Tax Return Click on eFile > Income Tax Returns > File Income Tax Return
Assessment Year and Mode Select the appropriate assessment year and select the online mode and click on proceed.
ITR Form Select the appropriate ITR Form, in this case, ITR 2.
Select the checkboxes Next, select the checkboxes applicable to your situation.
Review and File ITR Finally, review all the details that you had entered previously and pay the tax dues (if any) and submit the return. Once you submit the return, proceed to everify it to complete the process.
Structure of ITR-2
Part/ Schedule
Heading
Fields
PART A- GENERAL
Personal Information
Name, Address, Date of Birth, PAN, contact details.
Filing Status
Employer Category, Tax status, Residential status, Return filed under the section.
PART B-TI
Computation of total income
Total Income from all income sources, Losses of the current year set off, Gross Total Income, Deductions under Chapter VI-A.
PART B-TTI
Computation of tax liability on total income
The Bank Account details, Verification, and TRP details (if any) are to be provided.
Schedule IT
Details of Advance Tax and Self Assessment Tax Payments
BSR code, Date of Deposit, Chalan number, Tax Paid
Schedule TDS
TDS1: Details of Tax Deducted at Source from SALARY
TAN of Employer, Employer Name, Tax Deducted, etc.
Schedule TDS
TDS2: Details of Tax Deducted at sources from Income other than Salary (As per FORM 16A) & Details of tax deducted at source on sale of immovable property u/s 194IA (Form 26QB)
TAN, Name of Deductor, Year of Deduction, Tax deducted, etc.
Schedule TCS
Details of tax collected at source
TAN of the collector, Name of Collector, Tax Collected, etc.
Schedule S
Details of Income from Salary
Name and PAN of the Employer, Address of the Employer, Salary, Perquisites, Allowance, etc.
Schedule HP
Details of Income from House Property
Details of House Property, Name and PAN of the Co-owners and Tenants, Details of Rent Income, Interest payable on Borrowed Capital, etc.
Schedule CG
Capital Gains
Details about the Short term and Long term Capital gains, Sales consideration, Cost of Acquisition, Deductions under Section 54,54B,54EC,54F,54GB.
Schedule OS
Income from Other Sources
A dividend, Interest, Rental income from machinery, Winnings from lotteries, Crossword puzzles, Races, Games.
Schedule CYLA
Details of income after setoff of current year losses
Details of current year losses and its Inter Headset off
Schedule BFLA
Details of income after Set off of Brought Forward Losses of earlier years
Details of brought forward losses set off against current year’s income, total brought forward losses set off.
Schedule CFL
Details of Losses to be carried forward to the future years
Total of earlier year losses, current year losses, Total of carried forward to future years.
Name of Donee, Address, City or District, State Code, PAN of Donee, Amount.
Schedule SPI
The income of specified persons (spouse, minor child, etc.) included in the income of the assessee (income of the minor child, in excess of Rs. 1500 per child, to be included)
Name and PAN of Person, Relationship, Nature of Income, Amount.
Schedule SI
Income chargeable to income tax at special rates
Description of Special Rate Income, Special Rate, Income, Taxable Income after adjusting min. chargeable to tax, Tax thereon.
Schedule EI
Details of Exempt Income (Income not to be included in Total Income)
Interest income, Dividend, Agricultural Income.
Schedule PTI
Details of Income from Business Trust or Investment Fund
Details of Income earned from Business Trust or Investment Fund as per section 115UA, 115UB.
Schedule FSI
Details of Income from outside India and tax relief
A country, Head of income, Income from outside India, Tax paid outside India, Tax payable in India, Relevant article of DTAA if relief is claimed u/s 90 or 90A
Schedule TR
Summary of tax relief claimed for taxes paid outside India
Details of tax relief claimed
Schedule 5A
Information regarding the appointment of income between spouses governed by Portuguese Civil Code
Name and PAN of a spouse, Income received under different heads, Amount appointed in the hands of the spouse, TDS details.
Schedule FA
Details of Foreign Assets and Income from any source outside India
Details of foreign bank accounts, financial interest in any entities, Immovable Properties, Other Capital Assets.
Schedule AL
Details of Assets and Liabilities
Details of an immovable asset, Details of a movable asset, Interest held in the asset of a firm or AOP.
