TAXAJ

Tax Filing for Securities Traders

The trader package is designed to ensure maximum Tax Savings for people having a trading income. Along with this, it also includes hassle-free filing by an expert CA who knows the nuances of Intraday and F&O trading. Mis-filing or non-filing can lead to the unnecessary hassle of having to answer IT notices.

You can classify yourself as an Investor if you hold equity investments for more than 1 year and show income as long term capital gain (LTCG). You can also consider yourself an investor and gains as short term capital gains (STCG) if your holding period is more than 1 day and less than 1 year. We also discussed how it is best to show your capital gains as a business income if the frequency of trades is higher or if investing/trading is your primary source of income.

In this chapter we will discuss all aspects of taxation when trading is declared as a business income, which can be categorized either as:

  1. Speculative business income – Income from intraday equity trading is considered as speculative. It is considered as speculative as you would be trading without the intention of taking delivery of the contract.
  2. Non-speculative business income – Income from trading F&O (both intraday and overnight) on all the exchanges are considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of the underlying contracts. Even though currently almost all equity, currency, & commodity contracts in India are cash-settled, but by definition, they give rise to giving/taking delivery (there are a few commodity futures contracts like gold and almost all agri-commodity contracts with the delivery option to it).Income from shorter-term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if the frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.
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About This Plan

Get your account summary prepared and tax returns filed by TAXAJ Experts

Created by potrace 1.15, written by Peter Selinger 2001-2017

Timeline

It usually takes 1 to 2 working days.

Buy Now
Services Covered
Who Should Buy
How It's Done
Documents Required
Services Covered

  • Income tax return for individual trading in derivatives
  • Income tax return for individual in intraday trading
  • Consolidation of Trading statements across multiple platforms
  • Prepare Account Summary - P&L and Balance Sheet (up to 100 entries per year)
  • Tax Return preparation & Filing by Experts
  • Business Hours CA Support - Email and Phone
  • Excludes the Tax audit Fees
Who Should Buy
  • Salaried Individual having income or loss from F&O Trading or intraday equity trading
  • Self Employed traders who have income or loss from F&O Trading or intraday equity trading
How It's Done

    • Purchase of Plan
    • Upload documents
    • Review computation sheet
    • Return filed & acknowledgement generated
Documents Required
  • Form 16 from your company
  • Form 26AS Tax Credit Statement
  • Trading account statement from your broker
  • Bank statement if interest received is above Rs. 10,000/-

Taxation of trading/business income

Unlike capital gains, there is no fixed taxation rate when you have a business income. Speculative and non-speculative business income has to be added to all your other income (salary, other business income, bank interest, rental income, and others), and taxes paid according to the tax slab you fall in. You can refer to chapter 1 for tax slabs as applicable for FY 2020-21.

Let me explain this with an example:

  • My salary – Rs.1,000,000/-
  • Short term capital gains from delivery based equity – Rs.100,000/-
  • Profits from F&O trading – Rs.100,000/-
  • Intraday equity trading – Rs.100,000/-

Gives these incomes for the year, what is my tax liability?

In order to find out my tax liability, I need to calculate my total income by summing up salary, and all business income (speculative and non-speculative). The reason capital gains are not added is that capital gains have fixed taxation rates unlike a salary, or business income.

Total income (salary + business) = Rs.1,000,000 (salary income) + Rs.100,000 (Profits from F&O trading) + Rs.100,000 (Intraday equity trading)  = Rs 1,200,000/-

I now have to pay tax on Rs 12,00,000/- based on the tax slab –

  • 0 – Rs.250,000 : 0% – Nil
  • 250,000 – Rs.500,000 : 5% – Rs.12,500/-
  • 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,
  • 1,000,000 – 1,200,000: 30% – Rs.60,000/-
  • Hence total tax : 25,000 + Rs.100,000 + Rs.60,000 = Rs.172,500/-

Now, I also have an additional income of Rs.100,000/- classified under short term capital gains from delivery based equity. The tax rate on this is flat 15%.

STCG: Rs 100,000/-, so at 15%, tax liability is Rs.15,000/-

Total tax = Rs.185,000 + Rs.15,000 = Rs.200,000/-

I hope this example gives you a basic orientation of how to treat your income and evaluate your tax liability.

We will now proceed to find a list of important factors that have to be kept in mind when declaring trading as a business income for taxation.

