A complete guide on how to calculate and file income tax returns on gains from stocks

Investing in stocks is quite common today, and as the income tax return (ITR) filing season is underway, investors who trade in stocks are also required to file an ITR against the income they earn from buying and selling shares. Here is a comprehensive guide on how to file an ITR for income from the stock market.

How is tax calculated on income from stocks?

According to the Income Tax Act of 1961, the taxability of gains arising on the sale of shares depends upon several factors, such as the period of holding and volume of transactions.

"If an individual buys shares to invest, depending on the period of holding, it will be regarded as a long-term or short-term asset and will be taxed as capital gains. Whereas if they purchase shares with the purpose of trading or business, it will be treated as business income and taxed accordingly," said tax expert CA Sunil Garg.

Capital gains are divided into two parts: STCG and LTCG.

Short-term capital gain (STCG) is applied to short-term capital assets in which any capital asset is held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer.

Note: The period of holding is to be considered 24 months instead of 36 months in the case of unlisted shares of a company.

Long-term capital gain (LTCG) is applied to assets that are held for a period of more than 36 months immediately preceding the date of their transfer. Here, the period of holding is to be considered 24 months instead of 36 months in the case of unlisted shares of a company.

"Intraday trading in the eyes of the Income Tax Act is considered to be a speculative business. The gains made in intraday trading are taxed at a special rate of flat 30 per cent. The gains of intraday trading are not taxed on the basis of slabs. Further, the loss from intraday trading can not be set off with any other income. Also, the loss form it can be carried forward till 4 years instead of 8 years which is the norm for any other losses," said Archit Gupta, Founder and CEO, Clear.

How should an ITR form be filed for income from stocks?

If a taxpayer is treating the income from stocks as business income, then he or she has to fill out Form ‘ITR 3," and if the income is treated as capital gains, then taxpayers have to fill out Form ‘ITR-2’ for both short-term and long term.

How should one file an ITR-2 form for income from stock?

Step 1: Visit the official website of the Income Tax Department and log in.

Step 2: Select File>Income Tax Returns>File Income Tax Returns.

Step 3: Select the assessment year, choose the status, and select the ITR form. Next, select ‘Taxable income is more than the basic exemption limit’ as the reason for ITR filing.

Step 4: The next page will show 5 different types of schedules; select ‘General’ and click on ‘Income Schedule’. Then select ‘Schedule Capital Gains’ and then choose the type of capital asset from the provided list.

Step 5: Capital gains are of two types: short-term capital gains and long-term capital gains. To report STCG, one has to click on ‘Add details'. Then they have to provide the consolidated amount obtained from the sale of short-term assets along with the COA (Cost of Acquisition) in a particular FY.

Step 6: Long-term capital gains (LTCG) are subject to taxation under Section 112A. For long-term capital gains, individuals have to provide scrip-wise details while they file ITR 2. This will include the ISIN, selling price, purchase price, date of different transactions, and more.

After providing these details in ‘Schedule 112A’, one has to click on ‘Add’.

Step 7: Once the necessary schedules are "confirmed, individuals have to review Part B TTI and then tap on ‘Preview Return’. Next, download the ITR and proceed with the declaration.

Step 8: Fill in the required details and tap on ‘Proceed to Validation’. After validation, the ITR filing has to be verified.

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