Here’s a detailed checklist of documents you’ll need for a smooth income tax filing process:
Essential Documents:
PAN (Permanent Account Number)
Aadhaar Card
Bank Account Details
TDS Certificates
Challan of Taxes Paid
Details of Original Return (if filing a revised return)
Details of Notice (if filing in response to a notice)
Documents Based on Type of Income:
For Salary Income:
Form 16/Salary Slips received from your employer
Pension Statement/Passbook
For House/Property Income:
Co-owner details (if applicable)
Address of the property
Interest certificates/Repayment certificate from a bank (for property loan)
Here are the major changes in ITR 2 for Assessment Years 2021-22 and 2020-21:
For AY 2021-22:
Option to Choose Tax Regime: Taxpayers can opt between the old and new tax regimes based on their preference.
Quarterly Breakdown for Dividend Income: Dividend income must be reported with quarterly breakdowns for accurate calculation of interest under Section 234C.
For AY 2020-21:
Mandatory Filing for RNORs and Non-Resident Individuals: RNORs and non-resident individuals must file ITR 2 even if their income is below INR 50 lakh.
Disclosure of High-Value Transactions: Taxpayers must disclose cash deposits exceeding INR 1 crore in current accounts, expenditure above INR 2 lakh on foreign travel, or expenditure above INR 1 lakh on electricity.
Resident Individuals Owning Multiple Properties: Residents with more than one house property must file ITR 2.
Ineligibility for Business and Profession Income: Taxpayers earning income from business and profession cannot file ITR 2.
Disclosure of Company Details: Directors in a company or those holding unlisted equity investments must disclose the type of company.
Separate Section for LTCG Calculation: A dedicated section, Section 112A, is introduced for calculating long-term capital gains on the sale of equity shares or units of a business trust liable to STT.
Important Keyword: Aadhaar, Business and Profession Income, Capital Gains, Income from House Property, Income Source, ITR Documents, ITR Form, Salary Income, Tax Saving Investments.
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Documents required for Income Tax Return filing in India
Income Tax Return (ITR) forms vary depending on the taxpayer’s sources of income. Specific documents are necessary for filing the ITR.
Additional documents required may vary depending on the taxpayer’s income situation. These documents do not need to be submitted to the Income Tax Department during the filing of the Income Tax Return since ITR forms are annexure-less. However, if a taxpayer receives a notice from the Income Tax Department, such documents may be required to be submitted.
List of Basic Documents required for filing the Income Tax Return – ITR
Here’s a breakdown of the essential documents required for filing an Income Tax Return (ITR) in India, based on different income heads:
Salary Income/ Pension Income:
Form 16
Salary Slips (if Form 16 is unavailable)
Pension Statement/ Passbook
House Property Income:
Property Address
Rent Agreement
Co-ownership details for co-owned property
Municipal Tax Receipts
Form 16A (if TDS is deducted on rental income)
Home loan repayment certificate/ Interest Certificate from the bank
Pre-Construction Interest Details
Capital Gains Income:
Sales and Purchase deed, stamp duty valuation (for sale of land/ building)
Details of Improvement cost
Details of expenses related to the transfer of capital assets
Proof of cost of the asset, cost of improvement, and sales receipts (for movable assets)
Details of investments made to claim exemptions
Capital Gains Deposit Account details (if applicable)
For shares & securities: Trading statement/ Stock Ledger/ Contract Notes
Business and Professional Income:
Balance Sheet and Profit & Loss Statement
Bank Account Statement/ Passbook
Supporting documents for expenses incurred
Cash Register
Any other documents required to maintain business & profession books of accounts
Audit Report (if profit from business is less than 8% of Total Turnover)
Income from Other Sources:
Total interest income earned from savings/ current account
Interest certificate from deposits/ Bonds/ NSC
PPF Account Statement/ Passbook
Dividend Warrants/ counterfoils
Proof of details of receipt of any other incomes
Rent Agreement (in case of let out machinery)
These documents provide comprehensive support for accurate tax filing across various income categories.
Documents Required for Tax Saving Investments (Section 80)
For individuals seeking tax-saving investment opportunities, certain documents play a crucial role in claiming deductions. Here’s a list of documents essential for tax-saving investments:
ELSS/ ULIP/ NSC Investment Details:
Documents confirming investment in Equity Linked Savings Schemes (ELSS), Unit Linked Insurance Plans (ULIP), or National Savings Certificate (NSC).
PPF Account Passbook/ Statement:
Passbook or statement reflecting transactions and balances in the Public Provident Fund (PPF) account.