Carry forward business loss

If you file your income tax returns on time July 31st for non-audit case and Sept 30th for audit case, you can carry forward any business loss that is incurred.

Speculative losses can be carried forward for 4 years and can be set-off only against any speculative gains you make in that period.

Non-speculative losses can be set-off against any other business income except salary income the same year. So they can be set-off against bank interest income, rental income, capital gains, but only in the same year.

You carry forward non-speculative losses to the next 8 years; however, do remember carried forward non-speculative losses can be set-off only against any non-speculative gains made in that period.

For example, consider this – my hotel business income is Rs 1,500,000/-, my interest income for the year is Rs.200,000/-, and  I make a non-speculative loss of Rs 700,000. In such a case, my tax liability for the year would be –

My gain is Rs 1,500,000/ from business and Rs.200,000/- from interest, so total of Rs.1,700,000/-.

I have a non-speculative business loss of Rs.700,000/-, which I can use to offset my business gains, and therefore lower my tax liability. Hence

Tax liability = Rs.1,700,000 – 700,000 = Rs.1,000,000/-

So I pay tax on Rs.1,000,000/- as per the tax slab I belong to, which would be –

  • 0 – Rs.250,000 : 0% – Nil
  • 250,000 – Rs.500,000 : 5% – Rs.12,500/-
  • 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,

Hence, Rs.112,500/- goes out as tax.

Offsetting Speculative and non-speculative business income

Speculative (Intraday equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.

If you incur speculative (intraday equity) loss of Rs.100,000/- for a year, and a non-speculative profit of Rs 100,000/-, then you cannot net-off each other and say zero profits. You would still have to pay taxes on Rs 100,000/- from non-speculative profit and carry forward the speculative loss.

For example, consider this –

  • Income from Salary = Rs.500,000/-
  • Non Speculative profit = Rs.100,000/-
  • Speculative loss = Rs.100,000/-

I calculate my tax liability as –

Total income = Income from Salary + Gains from Non Speculative Business income

= Rs.500,000 + Rs.100,000 = Rs.600,000/-

I’m required to pay the tax on Rs.600,000 as per the slab rates –

  • 0 – Rs.250,000 : 0% – Nil
  • 250,000 – Rs.500,000 : 5% – Rs.12,500/-
  • 500,000 – Rs.600,000 : 20% – Rs.20,000/-,

Hence total tax = Rs.12,500 + Rs.20,000 = Rs.32,500/-

I can carry forward speculative loss of Rs.100,000/-, which I can set-off against any future (up to 4 years) speculative gains. Also to reiterate, speculative business losses can be set-off only against other speculative gains either the same year or when carried forward. Speculative losses can’t be set-off against other business gains.

But if I had a speculative gain of Rs 100,000/- and non-speculative loss of Rs 100,000/- they can offset each other, and hence tax in the above example would be only on the salary of Rs 500,000/-.

What is Tax Loss Harvesting?

Towards the end of a financial year, you might have realized profits and unrealized losses. If you let it be, you will end up paying taxes on realized profits and carrying forward your unrealized losses to next year. This would mean a higher tax outgo immediately, and hence any interest that you could have earned on that capital which goes away as taxes.

You can very easily postpone this tax outgo by booking the unrealized loss, and immediately getting back on the same trade. By booking the loss, the tax liability for the financial year would reduce.

BTST (ATST) – Is it speculative, non-speculative, or STCG?

BTST (Buy today Sell tomorrow) or ATST (Acquire today sell tomorrow) is quite popular among equity traders. It is called BTST when you buy today and sell tomorrow without taking delivery of the stock.

Since you are not taking delivery, should it be considered as speculative similar to intraday equity trading?

There are both schools of thought, one which considers it to be speculative because no delivery was taken. However, I come from the second school, which is to consider it as non-speculative/STCG as the exchange itself charges the security transaction tax (STT) for BTST trades similar to regular delivery based trades. A factor to consider is if such BTST trades are done just a few times in the year show it as STCG, but if done frequently it is best to show it as speculative business income.

Advance Tax – Business Income

Paying advance tax is important when you have a business income. Like we discussed in the previous chapter, the advance tax has to be paid every year – 15% by 15th Jun, 45% by 15th Sep, 75% by 15th Dec, and 100% by 15th March. I guess the question that will arise is % of what?

