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Tax trouble for aggressive/short term Investors

If you have invested in stocks or IPOs by taking a loan, the tax liability can go up substantially

Enthused with the success of COAL India, people want to invest in the upcoming initial public offerings (IPOs) and follow-on public offerings (FPOs). He is even willing to borrow to invest in these. But this excitement can cost him dear.

Classified as business income

Buying and selling equities frequently can bring you on the taxman's radar. Consequently, the capital gains made from the transactions will be added to your income and taxed, according to the income-tax (IT) slab.

Income tax experts believe as there are no hard and fast rules on this, and it differs on a case-to-case basis, one runs the risk of paying tax under business income if the amount is reasonably high. For instance, the I-T department will not bother for a gain of `50,000 or `1lakh. But if the capital gains are substantial, say `10 lakh in a financial year, there is a strong chance that it will be classified under 'business income'.

The clincher for the taxman: If you borrow regularly to make investments in IPOs and FPOs. Or, if you avail of margin funding to do daily trading in shares or indices.

If these conditions are applicable to you, your profits are re-categorised as business profit, according to the I-T Act. Interestingly, the Act refers to regular trading in shares as 'an adventure in the form of trade'.

According to the Act, capital gains are proceeds received from selling capital assets, which were bought to hold and not make immediate profit. Say you bought and sold shares within six months, the capital gains would be considered passive income and taxed accordingly.

For a broker, the classification of his/her income under 'business income' is fine. But for a salaried individual, it could hurt badly. Say one makes capital gains of `10 lakh. In addition, his taxable salary is `6lakh. The tax officer can club these two incomes and tax him at the rate of 33 per cent. That would mean a flat tax of `5.3 lakh.

However, if the two incomes were to be divided – capital gains and taxation –his tax liability would be much lesser.

You would have paid `1.5 lakh for capital gains and `1.2 lakh, according to the 20 per cent slab. His outgo, therefore, increases by `2.6 lakh or almost 50 per cent.

Even gains from intra-day trade are termed as speculative gains and come under business income, because the shares are not delivered to you on that particular day.

There is respite, though

Those who want to pursue this aggressively may get some tax benefits as well. One can set-off their business income against expenditure you incur to gain the income.

For instance, if you took a personal loan to buy shares and paid interest of 12 per cent, you can request the officer to take the cost into account and reduce the tax liability accordingly. However, you will not be allowed, if you are earning tax-free income from the expenditure you incur such as dividends from shares.

Buying and selling equities frequently can bring you on taxman's radar

The capital gains made from the transactions get added to your income and taxed, according to the income tax slab

You run the risk of paying tax under 'business income' if the amount is high

If you borrow regularly to make investments in IPOs and FPOs, your profits are categorised as 'business profit'

Also, if you avail of margin funding to do daily trading in shares or indices

For salaried individuals, classification of income under 'business income' can hurt badly

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