Income Tax: Explained - How stock market gains are taxed and how to declare them in your ITR Filing - Step by step guide from expert

In FY 2021 the stock market was at all-time high and various investors might have booked their profits in the year. Apart from that, we remember that salary, rent, and businesses are the taxation part of the income; however, we usually don't pay attention to the gains made from trading in the stock market which comes under the taxation part. 

These gains made by you are covered under income tax return which you are urged to file by December 31, 2021, for the assessment year 2021-22 (FY 2020-21). Amit Gupta, MD, SAG Infotech, shares his knowledge on how stock market gains are taxed and how to declare them in your ITR Filing. 

How stock market gains are taxed?

Explaining the method used to tax the trading gains, Amit Gupta says, "Under the income tax act 1961, the taxability of gains relied on factors like holding period and volume of transactions. If the shares purchased by the assessee are for the purpose of investment then the same would be treated as a capital asset and taxed as capital gains. But if the shares are bought and sold in a short duration repeatedly then the same would be taxed as the business income."

STCG and LTCG

Talking about STCG and LTCG, Gupta adds, "The gains on which the tax is levied are called capital gains; they are subsequently divided into short-term or long-term capital gains (STCG and LTCG) depending on the duration of holding. If any shares are held by the taxpayer for more than one year (two years for unlisted shares), then those shares would be classified as long-term, and if not then it comes under short-term. Under section 112 of the income tax act, Long term capital gain (LTCG) from the unlisted shares is taxed at 20% while on the other side STCG is taxed on the prescribed slab rate of the investors. But if the shares are listed then it is levied with tax at a concessional rate of 15 per cent/10 per cent beneath Sections 111A/112A, correspondingly (for LTCG and STCG). The business income is taxable under the slab rate subjected for the individual."

"There must be effective classification about the short-term or long-term relied on the grounds of the holding period," he further adds. "You must note that STCG is to be taxed at a 15% rate whatever be your tax slab." 

Now vs then: LTCG

"Before the beginning of the budget 2018, the Long term capital gain (LTCG) on the sale of the equity shares or equity-based units of the mutual funds were exempted from the tax. But this privilege has been taken away by the financial Budget 2018. From now an LTCG tax of 10% along with the subject cess would be applicable if the seller makes LTCG exceeding Rs 1 lakh on the sale of the equity shares or equity-based units of the mutual funds. Indeed the indexation advantage would also not be given to the seller," he explained. 

"If you are qualified then you must secure to avail the advantage of the indexation during computation of the cost of acquisition of the shares." 

Step by step guide: How to declare gains in ITR filing

- "Under the Capital Gain Schedule in the ITR form, the obtained capital gains on share transfer needed to be stated, also to maintain the difference between short term and long term gains," he advised.

- "Beneath ITR-1/ITR-4 the information of the capital gains does not need to be reported," he added.

- "An assessee would require to utilize ITR-3 or ITR-4 towards declaring the business income," he concluded.