Earned Short Term Capital Gains on Shares? Here's What You Need to Know While Filing ITR - Outside View by PersonalFN

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Earned Short Term Capital Gains on Shares? Here's What You Need to Know While Filing ITR
Sep 29, 2020

The Central Board of Direct Taxes (CBDT) has issued clarification regarding scrip wise disclosure in income tax return for FY 2019-20 (AY 2020-21). As per the press release from CBDT, scrip wise information is not required to be furnished in income tax return (ITR) in case of short-term capital gains or business income.

Individuals who have earned capital gains in addition to income from business/profession are required to disclose the same in the specified income tax return forms. ITR - 2 Form is for individuals and HUFs who do not have income from profits and gains of business or profession, whereas ITR - 3 Form is for individuals and HUFs having income from profits and gains of business or profession.

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For equities, gains from a holding period of less than one year is considered as short term capital gain (STCG), while gains from a holding period of more than 1 year is considered long term capital gain (LTCG). Accordingly, gains from day trading and or short term sale of shares/units are categorized as short term capital gains.

CBDT added that scrip wise details in the ITR form is to be filled up only for reporting the long term capital gains for shares/units which are eligible for the benefit of grandfathering. Grandfathering is a provision in which gains made under the old rule up to a specified date is not affected by the new rule. There is no need to furnish scrip wise details in IT forms for computation of capital gains if the shares/units are not eligible for grandfathering.

Till April 2018, there was no tax on gains from shares/units held for more than one year. The government imposed LTCG tax on equities at 10% from April 1, 2018 if the gains exceed Rs 1 lakh in a financial year (STCG is taxed at the rate of 15%). Further, it allowed grandfathering on gains made on listed shares/specified units up to January 31, 2018.

CBDT has stated that as the grandfathering is to be allowed by comparing different values (such as cost, sale price and market price as on January 31, 2018) for each shares/units, there is a need to capture the scrip wise details for capital gains of these shares/units.

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According to CBDT, the main intent behind reporting requirement for these shares/units is as follows:

  1. Taxpayer may not claim or wrongly claim the benefit of grandfathering due to lack of understanding of the provisions. Requiring scrip wise details will facilitate taxpayers in correctly computing the LTCG on these shares/units.
  2. Income tax authorities may find it difficult to check the correctness of the claim if the calculation is not made scrip wise and the taxpayer is allowed to enter the total figures only. These reports may then have to be audited, leading to unnecessary grievances/rectifications at a late stage.
  3. Scrip wise details of long term capital gains can be cross verified by the IT department electronically with stocks exchanges, brokerages, etc. and there will be no need to subject these income tax returns to further audits or scrutiny.

Income tax return filing is still a complicated process for most individuals and they end up opting for professional assistance to help them with the process. Often taxpayers are not aware about changes in tax filing rules and the finer points of taxation which can lead to errors in filing returns. Here are some of the areas where taxpayers face difficulties:

  • The type of form to be filed
  • Deductible items and limits
  • Adjustment of losses against other gains
  • Disclosing all sources of incomes

The government has taken steps to make tax filing easy for individuals through steps like pre-filled ITR forms. However, it is still in early stages and there is still a long way to go. Taxpayers should verify the pre-filled data carefully before submitting it.

Keep in mind to fill the correct details in the ITR as wrong disclosures can lead to consequences. If you have made a mistake it can be rectified by filing a revised return.

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Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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