ITR 3 – Income Tax Filing For Business Professionals
February 16, 2018
ITR 4 Form – Income Tax Filing for Presumptive Income
February 17, 2018

How to Report Capital Gains in Your Business Income Tax Return?

Last Update Date : June 20, 2018

To the normal music lover, listening to the music of a guitarist flowing effortlessly probably leaves you mesmerized.  However, an expert guitarist would be able to decipher any beats missed or variations in the notes.  When filing business tax returns, the Assessing officer (AO), is a tax expert who knows exactly what he/she is looking for.  So, while it might have been an error, the AO will catch any undeclared income, such as capital gains, and issue a notice asking you to pay tax on your “business income”, which you missed due to lack of awareness or knowledge of all the business tax laws, deductions and exemptions, just as an expert musician knows the difference between sharps and flats.

Difference Between Business Income and Capital Gains

Under the umbrella of capital gains, we have capital assets, which include for businesses: machinery, patents, royalties, property, stocks etc.  The cause for confusion arises when trading stock from your business income: is it stock in trade, short term or long-term capital gains, for investment purposes or stocks purchased and sold to generate funds for your business.

Before deciding to invest in stocks, the first thing a person must do is decide if it is going to be Capital Gains(CG) or a business income.  Both classifications have benefits and drawbacks, however, before choosing the classification, it must be noted that once you make the choice of CG or Business income, you cannot change it.   If you opt for the business income classification then your stocks will be taxed at the business income tax rate of 30%.  Whereas, if you opt for long term capital gains, which are holdings of more than 12 months, then it is taxed at 10%, as per the Budget 2018 announcement, however short-term gains, are taxed 15%.  While the business tax rate is higher than the capital gains tax rate, this classification allows you to write off your losses, thereby reducing your taxable income.

Filing ITR 3 and ITR 4 with Capital Gains

Reflecting Capital Gains as Business Income

The capital gains for a business include the following assets but not exclusively: machinery, property, stocks, patents etc.  When the capital asset is sold, the profits arising from the sale of the asset is a capital gain.  So, for example if a piece of machinery is bought and sold several years later, the capital gain would be determined as follows:

Sale price of machinery – {the cost of acquisition + costs for sale and purchase + any costs incurred for improvements during holding period of the machinery/asset} = capital gain.  

The above mentioned, costs would be treated as business expense and deducted against your business income to reduce your taxable income level.

Significant Trading Activity

When stocks are bought with the purpose of earning a profit and exceeds Rs. 1 crore, then it classified as stock in trade and becomes a business income and subject to the business income tax slab rates.

The holding period also plays a crucial part, as equity stocks held for a shorter term are classified as business income, whereas stocks held over a long period of time would be reflected as a capital gain and subject to capital gain taxes and laws.

The balancing and maintaining of expenses and revenue can be complicated and mistakes can happen, especially when amendments to tax laws are made.  So, when reflecting your capital gains your business returns, the experts at H&R Block India can help you through every step of the tax preparation and filing process.

Not sure how to file your Business Tax Return? Let H&R Block help you file your taxes.
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