Life/Medical Insurance Receipts:
Receipts or premium payment details for life insurance policies or medical insurance plans.
Details of Tax-Saving FD:
Information related to investments in Tax-Saving Fixed Deposits, including deposit receipts and interest certificates.
National Pension Scheme Investment Details:
Documentation supporting contributions made to the National Pension Scheme (NPS).
Senior Citizen Saving Scheme Investment Details:
Documentation pertaining to investments in the Senior Citizen Saving Scheme (SCSS).
Donation Receipts:
Receipts or certificates acknowledging donations made to eligible charitable organizations.
Children Tuition Fees Paid Receipts:
Receipts confirming payment of tuition fees for children’s education.
Repayment Certificate for Home Loan/ Education Loan:
Certificate or statement from the lending institution confirming repayment of home loan or education loan, eligible for tax deduction.
Certificate from Specified Medical Authorities in Case of Disability:
Certification from designated medical authorities validating disability for claiming tax benefits.
Receipts/Proof of Any Other Tax-Saving Investments/Contributions:
Supporting documents for other tax-saving investments or contributions made during the financial year.
Documents Required for Foreign Income and Foreign Investments:
Details of foreign income earned and taxes deducted, if applicable.
Information regarding assets held outside India, including foreign bank accounts.
These documents serve as evidence of tax-saving investments and contributions, facilitating the process of claiming deductions while filing income tax returns.
Important Keyword: Capital Gains, Income from Business & Profession, Income from House Property, Income from Other Sources, Salary Income.
Table of Contents
What are the 5 Heads of Income?
In the quest to enhance earnings and foster financial growth, individuals and businesses explore various avenues such as employment income, interest from savings or investments, profits from sales, and revenue from diverse sources like equity trading, cryptocurrency, and more. However, the complexity of managing multiple income streams often poses challenges during tax filing. To simplify this process, the income tax department has devised five primary categories, or heads, under which all types of income can be classified.
Heads of Income
To ensure seamless tax filing and compliance with regulatory requirements, the income tax department has delineated five distinct heads under which taxpayers must categorize their earnings accurately. This meticulous allocation helps prevent potential issues and ensures smooth ITR filing.
Here are the five heads of income:
Income from Salary
Income from House Property
Income from Capital Gains
Income from Business and Profession
Income from Other Sources
Income from Salary:
This head encompasses various forms of remuneration received by an individual as part of their employment, including salaries, wages, allowances, bonuses, commissions, and pensions. It also covers advance salary, gratuity, and arrears received post-employment. It’s crucial for these earnings to arise from an employer-employee relationship to be classified under this head. Additionally, certain exemptions like standard deduction, house rent allowance (HRA), and conveyance allowance are available under this category.
Income from House Property:
Under this head, individuals must declare rental income earned from properties they’ve leased out, such as rental income from land or property. Taxpayers can claim deductions for interest paid on home loans for both self-occupied and rented properties. However, if an individual owns multiple properties, only one can be considered self-occupied, while the others are deemed let out.
Income from Capital Gains:
This category encompasses profits or losses incurred from the sale of capital assets, including investments like land, buildings, shares, jewelry, bonds, and mutual funds. It’s divided into short-term and long-term capital gains based on the duration of asset ownership. Short-term gains arise from assets held for a short period, typically up to 12 months, while long-term gains stem from assets held for longer durations.
Income from Business and Profession
This category encapsulates the profits or losses derived from engaging in any business or profession. Business activities encompass various endeavors such as trade, commerce, manufacturing, and similar ventures. On the other hand, a profession refers to a specialized field where individuals have acquired expertise through formal education and examination.
Within this head, there are three distinct sub-categories for business income:
Speculative Business Income: This pertains to income generated from speculative transactions where there’s no actual delivery of assets involved.
Non-Speculative Business Income: This category covers income earned from regular business activities, including trade, manufacturing, or any professional services rendered.
Specified Business Income: Certain specific types of business income fall under this category, often subject to specialized regulations or provisions.
Moreover, taxpayers have the option to opt for the presumptive taxation scheme, allowing them to declare profits at reduced rates and pay taxes accordingly based on this declaration.
Income from Other Sources:
Any income not categorized under the above heads is reported under income from other sources. This includes earnings like interest from savings accounts or deposits, dividends from shares or mutual funds, proceeds from lotteries or games, and gifts received, among others.
Important Keyword: Business Income, Capital Gains, Equity Trading, Income Tax Rates, ITR-2, Tax Audit.
