Taxation on unlisted share

Taxation on sale of securities - Planify Discover and get info on how much income tax one needs to pay on the buy and sale of Unlisted shares and pre IPO shares. know about taxation and capital gain tax for short and long-term investments.

Income Tax on Trading in unlisted shares is similar to the tax treatment of other capital assets. Unlisted shares are generally taxed based on the duration of holding. If held for less than 24 months, the seller will be taxed based on their income tax slab.

Everyone knows that Income from salary, rental income and business income is taxable under their respective heads. But what about income from sale or purchase of securities? Many stakeholders which includes homemakers, retired people, youth, working professionals spend their time gainfully buying and selling securities but are unsure of how this income is taxed.

Income from business v. Capital Gains Certain taxpayers treat gains or losses from the sale of securities as ‘Income from Business’, while certain others treat it as ‘Capital gains’. Whether your gains/losses from sale of securities should be treated as business income or be taxed under capital gains, has been a matter of much debate. In case of significant security trading activity usually your income is classified as income from business.

When you treat the sale of securities as business income, you are allowed to reduce expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year.If you treat your income as capital gains, expenses incurred on transfer are deductible.

What should be classified as significant security trading activity though has led to uncertainty and a lot of litigation? Taxpayers receive notices from the tax department and end up spending a lot of time and energy explaining why they chose a specific tax treatment for the sale of securities

Clarification from CBDT Taxpayers have now been offered a choice of how they want to treat such income. Once they choose, they must however continue the same method in subsequent years too, unless there is a major change in circumstances of the case. Do note that the choice has been made applicable only to listed securities.

With a view to reducing litigation in such matters, CBDT has issued the following instructions (CBDT circular no 6/2016 dated 29th February 2016)– If the taxpayer himself opts to treat his listed securities as stock-in-trade, the income shall be treated as business income. Irrespective of the period of holding of listed securities. The AO shall accept this stand chosen by the taxpayer.

If the taxpayer opts to treat the income as capital gains, the AO shall not put it to dispute. This is applicable for listed securities held for a period of more than 12 months. However, this stands once taken by a taxpayer in a specific assessment year shall be applicable in subsequent assessment years also. And the taxpayer will not be allowed to take a different stand in subsequent years.

In all other cases, the nature of transaction (whether capital gains or business income) shall continue to be decided based on the concept of ‘significant trading activity’ and the intention of the taxpayer to hold securities as ‘stock’ or as ‘investment’.

How to treat the sale of unlisted shares in this context?

However, in case of sale of unlisted shares for which no formal market exists for trading, the department has given its view. Income arising from transfer of unlisted shares would be taxed under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.

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