Share Market Profits in ITR: Business Income or Investment?
Riya Thawani
Riya Thawani is a Chartered Accountant and the founder of CA Riya Thawani & Company. With strong expertise in taxation, GST compliance, and business advisory, she assists individuals and startups with financial planning and legal compliance. She is passionate about simplifying tax laws for professionals and entrepreneurs through insightful articles and workshops.
Is share market income considered business income? Which ITR is used for business income and capital gains? How to avoid income tax on share market profit? Do I need to file an ITR if I invest in the stock market? What is the difference between capital gains and business income? Can share trading be shown as business income under 44AD? Investing and trading in the share market have become preferred choices for many Indians today. With the availability of online platforms, reduced brokerage, and increased awareness, individuals actively buy and sell shares, derivatives, and other securities. However, when the time comes to file Income Tax Returns (ITR), many traders face confusion: should their share market activity be treated as investment income or business income? The answer largely depends on the nature, frequency, and intent of trading. Let us understand this in detail.
Understanding the Share Market in Taxation Terms
For income tax purposes, income from the share market can fall under two broad categories:
- Capital Gains – Applicable when shares are held as investments. Profit from selling them is taxed as capital gains (short-term or long-term).
- Business Income – Applicable when trading in shares is frequent, systematic, and with a profit motive, similar to carrying on a business.
Therefore, an individual can file an ITR considering share market activities either under capital gains or under business income, depending on how the transactions are classified.
When Share Market Income is Treated as Business
If a person engages in trading as their primary activity or on a regular scale, the tax authorities may treat it as a business. This is common among intraday traders, F&O traders, and those who deal in large volumes.
Situations where share trading is considered business:
- Intraday Trading – Buying and selling shares within the same day without actual delivery of shares. This is treated as a speculative business income.
- Futures and Options (F&O) – Trading in derivatives is regarded as a non-speculative business income, even if there is no physical delivery of shares.
- High Volume Delivery Trades – When delivery-based trades are frequent and significant, they may also be classified as business income rather than investments.
Types of Business Income from the Share Market
When share trading is considered a business, it can fall into two categories:
1. Speculative Business Income
a. This involves intraday trading of equity shares.
b. Profits or losses from these activities are taxed as speculative business income.
c. Losses from speculative business can only be set off against speculative business profits.
2. Non-Speculative Business Income
a. This includes F&O trading and certain forms of delivery-based share trading.
b. Such income is taxed under the head of business or professional income.
c. Losses can be set off against any business income, subject to conditions.
Filing ITR for the Share Market as a Business
If your share market income qualifies as business income, you must file your ITR accordingly. Generally, ITR-3 is used for individuals and HUFs having income from business or profession.
Key Points While Filing ITR:
1. Books of Accounts
a. A trader must maintain records such as purchase/sale statements, expenses incurred (brokerage, internet charges, advisory fees, etc.), and other relevant documents.
b. For small traders, detailed accounting may not be compulsory, but maintaining proper records is advisable in case of scrutiny.
2. Audit Requirement
a. If turnover exceeds the prescribed limit (₹1 crore in general cases, or ₹10 crore where more than 95% transactions are digital), a tax audit under Section 44AB may be mandatory.
3. Expenses Deduction
a. As trading is treated like a business, expenses incurred in earning such income (brokerage, Demat charges, software subscription, advisory fees, internet, depreciation on laptop, etc.) can be claimed as deductions.
b. This reduces the taxable income.
Tax Treatment and Rates
- Business income from share trading is added to the total income and taxed according to the individual’s applicable slab rate.
- There is no separate concessional tax rate like in the case of long-term capital gains on investments.
- For F&O and intraday, the entire profit is treated as business profit and taxed accordingly.
Advantages of Treating the Share Market as a Business
- Deduction of Expenses – All expenses directly related to trading can be claimed.
- Set-off of Losses – Business losses (other than speculative) can be adjusted against other heads of income.
- Clarity in Regular Trading – For full-time traders, classifying trading income as business income avoids disputes with tax authorities.
Challenges and Compliance
While treating share market activity as business has advantages, it also involves higher compliance:
- Maintenance of Books – Traders must keep proper records, which can be tedious.
- Audit Requirement – If turnover is high, a tax audit becomes mandatory, increasing compliance costs.
- Complexity in Calculating Turnover – Determining turnover in F&O and intraday trades requires careful calculation.
- Loss Carry Forward – Speculative losses can be carried forward only for four years, while non-speculative losses for eight years.
Capital Gains vs. Business Income – A Key Decision
The choice of whether to show income as capital gains or business income depends on intention and consistency:
- If shares are bought for investment and held for a longer period, gains should be shown under capital gains.
- If trading is frequent and systematic with a profit motive, income should be declared as business income.
- The taxpayer should follow a consistent approach year after year to avoid raising suspicion with tax authorities.
Conclusion
Yes, ITR can certainly be filed for share market activities as business income, provided the nature of trading justifies it. Intraday trades, F&O, and frequent high-volume transactions are typically classified as business rather than investments. In such cases, the appropriate form is ITR-3, with due consideration of bookkeeping, audit requirements, and tax treatment.
For casual investors, reporting gains under capital gains may be more suitable. However, for active traders, treating it as a business offers better clarity, allows expense deductions, and ensures compliance with tax laws.
In short, whether share market income should be filed as business income depends on how you trade. Identifying this correctly not only helps in the accurate filing of returns but also prevents future disputes with the Income Tax Department.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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