Table of Contents
Income Tax on Equity Share Trading
Trading in equity shares and stocks has witnessed a remarkable surge in accessibility, thanks to the proliferation of online trading platforms. This convenience has empowered individuals to engage in equity trading, encompassing a spectrum of financial instruments like delivery stocks, intraday trades, futures, options, and more. However, it’s imperative to fulfill tax obligations by filing Income Tax Returns (ITR) and settling taxes on such earnings. Equity share trading typically manifests in two primary forms: Equity Delivery Trading and Equity Intraday Trading.
What is Equity Trading?
Equity Delivery Trading
When a trader engages in Equity Delivery Trading, they purchase equity shares from the stock market with the intention of holding onto them for more than a day. The term “delivery” denotes the transfer of ownership of shares to the buyer’s Demat account. The primary objective here is to capitalize on potential short or long-term capital gains. Income generated from Equity Delivery Trading is categorized as either Capital Gains or Non-Speculative Business Income.
Moreover, when an investor subscribes to an IPO (Initial Public Offering) and receives shares, any income generated from selling these shares is treated as capital gains for tax purposes.
Equity Intraday Trading
Equity Intraday Trading involves the purchase and sale of equity shares within the same trading day. The aim is to capitalize on price fluctuations and generate profits swiftly. Unlike Equity Delivery Trading, there is no transfer of ownership of shares in Equity Intraday Trading, as trades are executed on the same day.
For tax purposes, Income Tax treats Equity Intraday Trading as Speculative Business Income. This is because it involves trading without the actual delivery of shares and with the objective of making rapid profits. Consequently, traders engaged in intraday trading are required to pay taxes at slab rates.
Equity F&O Trading
Equity Futures and Options (F&O) Trading involves buying or selling futures contracts or options contracts based on an underlying asset, such as equity shares. Income generated from equity F&O trading is categorized as non-speculative business income for income tax purposes.
Unlike speculative income, which is associated with activities like intraday trading, non-speculative business income is derived from trading activities where contracts are held for longer durations and involve predetermined terms. Therefore, income from equity F&O trading is taxed differently from speculative income, and traders are subject to specific tax regulations governing non-speculative business income.
How to treat sale of shares as Capital Gains or Business Income?
The classification of income from the sale of equity shares and mutual funds as either Capital Gains or Business Income hinges on several key factors. These factors are essential in determining the tax treatment of such income and have been subject to interpretation and debate between traders and tax authorities.
Significant Trading Activity: The level of trading activity conducted by the taxpayer is a crucial factor. If the trader engages in substantial and regular trading of shares, securities, or derivatives like futures and options, the income derived from these activities is typically classified as Business Income. Conversely, if the volume of trading transactions is low, irregular, and not a primary activity, the income is usually treated as Capital Gains.
Intention of the Taxpayer: The taxpayer’s intention behind the transactions also plays a vital role. If the primary objective is to actively trade shares and securities for short-term gains, the income is considered Business Income. Conversely, if the taxpayer’s intention is to hold investments for long-term appreciation, earning dividends and interest, the income is categorized as Capital Gains.
These factors collectively guide the tax authorities in determining the appropriate classification of income from equity trading. It’s essential for traders to understand these distinctions to ensure compliance with tax regulations and accurately report their income.
Clarification from CBDT Circular
To streamline tax procedures and minimize disputes, the CBDT has proposed a structured approach regarding the classification of income from shares and securities:
Listed Shares and Securities:
Taxpayers have the flexibility to choose whether to report income as Capital Gains or Business Income for listed shares and securities.
If the taxpayer treats listed shares and securities as stock-in-trade, regardless of the holding period, the income will be categorized as Business Income.
If the taxpayer considers listed shares and securities held for over 12 months as investments, the income will be treated as Capital Gains. Continuity in this method is required in subsequent years unless there’s a significant change in circumstances.
Unlisted Shares and Securities:
Income from unlisted shares and securities should uniformly be treated as capital gains, irrespective of the holding period.
Other Cases:
For all other scenarios, including listed shares and securities not falling under the above categories, the determination of income head will be based on significant trading activity and the taxpayer’s intention regarding holding them as stock or investment.
This structured approach aims to provide clarity and consistency in the treatment of income from shares and securities, thereby reducing ambiguity and potential litigations.
