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December 12, 2020

How you need to show equity shares transaction in ITR? In detail or Consolidated?

by CA Shivam Jaiswal in Income Tax, Stock Market

How you need to show equity shares transaction in ITR? In detail or Consolidated?

An income tax return (ITR) is basically a document that is filed as per the provisions of the Income Tax Act, reporting one’s income, profits and losses and other deductions as well as details about tax refund or tax liability. The process of filing income tax return (ITR) can become quite complex if you do not understand the implications of what you are filling in the form. One such issue arises on how one is supposed to show equity shares transaction in ITR.

Also Read How to calculate long term and short term Capital Gain on Shares and Mutual Fund in Income Tax

How are shares transactions to be disclosed in ITR?

If one has share trading activity, the same has to be declared under the head “Income from Capital Gain”.

Share trading falls into 4 separate categories:

  • Long Term STT Paid
  • Short Term STT Paid
  • Long Term STT not paid
  • Short Term STT not paid

Short Term Capital Gains

If equity shares listed on a stock exchange are sold within 12 months of purchase, the seller may make short term capital gain or incur short-term capital loss. The seller makes short-term capital gain when shares are sold at a price higher than the purchase price.

Calculation of Short-term capital gain = Sale price (-) Expenses on Sale (-) Purchase price

Long Term Capital Gains

  • If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make long-term capital gain or incur long-term capital loss.
  • Before the introduction of budget 2018, long-term capital gain made on sale of equity shares or equity-oriented units of mutual fund was exempt from tax under Section 10(38)
  • As per the provisions of the Financial Budget of 2018, if a seller makes long term capital gain of more than Rs. 1 lakh on sale of equity shares or equity-oriented units of mutual fund, the gain made will attract a capital gains tax of 10% long-term capital gains tax.
  • Also, the benefit of indexation will not be available to the seller. These provisions apply to transfers made on or after 1 April 2018.

Are shares transactions required to be disclosed scrip-wise in ITR?

  • The gain from share trading in case of stock traders or day traders is generally categorised as short-term capital gains or business income. This is because their holding period of shares/units in most of the cases is less than one year which is a prerequisite for the gains to be categorised as long-term capital gains.
  • There is no requirement for scrip wise reporting for day trading and short-term sale or purchase of listed shares in the filing of income tax return (ITR) in assessment year (AY) 2020-21.
  • The scrip wise details are needed while filing ITR for AY 2020-21 for reporting long-term capital gains (LTCG) for listed shares or specified units eligible for the benefit of grandfathering.

What do you mean by ‘grandfathering mechanism’?

The Finance Act, 2018 exempted gains made on the listed shares/specified units up to January 31, 2018, by introducing grandfathering mechanism for computation of LTCG for these shares.

When a new clause or policy is added to a law, certain persons may be relieved from complying with the new clause. This is called “grandfathering”. “Grandfathered” persons enjoy the right to avail concession because they have made their decisions under the old law. The concept of grandfathering in the case of LTCG on sale of equity investments works as follows:  

A method of determining the Cost of Acquisition (COA) of such investments have been specifically laid down as per the COA of such investments shall be deemed to be the higher of:

  • The actual COA of such investments; and
  • The lower of:
    1. Fair Market Value (‘FMV’) of such investments; and
    2. the Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price

Further, the FMV would be the highest price quoted on the recognised stock exchange on 31 January 2018. In case there is no trading of the said asset in such stock exchange, the highest price on a day immediately preceding 31 January 2018 shall be considered to be the FMV. In effect, the taxpayer can claim the highest price quoted on the recognised stock exchange on 31 January 2018 as the COA and claim the deduction for the same.

Since grandfathering is allowed by comparing different values including cost, sale price and market price as on January 31, 2018, for each shares/units, the scrip wise details for computing LTCG of these shares/units were required.

Without this reporting requirement, there may be situations where a taxpayer may not claim or wrongly claim the benefit of grandfathering due to lack of understanding of the provisions.

Moreover, if the calculation is not made scrip-wise and the taxpayer is allowed to enter the total figures only, the income tax authorities would not be able to check the correctness of the claim. As a result, many returns will have to be audited leading to unnecessary grievances/rectifications at a later stage.

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