Can share market profits be shown as business income to avoid tax if total income is under ₹12 lakh?

Many taxpayers with income from shares, dividends, and bank interest often wonder whether changing the classification of share market profits can help reduce tax liability.

Today's Q&A explains these details in response to a reader's query.

For those who are engaged in the business of share trading, the profits, including dividends on shares, can be offered as business income. Whether the share market profits can be treated as business income or capital gains would depend on various factors, and also on the facts of each case.

The major factors to be considered for such evaluation would include frequency and volume of transactions, the source of funds used for investing, the purpose of making the investment, accounting treatment of the transactions in the books of accounts of the taxpayer, etc.

The matter has been a bone of contention between taxpayers and the income tax department for quite some time. In order to reduce the litigation on this count, the Central Board of Direct Taxes (CBDT) has issued various circulars from time to time. As per the latest circular No. 6/2016 dated 29-02-2016, the CBDT has advised its officers to accept the stand taken by taxpayers in this regard with respect to listed shares and securities.

The circular provides that for listed shares sold after 12 months, if the taxpayer claims the investments to be capital assets, the assessing officer has to accept such stand taken by the taxpayer. Irrespective of the holding period, if the taxpayer wants to treat his investment in listed shares and securities as his stock in trade, the tax officer should also accept this stand. However, the stand once taken has to be consistently followed year after year and cannot be changed without having adequate reasons.

So, in case you wish to treat your share market profits as business income, you can do so provided the same is justified based on the various factors stated above. Please note that the stand once taken cannot be changed later on to suit you.

Before you venture into this option, please note that the income tax officer may not accept your choice to treat the share market profits as business income in case your case is selected for detailed scrutiny and the matter may get litigated further.