Determining whether income from the sale of shares should be classified as Capital Gains or Business Income involves considering various factors:
Nature of Activity:
Whether the purchase or sale of securities is linked to the taxpayer’s usual trade or business, or if it’s an occasional independent activity.
Intention of Purchase:
Whether the purchase of shares is for resale at a profit or for long-term appreciation and earning interest/dividends.
Volume and Frequency:
The significance of the volume of transactions in the financial year and whether there were continuous and regular trading activities.
Holding Period:
The duration for which shares and securities are held by the taxpayer.
Impact on Livelihood:
The time devoted to trading and its impact on the taxpayer’s livelihood.
Regarding the treatment of income, taxpayers can maintain two portfolios:
An investment portfolio comprising securities treated as capital assets.
A trading portfolio comprising securities treated as trading assets.
Income under both Capital Gains and Business Income heads can be possible in such cases. However, taxpayers must maintain clear records to distinguish between shares held for investment and those held as stock in trade.
For Equity Share Trading, the income is classified as Capital Gains in the following manner:
Long-Term Capital Gain (LTCG) under section 112A for listed securities held for over 12 months.
Short-Term Capital Gain (STCG) under section 111A for listed securities held for up to 12 months.
By adhering to these guidelines and accurately documenting transactions, taxpayers can ensure proper classification of income from equity share trading.
Equity Trading as Non-Speculative Business Income
In cases where a trader engages in significant trading activity and derives trading income as their sole source of earnings, the resulting profit or loss is categorized as Non-Speculative Business Income. Under this classification, the trader is eligible to claim expenses incurred in generating this business income. Consequently, the trader must file their income tax return using Form ITR-3. This form is specifically designed to accommodate individuals or Hindu Undivided Families (HUFs) with income from business or profession, ensuring accurate reporting and compliance with tax regulations.
Income Tax on Equity Share Trading
The taxation rates on trading in equity shares vary depending on how the income is classified. When the income from trading is categorized as Non-Speculative Business Income, it is subject to taxation at the applicable income tax slab rates. However, if the income is treated as Capital Gains Income, the following tax rates apply:
Long-Term Capital Gains (LTCG) under Section 112A:
For listed securities held for more than 12 months: LTCG exceeding INR 1,00,000 is taxed at a rate of 10%.
Short-Term Capital Gains (STCG) under Section 111A:
For listed securities held for up to 12 months: STCG is taxed at a rate of 15%.
It’s essential for traders to accurately determine the nature of their income and apply the corresponding tax rates to ensure compliance with tax laws and regulations.
Income Tax on Equity treated as Capital Gains Income
Type of Security
Period of Holding
Long Term Capital Gain (LTCG)
Short Term Capital Gain (STCG)
Domestic Company
Listed Equity Share (STT paid)
12 months
10% in excess of Rs. 1,00,000 under Section 112A
15% under Section 111A
Listed Equity Share (STT not paid)
12 months
10% without Indexation
Slab Rates
Unlisted Equity Share (STT not paid)
24 months
20% with Indexation
Slab Rates
Foreign Company
Listed Equity Share
24 months
10% without Indexation
Slab Rates
Unlisted Equity Share
24 months
20% with Indexation
Slab Rates
Income Tax on Equity treated as Non-Speculative Business Income
Non-Speculative Business Income is taxable at slab rates.
Slab Rates if Equity Trader opts for Old Tax Regime
Taxable Income (INR)
Slab Rate
Up to 2,50,000
NIL
2,50,001 to 5,00,000
5%
5,00,001 to 10,00,000
20%
More than 10,00,000
30%
Certainly, it’s important to consider the additional surcharge and cess while calculating the total tax liability. Here’s how it works:
Surcharge: Surcharge is applicable on the total income as per the prescribed surcharge slab rates. These rates vary depending on the level of income.
Health and Education Cess: Additionally, the Health and Education cess is levied at a rate of 4% on the total tax amount, including the basic tax and surcharge.
By factoring in both the surcharge and the Health and Education cess, taxpayers can accurately determine their total tax liability on trading income from equity shares.
Slab Rates if Equity Trader opts for New Tax Regime
Taxable Income (INR)
Slab Rate
Up to 2,50,000
NIL
2,50,001 to 5,00,000
5%
5,00,001 to 7,50,000
10%
7,50,001 to 10,00,000
15%
10,00,001 to 12,50,000
20%
12,50,001 to 15,00,000
25%
More than 15,00,000
30%
Turnover Calculation for Equity Trading
Correct, turnover is a crucial factor in determining the applicability of tax audit, especially when equity trading is treated as a business income. Here’s how turnover is calculated:
For Equity Delivery Trading, turnover is calculated as the absolute profit. This means summing up the positive and negative differences resulting from trading activities. Turnover calculation can be done either through a scrip-wise method or a trade-wise method, depending on the preference and ease of calculation for the trader.
