Share Trading Income for NRIs –Is it Business Income or Capital Gain?

With the advent of mobile-based trading applications, capital market activity of individuals has surged during the years. All trading activity is mapped to the PAN number of an individual through the Demat Account, making it possible for Income Tax (IT) department to trace undeclared income from such activity.

Also, before reporting such income in the tax returns, it is crucial that one decides the nature and taxation of his/her transactions i.e. whether the same would be taxable as business profits or capital gains. The issue was a matter of litigation, as the real intention behind the investments made i.e. whether the shares are held as investments or as stock-in-trade, was difficult to ascertain.

Therefore, the IT department clarified through a circular Circular No. 6/2016 dated 29th of February 2016) that the income from share trading activity of listed securities, may be treated as capital gains or business profits at the option of the investor. The followings points would need to be noted in case of listed securities:

• If the taxpayer, himself classifies the listed security as stock in trade irrespective of the period of holding, then such income shall be treated as business income.

• If the taxpayer treats the income from transfer of a listed security, held for a period of more than 12 months as capital gains, then such stand shall not be disputed by the IT department. The position once adopted cannot be altered in subsequent years.

• In all other cases, many factors such as the frequency of transactions, scale of activity, intention of purchase, treatment in books of accounts, typical holding period etc. would influence the characterization of the income. A person can also have both nature of income in the same year. Before opting the nature of income, an investor would require to analyse other factors as well which impacts the taxability of such income.