All incomes are subject to the due diligence of the tax system. In the realm of taxes, we're well aware that the income derived from a salary, rental property or business venture is subject to the watchful eye of the taxman. However, for those who find solace in the world of buying and selling shares, the waters can be murky. Regrettably, many Indians, a country where tax evasion is commonplace, neglect to report profits made through the sale and purchase of shares on their income tax returns. Neglecting to report gains or losses on the sale or purchase of shares may seem like a minor detail, but it can have far-reaching consequences. In this article, we will examine the ramifications of omitting gain from the sale and purchase of shares from income tax returns in India.

Taxation of Income Earned from Sale/Purchase of Shares

As a first step, understand that any money made from the purchase or sale of shares is considered capital gain. Any earnings or losses arising from the sale or purchase of equity shares fall under the umbrella of 'Capital Gains.' For tax purposes, you must report any capital gains you've made. Failure to comply with this requirement constitutes a violation of the Income Tax Act, which could result in serious legal repercussions.

Income falling under the category of 'Capital Gains' is further divided into two distinct types based on the holding period of shares namely Long-term capital gains and Short-term capital gains. The holding period, in this case, refers to the length of time for which the investment is held, from the day of acquisition until the day of sale or transfer.

It's important to note that holding periods vary across different classes of capital assets, and for income tax purposes, the holding period of listed equity shares and equity mutual funds differ from that of debt mutual funds. This variation also affects their respective taxability.

If you invest in shares listed on a stock exchange and sell them within 12 months of buying them, any profit or loss would be considered a short-term gain or loss. If you make a profit and sell the shares for a higher price than what you paid, you'll be charged a tax rate of 15%.

If you hold the shares for more than 12 months before selling, any resulting profit or loss would be a long-term gain or loss. Before the 2018 Budget, any gains made from selling long-term investments were exempt from tax, which meant you didn't have to pay any tax on them. However, this exemption was removed in the 2018 Financial Budget.

From 1 April 2018, if you sell your shares or equity-oriented mutual fund units and make a long-term capital gain of over Rs.1 lakh, you'll have to pay a tax of 10%, plus cess. Additionally, you won't be able to benefit from indexation anymore. It's worth noting that this new rule will only apply to transfers made on or after 1 April 2018, meaning that any gains made from selling shares before this date won't be taxed.

Consequences of Not disclosing Income from Sale/Purchasing of Shares

One of the most serious consequences of not reporting share trading income on your tax returns is the possibility of being caught by the Income Tax Department. The IT Department employs technology and data analytics to track suspicious transactions and can detect tax evasion through various means. If any discrepancies are found in your tax returns, the IT Department may initiate an inquiry, which can lead to fines and penalties.

In case you are discovered by the Income Tax Department, you will be required to pay a penalty equal to 50% of the unpaid tax amount. Additionally, you will be charged interest on the unpaid tax balance, which can accrue at a rate of up to 1.5% per month. These fines and penalties can accumulate rapidly, resulting in substantial monetary losses.

Furthermore, omitting share trading income from your tax returns is illegal, and deliberately avoiding tax payments can result in criminal charges being filed against you by the IT Department. This, coupled with fines and penalties, can lead to imprisonment for up to seven years.

In addition to legal ramifications, failing to disclose share trading income on your tax returns can adversely affect your credit score. Lenders evaluate your creditworthiness based on your credit score, and having a low score can make it difficult for you to obtain loans, credit cards, and other financial products in the future.

Additionally, not reporting share trading income may impede your ability to obtain a visa. Several countries require applicants to provide their tax returns when applying for a visa. If you have a history of tax evasion, it can negatively impact your visa application and result in denial of entry

Bottomline

Finally, failing to report gains or losses from the sale or acquisition of shares on tax returns could have serious consequences. Capital gains must be reported on tax returns in order to avoid fines, penalties, and other legal implications. It is a general duty for taxpayers to contribute to the growth of the country and we should do our best to pay what the government requires of us in terms of taxes.

Yet how other capital gains are calculated differs depending on the asset in question and how long it was kept before being sold. You can get a more thorough understanding of the precise calculations involved in your capital gains tax from our experts at SuperCA if you've sold or intend to sell any assets. This will help you make better decisions. You’ll get one-stop solutions to all of your tax-related concerns from our in-house tax and finance specialists. Do contact us for a no-cost consultation.