Tax Audit for Equity Trading
Understandably, determining when a tax audit is necessary can be complex, especially for equity delivery trading treated as business income. Here’s a breakdown of the conditions:
Trading Turnover up to INR 2 Cr:
Tax audit is applicable if:
The taxpayer incurs a loss or the profit is less than 6% of the trading turnover, and
The total income exceeds the basic exemption limit.
If the profit is equal to or more than 6% of the trading turnover, tax audit is not required.
Trading Turnover of more than INR 2 Cr and up to INR 10 Cr:
Tax audit is applicable if:
The taxpayer incurs a loss or the profit is less than 6% of the trading turnover, or
The profit is equal to or more than 6% of the trading turnover, and the taxpayer has not opted for the Presumptive Taxation Scheme under Section 44AD.
Tax audit is not applicable if:
The profit is equal to or more than 6% of the trading turnover, and the taxpayer has opted for the Presumptive Taxation Scheme under Section 44AD.
Trading Turnover of more than INR 10 Cr:
Tax audit is mandatorily applicable if the turnover of intraday trading exceeds INR 10 Cr.
These guidelines aim to ensure compliance with tax regulations while providing clarity to traders on when a tax audit is necessary.
ITR Form, Due Date, and Tax Audit Applicability for Equity Traders
ITR Form
ITR-2 if the trading is treated as Capital Gains. ITR-3 if the trading is treated as Business Income.
Due Date
31st July if Tax audit is not applicable 31st October if Tax audit is applicable
Tax Audit
If trading is treated as business income then trader have to verify the audit applicability
Advance Tax for Equity Share Trading
Here’s how the Advance Tax payment schedule works for equity traders who don’t opt for presumptive taxation:
Advance Tax Payment Schedule for Equity Traders (Non-Presumptive Taxation):
15% of Estimated Tax by 15th June: Estimate your total tax liability for the financial year and pay 15% of it by 15th June.
45% of Estimated Tax by 15th September: By 15th September, pay 45% of your estimated tax liability for the year.
75% of Estimated Tax by 15th December: Pay 75% of your estimated tax liability by 15th December.
100% of Estimated Tax by 15th March: Finally, pay the remaining 100% of your estimated tax liability by 15th March of the financial year.
These installments help ensure that taxpayers meet their tax obligations progressively throughout the year, rather than facing a large tax bill at the end. It’s important for equity traders to estimate their tax liability accurately and make timely payments to avoid penalties and interest charges.
Advance Tax Liability
Due Date
15% of Tax Liability
On or before 15th June
45% of Tax Liability
On or before 15th September
75% of Tax Liability
On or before 15th December
100% of Tax Liability
On or before 15th March
For equity traders who opt for presumptive taxation under Section 44AD and have profits, the Advance Tax payment differs from those who don’t opt for this scheme. Here’s how it works:
Advance Tax Payment for Equity Traders (Presumptive Taxation):
Single Installment by 15th March: The entire amount of Advance Tax must be paid in a single installment on or before 15th March of the financial year.
Under the presumptive taxation scheme, traders are not required to make quarterly installments. Instead, they pay the entire Advance Tax amount at once by the specified date. This simplifies the tax payment process for eligible traders, allowing them to fulfill their tax obligations efficiently.
Carry Forward Losses for Equity Trading
Under the tax treatment of equity trading as capital gains, different rules apply depending on whether the gains or losses are short-term or long-term. Here’s a summary:
Short-Term Capital Losses:
Can be set off against both short-term and long-term gains in the current financial year.
If any loss remains after set off, it can be carried forward for up to 8 years.
Such carried forward losses can be adjusted against any capital gains in the subsequent years, regardless of whether they are short-term or long-term.
Long-Term Capital Losses:
Can only be set off against long-term gains in the current financial year.
If any loss remains after set off, it can be carried forward for up to 8 years.
Subsequent years’ gains can only be adjusted against these carried forward losses if they are long-term gains.
When equity trading is treated as business income, the losses incurred are considered non-speculative business losses. Here’s how they are treated:
These losses can be adjusted against any income except salaries.
