'Don't treat earning below Rs 5 lakh from shares as biz income'

New Delhi: In order to help attract more retail investors to the stock market, a high-level panel has suggested levying lower short-term capital gains tax on annual earning of less than Rs 5 lakh from share trading rather than treating it as business income.

The Justice (rtd) R V Easwar Committee on simplification of income tax laws, in its draft report, suggested doing away with the discretion given to tax assessing officer to classify equity trading income as business income or short/long term capital gains.

The move to make annual income of less than Rs 5 lakh made on equity trading as short-term capital gains would help reduce litigations and bring in more retail money into the stock markets.

Tax on short term capital gains is levied at 15 percent plus surcharge, while business incomes are taxed at maximum rate of 30 percent plus cess. "Amendments to provide that in cases where shares are shown as capital assets and held for one year or less, the Assessing Officer will not re-characterise the surplus on sale as business income, provided the surplus in a year is Rs 5 lakhs or less," the report said.

It further said that in case the shares are held for a period more than one year and shown as capital assets in I-T returns, then the surplus should be taxed as long-term capital gains.

Long term gain on sale of shares is fully exempt from tax. "In case they (shares) are held for a period more than one year, and shown as capital assets (and not as stock-in- trade), surplus to be taxed as long-term capital gains," the report added.

"This us a welcome move and will provide relief to the common tax payers. It would help avoid litigation in respect of classification of gains, whether as business income or capital gains, arising from a transfer of shares and securities, subject to fulfilment of specified conditions," said Vikas Vasal KPMG (India) Partner.

Nangia & Co Managing Partner Rakesh Nangia said this will resolve the difficulty of taxpayers being required to prove their intention in acquiring shares before the tax officer. "The committee has brought the much needed certainty on taxability. This shall end the avoidable litigation and thereby save the trouble faced by genuine taxpayers," he said.