The % of the annual tax that you are likely to pay, yes! When you have a business income you have to pay most of your taxes before the year ends on March 31st. The issue with trading as a business is that you might have a great year until September, but you can’t extrapolate this to say that you will continue to earn at the same rate until the end of the financial year. It could be more or less.

But everything said and done, you are required to pay that advance tax, otherwise, the penalty is 12% annualized for the time period it was not paid for. The best way to pay advance tax is by paying tax for that particular time period, so Sept 15th pay for what was earned until then, and by March 15th close to the year-end, you can make all balance payments as you would have a fair idea on how you will close the year. You can claim a tax refund if you end up paying more tax than what was required to pay for the financial year. Tax refunds are processed in a quick time by the IT department.

You can make your advance tax payments online by clicking on Challan No./ITNS 280 on https://incometaxindiaefiling.gov.in/

Also, here is an interesting link that helps you calculate your advance tax – http://www.incometaxindia.gov.in/Pages/tools/advance-tax-calculator.aspx.

Turnover and Tax Audit

When is an audit required?

An audit is required if you have a business income and if your business turnover is more than Rs 5 crore for a financial year (from FY 20-21). In the case of digital transactions (equity transactions are 100% digital), this turnover limit is Rs 5 crores. For equity traders, an audit is also required as per section 44AD in cases where turnover is less than Rs.5 Crores but profits are lesser than 6% of the turnover and total income is above the minimum exemption limit.

However, let us understand what audit really means.

The dictionary meaning of the term “audit” is check, review, inspection, etc. There are various types of audits prescribed under different laws like company law requires a company audit; cost accounting law requires a cost audit, etc. Likewise, the Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law if he meets the above-mentioned turnover criteria.

An audit can also be defined as having an accountant verify if you have prepared all your accounts right. In this case, it is getting an accountant to check if you have created a correct balance sheet and P&L statement for the year. Ideally, this audit should be done by the IT department itself, but considering the number of balance sheets out there, it is surely impossible for the IT department to audit each one of them. Hence we need a Chartered accountant (CA), who is a qualified professional and authorized by the Income-tax department to perform audits on the balance sheet and P&L statements. You the taxpayer can use any CA of your choice.

What role should a CA play?

Ideally, a CA is required to only audit and sign on the balance sheets and P&L statements. But a CA also typically ends up creating your balance sheets and P&L statements and will audit them only if required.  We will in the next chapter briefly explain how a CA typically creates these two statements.

The importance of the audit process by a CA cannot be understated, apart from all the reporting requirements an audit also helps traders/investors know their financial health, ensure it faithfully reflects the income, and claims for deduction are correctly made. It also helps lenders evaluate credibility, and act as a check for any fraudulent practices.

Which ITR form to use? – ITR3 (ITR 4 until 2016), we will discuss more on this in the last chapter. I have come across incidents where people have declared both speculative and non-speculative as capital gains to avoid having to declare business income, and not having to use ITR3. Taking a shortcut like this could mean a lot of trouble if called for an IT scrutiny.

Business expenses when trading – Advantage of showing trading as a business is that you can show all expenses incurred as a cost which can then be used to reduce your tax outgo and if a net loss for the year after all these costs, it can be carried forward as explained above.

Following are some of the expenses that can be shown as a cost when trading

  • All charges when trading (STT, Brokerage, Exchange charges, and all other taxes). I hope you remember that STT can’t be shown as a cost when declaring income as capital gains, but it can be in case of business income.
  • Internet/phone bills if used for trading (portion proportionate to your usage on the bill)
  • Depreciation of computer/other electronics (used for trading)
  • Rental expense (if the place used for trading if a room used – a portion of your rent)
  • Salary paid to anyone helping you trade
  • Advisory fees, cost of books, newspapers, subscriptions, and more…

Tax Audit in case of Income from trading in F&O

Since the Income from F&O Trading is considered as a normal business income, normal provisions of the Income Tax Act will apply in this case. The trader would be required to prepare normal books of accounts under Section 44A of the Income Tax Act.


Moreover, if the turnover is more than Rs. 5 Crore or if the Profit disclosed is less than 8%, the taxpayer would also be required to get the Tax Audit conducted under Section 44AB. This tax audit would be required to be conducted by a practicing Chartered Accountant for each year for which the turnover exceeds Rs. 5 Crores.

