Income Tax Return Filing 2023: Share trading and investment in stocks has gained a lot of popularity, thanks to trading apps and cheap and reliable internet, but not many are aware that gains from stocks must be declared in income tax return as well. With the income tax return filing season underway, it is imperative that the investors who trade in stocks file ITR detailing the income they earn from buying and selling shares. In this article we discuss clauses involved in taxation of income earned from selling shares, the definition of LTCG and STCG and the documents required and the ITR form to use while filing ITR to declare the income earned from buying and selling shares.

Income Tax Return Filing: Investment or trade? 

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Firstly, it is important to know that if an individual buys shares to invest, then it will be regarded either as a long-term or a short-term asset which is taxed as capital gains or losses. The gain or loss is calculated depending on how long the stocks are held. But, if the shares were purchased with the purpose of trading or business, then it will be treated as business income and taxed accordingly.

 

Income Tax Return 2023: Documents required to file ITR?

 

1) Form 26AS - which contains the details of the income tax that has been deducted and deposited by your employer.

2) Form 16 - which the employer gives detailing the earnings, tax deductions and investments shown.

3) Interest certificates 

4) Statement of capital gains. 

Both the interest certificate and the statement of capital gains can be procured from the fund house or the investment app where the trades have been made.

 

Income Tax Return 2023: Which form should you choose? 

 

As per the Income Tax Act of 1961, the tax levied on gains arising from sale of shares, depends upon different factors like the period of holding the stock in question and the volume of these transactions.

ITR-1 - A salaried person whose only source of income is the salary, has to select ITR-1 while filing return.

ITR-2 - The taxpayer will have to select ITR-2 form in order to report capital gains. 

ITR 3 - And if they conduct trades as a business, and that is their source of professional income, then they have to file the return via ITR form 3 in order to report capital gains or losses. 

 

Income Tax Return 2023: What are LTCG and STCG?

Capital gains are divided into two parts: short-term capital gain (STCG) and long-term capital gain (LTCG).

 

STCG or STCL: What is short-term capital gain or short-term capital loss? 

 

A seller makes a short-term capital gain (STCG) or incurs a short term capital loss (STCL), when equity shares are sold within 365 days of purchase. 

And when shares are sold at a higher price than purchase price, then it implies that a short-term capital gain has been made.

And when shares are sold at a price lower than the purchase price, then it is classified as a short term capital loss. 

Irrespective of the tax slab, short-term capital gains are taxable at 15%. 

 

LTCG or LTCL: What is long-term capital gain or long-term capital loss? 

 

If the equity shares are sold after 12 months of purchase, then the seller can make a long-term capital gain (LTCG) or incur a long-term capital loss (LTCL). 

Earlier, the long-term capital gains made from sale of equity shares were exempt from tax, but the exemption was removed in Budget 2018.

After this, a seller making a long-term capital gains of over Rs 1 lakh has to pay LTCG tax of 10% plus the applicable cess. 

Also, for transfers made on or after 1 April 2018, the benefit of indexation was also removed. 

 

Income Tax Return Filing 2023: What is ‘grandfathering rule’? 

 

If you've been holding stocks from before February 2018, then it is important to note that under this provision only the gains emanating from the 1st of Feb 2018 are considered for taxation. This is known as the ‘grandfathering rule’.