According to reports from Livemint, profits from securities are generally categorized under two segments: Business Income or Capital Gains. Typically, investment returns are treated as capital gains—either short-term or long-term—based on the asset type and the duration of ownership. For active traders, these profits (including dividends) may be declared as business income, but this classification depends on several variables and the specific merits of the individual's activities.
As reported by Livemint, key evaluative factors include the frequency and volume of trades, the funding source used for purchases, the primary intent behind the investment, and the accounting methods utilized in the taxpayer's records. The Central Board of Direct Taxes (CBDT) issued Circular No. 6/2016 to minimize disputes between taxpayers and the Income Tax Department. Specifically, for listed shares held over 12 months, if a taxpayer declares them as capital assets, the officer must accept that stance, while if a taxpayer prefers to treat securities as 'stock-in-trade,' the officer should comply.
According to Livemint, taxpayers must consistently apply their chosen classification to avoid disputes with the Income Tax Department during audits. The report warns that should a file be selected for detailed audit, an officer might challenge this classification, potentially leading to prolonged litigation if the facts do not support the claim. This distinction has historically caused friction between taxpayers and the Income Tax Department, making consistent application crucial for avoiding future complications.
As reported by Livemint, the guidance specifically addresses a reader's situation where annual earnings consist of stock market profits, dividends, and interest from bank accounts, with total income remaining below ₹12 lakhs. The report suggests that investors may report profits as business income if their activity aligns with the criteria mentioned, though it emphasizes the importance of maintaining consistent classification across all future years to avoid disputes with tax authorities.