The trader can carry forward these losses for 8 years.
In any of the upcoming years, these losses can be adjusted against gains earned from speculative or non-speculative business activities.
These provisions provide traders with options to manage their losses effectively, whether they are trading as investors with capital gains or as active traders with business income.
Important Keyword: Business and Profession Income, Capital Gains, Income from House Property, Income Source.
Table of Contents
Set Off and Carry Forward Losses
Setting off and carrying forward losses is a vital strategy for individuals and businesses alike when they encounter financial setbacks. This approach allows them to utilize these losses to diminish their tax obligations, thereby turning adversity into opportunity. By leveraging this strategy, taxpayers can navigate challenging financial circumstances more effectively, making it a crucial aspect of income tax planning.
Basics of Carry forward and Set off of losses
Taxpayers have the flexibility to offset losses against their income for the current year. If any losses remain unutilized, they can carry them forward to subsequent years to offset against future income. It’s worth noting that if taxpayers fail to file their Income Tax Return (ITR) within the stipulated deadline under Section 139(1), they forfeit the opportunity to carry forward losses to future years, except for losses under the head “Income from House Property.” However, even if they file a belated ITR, they can still carry forward losses under this category to future years.
Set Off Losses
Intra-Head Set Off of Loss:
Intra-head set-off entails offsetting losses against income within the same category. This means losses from a specific source within a particular category can be adjusted against income from another source within that same category. For instance, if there’s a loss from a self-occupied property but profit from another rented house property, you can use the losses to offset the income from the profitable property.
Inter-Head Set Off of Loss:
Inter-head set-off involves adjusting losses from one income category against profits from another income category. Therefore, if a taxpayer incurs losses in one income category but earns positive income in another, those losses can be offset against the income. For example, you could set off losses from a self-occupied house property against income from salary. However, before applying inter-head set-off, the taxpayer must first utilize intra-head set-off.
Methodology of set-off of losses for each head
Business (PGBP) Loss:
Non-Speculative Business Loss: Can be set off against any income except salary income.
Speculative Business Loss: Can be adjusted against only Speculative Business Profit.
Loss under Capital Gains:
Short-term capital loss: Can be adjusted against short-term and long-term capital gains.
Long-term capital losses: Can be adjusted against long-term capital gains only.
Capital gains losses can only be set off against capital gains and not with any other income.
House Property Loss:
Loss from house property: Can be set off against any other income.
Set off of losses can be done up to INR 2,00,000 for a particular assessment year.
Loss from trading in Cryptocurrency and other Virtual Digital Assets (VDA):
Losses from the transfer of cryptocurrency, NFT, or VDA: Cannot be set off against any other income.
Losses from other heads can be set off against profit on the transfer of cryptocurrency, NFT, or VDA.
Horse-Race Loss:
Losses from the business of owning and maintaining racehorses: Cannot be set off against any income other than income from the business of owning and maintaining racehorses.
Specified Business Loss:
Losses from businesses specified under section 35AD: Can be adjusted against income from specified businesses only.
Losses from other businesses and professions can be set off against specified business losses.
Loss from Gambling or betting:
Losses from winnings from lotteries, crossword puzzles, horse races, card games, and games having gambling or betting: Cannot be set off against any income.
Example of Set-Off Loss:
Non-Speculative Business Loss: INR 5,00,000 Speculative Business Income: INR 1,00,000 House Property Income: INR 2,50,000
Solution:
Taxpayers can set off Non-Speculative Business Loss in the following order:
Speculative Business Income (Intra-head set off): INR 1,00,000
House Property Income (Inter-head set off): INR 2,50,000
Carry Forward Loss to future years: INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)
Carry Forward Losses
Loss remaining after set-off refers to the portion of the loss that taxpayers can carry forward to future years to offset against future incomes. For instance, if there is a loss from self-occupied house property remaining after intra-head and inter-head set-off, the taxpayer can carry it forward for up to 8 years and adjust it against future income from house property.
