Short-term gains from shares

[K.Karthik Raja]

Short-term gains from shares

I am a salaried employee and the tax is deducted from my salary at
source. 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?

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.