Navigating the complexities of Income Tax Return (ITR) filing can be particularly daunting for individuals earning income from the stock market. This article, with insights from income tax experts, provides a comprehensive guide on how to accurately report your stock market income in your ITR, ensuring compliance and optimizing your tax liabilities for the assessment year 2025-26.

Understanding the Basics: Capital Gains vs. Business Income

The first step is to determine whether your stock market activities qualify as investments resulting in capital gains or as a business activity. This distinction is crucial as it dictates the ITR form you need to file and the applicable tax rules.

• Capital Gains: If you primarily invest in stocks for the long term, the profits from selling these shares are considered capital gains. Capital gains are further categorized into:

  • Short-Term Capital Gains (STCG): Profits from assets held for less than 12 months (for listed equity shares and equity mutual funds).
  • Long-Term Capital Gains (LTCG): Profits from assets held for more than 12 months.
  • Business Income: If you engage in frequent trading, intraday trading, or Futures and Options (F&O) trading, your income is likely to be classified as business income. Intraday trading is considered speculative business income, while F&O trading is treated as non-speculative business income.

Which ITR Form to Use?

The correct ITR form depends on the nature of your income:

• ITR-1 (Sahaj): Generally for resident individuals with total income up to ₹50 lakh, including salary, one house property, and income from other sources like interest. Starting FY 2024-25 (AY 2025-26), ITR-1 can be used even if you have long-term capital gains (LTCG) up to ₹1.25 lakh from shares or equity mutual funds (under Section 112A), provided you have no carried forward losses.

• ITR-2: For individuals and Hindu Undivided Families (HUFs) not having income from business or profession. This form is suitable if you have income from salary, more than one house property, capital gains exceeding ₹1.25 lakh, or foreign income/assets. It is applicable for those who have made profits or damages from stock purchases and sales.

• ITR-3: For individuals earning income from a business or profession. If your stock market activities are classified as a business, or if you are salaried and also trade in F&O, you must file ITR-3. This form is used to record revenue from jobs, real estate, capital gains, company or trade (including presumptive income), and other sources.
• ITR-4 (Sugam): For resident individuals, HUFs, and firms (other than LLPs) with total income up to ₹50 lakh and income from business and profession calculated under sections 44AD, 44ADA, or 44AE. ITR 4 can be used if you have long-term capital gains under section 112A up to Rs 1.25 lakh for FY 2024-25 (AY 2025-26).

Reporting Capital Gains

1. Calculate Capital Gains: Determine the sale price and deduct the purchase price and any expenses incurred during the transaction (brokerage, registration charges, etc.) to arrive at the capital gain.
2. Determine Holding Period: Ascertain whether the gain is short-term or long-term based on the holding period of the asset.

3. Report in ITR Form:

   • ITR-2: Fill out Schedule CG (Capital Gains). Provide details of STCG and LTCG separately.
   • ITR-1/ITR-4: If LTCG is up to ₹1.25 lakh and you meet other eligibility criteria, declare it in the respective schedules.

Reporting Business Income

1. Calculate Business Income: Compute your total income from stock trading activities, including intraday and F&O trading.
2. Fill Schedule P&L: In ITR-3, provide details of your trading income in Schedule P&L. For intraday income (speculative business income), add details under "Speculative Activity." For F&O income (non-speculative business income), provide details under "Trading Account."
3. Balance Sheet: If your business income exceeds a certain threshold, you may also need to fill out Part A – Balance Sheet.

Key Considerations and Recent Changes

• Tax Rates: STCG is taxed at 15%, while LTCG exceeding ₹1 lakh is taxed at 10%. Business income is taxed as per your applicable income tax slab rates.
• Budget 2024 Updates:
  • The updated ITR forms require you to report capital gains separately for transactions executed before and after July 23, 2024, aligning with the revised capital gains tax rules.
  • Long-term gains from listed shares and equity funds will be taxed at 12.5% without indexation, while short-term gains will be taxed at 20%, up from 15% earlier.
• Reporting Buyback Proceeds: From October 1, 2024, proceeds from share buybacks by domestic listed companies are treated as deemed dividends and must be reported under "Income from Other Sources."

Important Tips from Tax Experts

• Maintain Accurate Records: Keep detailed records of all your stock market transactions, including purchase and sale dates, prices, and expenses.
• Seek Professional Advice: If you find the process complex, consult a tax advisor to ensure accurate filing and optimize your tax planning.
• File Before the Due Date: The deadline for filing ITR has been extended to September 15, 2025, to accommodate structural changes in ITR forms introduced by Budget 2024. Filing on time helps avoid penalties and interest.
• Aadhaar Number: You can file the tax returns this year for forms ITR 1, 2, 3 and 5 using only the actual Aadhaar number, not the Aadhaar enrolment ID.
• New Validation Rule: If certain TDS section codes appear in Schedule TDS2 or TDS3—such as 194B, 194BB, 194S, 194LA, 195, 196A, 194Q, 194R and others—the income tax return will now be considered invalid for filing under ITR-1.

By understanding these guidelines and staying informed about the latest tax regulations, you can confidently report your stock market income in your ITR, ensuring compliance and potentially minimizing your tax burden.