To carry forward the loss to future years, taxpayers must file the Original Income Tax Return (ITR) within the due date as per Section 139(1). However, even if taxpayers file a Belated ITR under Section 139(4), they can still carry forward loss under the head House Property to future years. Below is a table outlining the rules for carrying forward and setting off losses against future incomes:
Example for Carry Forward of Loss:
FY 2021-22 (AY 2022-23)
Non-Speculative Business Loss: INR 5,00,000
Speculative Business Income: INR 1,00,000
House Property Income: INR 2,50,000
FY 2022-23 (AY 2023-24)
Speculative Business Income: INR 30,000
Non-Speculative Business Income: INR 1,40,000
Solution:
FY 2021-22 (AY 2022-23)
The taxpayer can set off Non-Speculative Business Loss in the following order:
Speculative Business Income (Intra-head set off) – INR 1,00,000
House Property Income (Inter-head set off) – INR 2,50,000
Carry Forward Loss to future years – INR 1,50,000 (5,00,000 – 1,00,000 – 2,50,000)
FY 2022-23 (AY 2023-24)
The taxpayer can set off Non-Speculative Business Loss in the following order:
Carry Forward Loss – INR 1,50,000
Non-Speculative Business Income – INR 1,40,000
Speculative Business Income – INR 10,000
Carry Forward and Set Off Business Loss
Non-speculative business loss:
Taxpayers can carry forward Non-Speculative Business Loss remaining after set off for up to 8 assessment years. These losses can be set off against incomes under the head ‘Profits and Gains from Business and Profession.’
Speculative business loss:
Losses from speculative business can be carried forward for 4 years. However, these brought-forward losses can only be adjusted against speculative business incomes.
Specified business loss:
There is no time restriction for carrying forward losses from specified business. These brought-forward losses can be adjusted against specified business incomes only.
Owing and maintaining racehorses
The taxpayer can carry forward losses from owning and maintaining racehorses for up to 4 years. However, they can only adjust these losses against the profits earned specifically from owning and maintaining the racehorses.
Carry Forward and Set Off of House Property Loss
The taxpayer has the option to carry forward and set off losses from House Property for a duration of 8 assessment years. Moreover, this carry forward of losses is permissible even if the Income Tax Return (ITR) is filed after the due date specified under section 139(1).
In the subsequent financial years, these carried forward House Property Losses can be set off against any income generated from House Property.
Carry Forward and Set Off of Capital Loss
The taxpayer has the provision to carry forward losses under the head of ‘Capital Gains’ for up to 8 assessment years, provided that they have filed their Income Tax Return (ITR) before the due date as specified under section 139(1).
In the subsequent financial years, the taxpayer can utilize the carried forward Short Term Capital Loss (STCL) to offset both Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG). However, the carried forward Long Term Capital Loss (LTCL) can only be set off against Long Term Capital Gains (LTCG).
Carry Forward and Set Off of Crypto Loss
As per the amendments introduced in Budget 2022, significant changes have been made to the taxation of cryptocurrency, NFTs, and other virtual digital assets (VDA). One notable change is regarding the treatment of losses incurred from the transfer of these assets.
Under the new provisions, taxpayers are no longer permitted to offset losses from the transfer of one virtual digital asset against profits from the transfer of another VDA or any other form of income. Additionally, the option to carry forward such losses to subsequent years for set-off against future income has been eliminated.
Furthermore, if a taxpayer experiences a loss under any other income head, they are prohibited from using it to offset profits generated from the transfer of virtual digital assets. These changes represent a significant shift in the tax treatment of cryptocurrency and other similar assets, highlighting the evolving regulatory landscape in this space.
Treatment of Loss as per New Tax Regime
With the implementation of Section 115BAC in Budget 2020, several changes were introduced in the treatment of losses under the income tax regime. Here’s a breakdown of the key modifications:
House Property Loss: Under the new tax regime, taxpayers can only set off the current year’s loss from house property against income derived from house property itself. Importantly, they are prohibited from offsetting house property losses against any other form of income. Moreover, if taxpayers opt for the new tax regime, they cannot carry forward house property losses to subsequent years.
Set Off Business and Profession Loss: In the scenario of business income, individuals or Hindu Undivided Families (HUFs) are restricted from setting off brought forward business losses or unabsorbed depreciation. Furthermore, they cannot carry forward these losses or unabsorbed depreciation if they are associated with deductions or exemptions withdrawn under clause (i) of sub-section (2) of section 115BAC.
In essence, under the new tax regime, taxpayers can carry forward short-term and long-term capital losses, as well as derivatives trading losses. However, losses such as house property losses and additional depreciation, which are invalidated under Section 115BAC(2)(i), cannot be set off or carried forward.
This distinction between the treatment of losses in the new and old tax regimes is illustrated in the accompanying image, providing a clearer understanding of the changes introduced.
