The Hindu Business Line : Short-term gains from shares

I also made a short-term capital gain from the sale of shares and I would like to know what will be the tax payable by me on such gain? — S. Kumar

You may remit the capital gains tax on your own by way of advance tax or self assessment tax or alternatively may give particulars of the gain to your employer and require your employer to deduct tax at source on your income including the capital gains.

Section 192(2B) specifically provides that if an employee has income under other heads, he may furnish particulars of such income to the employer who shall take the same into account in computing the tax to be deducted at source.

The employer shall also take into account any other income under the head salaries or other heads if the same is given by the employee.

The particulars of such income are to be furnished by the employee to the employer and is to be verified in the manner stated in Rule 26B of the Income Tax Rules.

It may be noted that there is no mandate in the law that an employee should furnish particulars to the employer.

He may furnish such particulars if he deems it necessary but it may also be noted that once the employee furnishes such particulars, the employer would be mandatorily required to take the same into account in determining the tax to be deducted at source.

I am a salaried employee and I don’t indulge in any business activity. But I trade in shares occasionally and I have the following queries:

If I deal in futures, will the resultant gain or loss be treated as speculative income or a short-term capital gain?

If I were to square off the transaction on the same day or carry it and square it off subsequently, will it make a difference? I am under the impression that dealing in shares in the futures market will be treated as speculative transaction and will be taxed at 30 per cent.

My broker, however, tells me that if the futures are squared off even on the same day it would still be considered as short-term capital gains and taxed at 10 per cent. Which is correct?

I have brought forward speculative losses from assessment year 2004-05, what are the incomes against which I can set off such loss?

I have brought forward short-term capital loss from assessment year 2005-06.

I am informed by my broker that the law has been amended last year to provide that dealing in futures will also be treated as short-term capital gain/loss. If this were so, can I set off the brought forward capital loss against the gain that I earn from dealing in futures? — Sulekha Ayyappan

Section 43(5) of the Act provides that transactions in share, securities, goods or commodities that are settled periodically or ultimately otherwise than by actual delivery will be treated as speculative in nature.

The loss or income arising therefrom will be treated as speculative loss or income. This Section, however, provides that trading in derivatives referred to in section 2(aa) of the SCRA 1956, carried on in a recognised stock exchange will not be treated as a speculative transaction.

This benefit will be available only if the transaction is carried on through a registered broker or sub-broker or by banks or mutual funds and where the transaction is carried out electronically on screen based systems and which is supported by a time stamp contract note which indicates the client identity and the number allotted under the SEBI Act or the SCR Act or the Depositories Act and also gives the permanent account number of the client.

It can therefore be seen that the dealing in derivatives satisfies all the conditions stated above, the loss or profit will not be treated as speculative in nature but will be treated as a regular business loss. In your case assuming that you satisfy all the conditions, given that you have stated that you are dealing through a broker the gain or loss from dealing in futures will be treated as regular business income/loss and not as short term capital gain or loss or as speculative income or loss.

In this background it can be appreciated that your brought forward speculative loss cannot be set off against the business income.

You may note that the provisions of section 73 only permit brought forward speculative losses to be set off against speculative income of subsequent years and should be set off within a period of 4 assessment years immediately succeeding the assessment year in which the loss was first computed.

Your brought forward short-term capital loss cannot also be set off against the business income.

You may note that the provisions of Section 74 only permit brought forward short-term capital losses to be set off against short-term capital gains or long-term capital gains of subsequent years and should be set off within a period of 8 assessment years immediately succeeding the assessment year in which the loss was first computed.

You may also note that if the income from dealing in futures is treated as business income, the tax rates will be the rates which normally apply to you as an individual and will not be taxed at 10 per cent, for this rate can only be applied if the income is a short term capital gain from dealing in securities where the sale is through a recognised stock exchange.

You may further note that it will make no difference whether the dealing in futures is squared off on the same day or is carried over and squared off subsequently.

In this connection it can be appreciated that if the conditions stated above in respect of dealing in futures are not satisfied, the gain or loss will be treated as speculative.

If this were so, the only difference would be that the brought forward speculative losses could be set off against the gain which is treated as speculative in the current year.

All the other aspects will remain the same.

(Mail your queries to taxtalk@thehindu.co.in or by post to `Tax Talk', Business Line, Kasturi Buildings, 859, Anna Salai, Chennai-600002)