Computation of Turnover in case of F&O Transactions for Tax Audit purposes

The value of transactions in F&O is usually very high but the profit margin is fairly low.  Although, the tax audit is required only in cases where the where the annual turnover is more than Rs. 1 Crores, but in case of Traders who deal in the F&O Market, they are easily able to generate such turnover in a month. Although the turnover is very high but the profit margin is fairly low.

Moreover, the transactions in F&O Market are completed without the delivery of shares or securities. The transactions are also squared up by payment of differences. The contract notes are issued for the full value of the asset purchased or sold but the entries in the books of accounts are made only for the difference. The transactions may be squared up at any time on or before the expiry date.

Therefore in case of Derivatives Transactions in the F&O Market, the manner of computation of turnover is different from the manner of computation of turnover in case of other businesses. In case of F&O Transactions, the turnover would be determined as follows:-

  1. The total of favorable and unfavorable trades would be taken as the turnover
  2. Premium received on the sale of options is also to be included in the turnover
  3. In respect of any reverse trade entered, the difference thereon, should also form a part of the turnover.

This can be explained with the help of an example. Assuming an F&O Trader enters into the following 2 transactions:-

  1. Purchases 1 Lot of Futures of Reliance worth Rs. 5 Lakhs and sells it for Rs. 5.50 Lakhs thereby receiving a profit of Rs. 50,000.
  2. Purchases 1 Lot of Futures of Tata Motors worth Rs. 2 Lakhs and sells it for 1.90 Lakhs thereby incurring a loss of Rs. 10,000.

In case of the above 2 transactions:-

  1. Total profit = Rs. 50,000 – Rs. 10,000 = Rs. 40,000
  2. Turnover for the purpose of Tax audit = Rs. 50,000 + Rs. 10,000 = Rs. 60,000

Nature of Income in case of Delivery Based Transactions

If the transactions in share market are entered into for the purpose of Investment – the gains arising on such transactions would be treated as Capital Gains. However, if the transactions are entered into as a Business transaction – the income arising on sale would be treated as Income from Business/Profession.

It would be determined on the facts of each case whether the delivery based transactions are to be treated as Capital Gains or are to be treated as Business Income.

If these transactions are treated as Business Transactions, then the tax would be levied as mentioned above. If the transactions are considered as Investments, then the tax would be levied in the manner as described in this article – Treatment of Capital Gains on sale of Delivery based Shares.

Treatment of Loss arising in F&O Transactions

As the transactions entered into in the F&O Market are treated as Non Speculative Transactions, the loss arising out of F&O Transactions would be allowed to be set off against all other incomes except Salary Income.

If the Loss is not set off against the incomes of the same financial year, then such loss can be carried forward and set off against future incomes. However, for the loss to be carried forward and set off, the loss should be disclosed in the Income Tax Return and the ITR should be filed before the due date of filing of income tax return.

If the Loss is not disclosed in the income tax return or the income tax return is not filed before the due date – the loss would not be allowed to be carried forward. Loss claimed in ITR filed after the due date of filing of Return as Belated Return is not allowed to be carried forward.

Frequently Asked Questions:

Q. Who are the CAs who’ll be filing my return?
TAXAJ taps into its CA network and puts you in touch with a qualified CA. These CAs bring a combined experience of 40 years in foreign taxation

Q. How to calculate Trading Turnover?
Turnover for Future and Options is the absolute value of each Profit and Loss trade during the year. For example, if you have a Profit of Rs.1000 and Loss of ₹500 from F&O, the turnover is ₹1,500.

Q. Do I have to provide login credentials to upload the audit report?
Yes, you will need to provide login credentials so that the CA can upload the audit report.

Q. What are other requirements if I am under a tax audit?
Apart from regular documents and the tax audit report you would require Class 2 Digital Signature for submitting your tax return.

Q. What are the types of transactions under share trading and where are they reflected in the tax return?
Short Term and Long Term Capital Gains form part of Income under the Head Capital Gains while trading in intra-day markets, F&O, Commodity, etc. fall under Income from Business and Profession

Q. What happens to the loss incurred in Share Market?
Losses from shares in speculation business can be carried forward for 4 years, while all the other losses can be carried forward for 8 years provided the tax return is filed within the due date of the original tax return