Tax Benefits & Implications of Declaring Trading as a Business Activity
Traders or investors are obligated under the income tax regulations to file their returns in right manner and pay taxes on their trading profits. So, it becomes important for any trader to understand the taxation treatment of trading business in India so that they can plan their trading activity accordingly and achieve their goals.
The first and foremost decision that any market participant has to make before starting filling Income tax is to declare whether he / she is an investor or a trader? Income tax regulations in India treats the activity of a trader and investor in different ways and have in-turn different taxation treatment and obligations.
We hereby in this article are outlining the benefits and implications for declaring self as a trader under the Income tax regulations. This is in-turn in continuation to our complete tax guide article Part VIII – Getting Started With Trading – Tax Guide for Traders in India for traders to understand the taxation treatment of trading business in India and Q&A : Tax Guide for Traders in India to answer many why`s and how`s of taxation for traders in India.
Who is a Trader?
A trader is someone who actively trades in the stocks, future & options, currency and commodities market. So, if you day trade or BTST in stocks (without taking delivery in your dmat), or trade in F&O segment (whether positional or intraday), then you have to declare self as a trader and not an investor.
If you are trading futures & options or day trading stocks on a recognized stock exchange, then you have to declare yourself as a Trader. So, equity trading for short term or long term will be considered as Business Trading and will be taxed just similar to taxation of ‘Futures & Options’.
Profits arising out from selling a stock after holding it for 12 months or less than 12 months or from trading derivatives will be treated as a Business Income and added to your total income and taxed according to your new respective tax slab.
Tax Benefits for a Trader
#1. Low Income Tax
If you are a trader, the total Income from trading and any other income is less than 2.5 Lacs then all the income will be tax free. This works in benefit for the full-time traders doing short term trading as they need not to incur the 15% tax on short term capital gain or those falling below the minimum tax bracket. While on the other hand, if you are an investor then even if your total income is less than the minimum tax bracket of Rs. 2.5 Lacs, you are mandated to pay 15% tax on short term trading gains.
#2. Set-off Losses with Other Income / Gains
Any loss arising from trading activity will be considered as a Business Loss and same can be offset against any other business income except salary.
Income from Rent, interest from saving bank account can be offset against the losses from trading.
For Example, In the year 2013-14, Mr. Shrinivasan has a annual salary of Rs. 6 lacs and he has incurred a total loss from derivatives of Rs. 1 lac and his income from other sources (rent, interest and other income apart from salary) is Rs. 1.5 lacs then his taxable income will be Rs. 6.5 Lacs (6 lacs + 1.5 lacs – 1 lac) and will be taxed according to his tax slab of 20% on 6.5 Lacs.
#3. Set-off Trading Expenses to reduce Taxable Income
For an active trader, all the income from trading is considered to be a business income so you can offset that trading income with the business expenses you incur to earn it.
Business expenses including STT, Rent, Brokerage Charges, Internet Charges, Advisory Fees, Computer Depreciation, Electricity Bill, Telephone Bills, Research Reports, Newspaper, Books, Software and Data Feed Charges etc can be used to reduce the taxable income from Speculative/Business Income. You can mention any other expenses that is incurred for undertaking your trading activity under the section “Other Expenses”.
In case of depreciation of assets, the purchase cost of assets cannot be treated as business expense as they are an asset and not an expense. But you can claim depreciation for assets (computer, laptop) during a course of time and offset it against the business income or profits to reduce your tax liability.
There are no limits for the business expense that can be claimed but any amount that is claimed need to be justified and supporting proofs must be presented and justified that they are incurred for conducting the trading activity, if asked by the Income Tax department. So, for any expenses you mention maintain the supporting documents for any future reference.
While in case of a capital gain (Short term or long term), only charges in contract notes other than STT and these business expenses cannot be claimed as an expense to reduce your taxable income.
#4. Carry forwarding the Business Losses & Speculative Business Losses in Subsequent Years
Any loss arising from the non speculative trading activity (Trading F&O`s) will be considered as Business Loss and can be offset against any other business income except salary. The balance, if any, can be carried forward and set off against business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.
For Example, In the year 2013-14, Mr. Shrinivasan has a annual salary of Rs. 6 lacs and he has incurred a total loss from derivatives of Rs. 1 lac and his income from other sources (rent, interest and other income apart from salary) is Rs. 50,000 then he can offset his loss against Rs. 50,000 income and can carry forward the remaining loss of Rs. 50,000 for the next year.
While any loss from the day trading will be considered as a Speculative Business Loss and can be carried forward against only speculative profit within the period of next 4 years.
Suppose, Mr. Srinivasan had incurred a day trading loss of 1 lac and booked a short term profit of 2 lacs during the same year, then the 1 lac loss cannot be netted off against 2 lacs profit. So, he has to pay short term tax on 2 lacs profit and 1 lac loss can offset against any speculative profits within next four years.
To get the benefit of carry forwarding the losses, it has to be filed in your income tax before the due dates for the financial year to get any benefit. Otherwise, you cannot claim the benefit.
Implication for a Trader
#1. High Taxes
Traders who fall under the higher tax bracket of 20% or 30% has this implication of paying more taxes on their trading profits as they don`t get the benefit of the tax free return on Long term capital gains on stocks or 15% on Short Term Capital Gains on Stocks.
#2. Audit
Traders with higher trading volumes are obligated under tax laws to undergo the audit of accounts if the Turnover for the financial year is greater than Rs. 1 crore and if your profit are less than 8% of your turnover.
#3. Implications of Filling Tax
Traders under the income tax laws are required to file their tax returns under forms ITR 4 or ITR4(S) which will require the need of a chartered account to file while the filling is more easy for investors to file via ITR forms ITR1 & ITR2.
As per section 43(5) of the Income Tax Act, 1961, profits earned by trading equity for intraday or non-delivery is categorized as Speculative Business Income and will be added to your other income under the head income from business / profession and will be taxed according to your total income slab.
Non-Speculative Business Income
Futures & Options Trading – Taxed as per Tax Slab
Income from trading Futures & Options (F&O) on a recognized exchanges (Equity, Commodity or Currency) will be considered as Non-Speculative Business Income. These income must be added to your total income and taxed according to your new respective tax slab.
As these incomes are considered as business income, so you can offset it with business expenses you incur to earn it like depreciation, internet bills, advisory fees, software charges, and more.
Are You an Investor or a Trader?
The first and foremost decision that any market participant has to make before starting filling Income tax is to declare whether he / she is an investor or a trader? Income tax regulations in India treats the activity of a trader and investor in different ways and have in-turn different taxation treatment and obligations.
Who is an Investor?
Trading Activity as Investment
An investor is someone who participates in Equity segment and buy shares of companies and sell it after holding it for some period of time. So, if you buy shares and sell it after taking the delivery in your dmat account, do not trade in F&O segment, or do not trade stocks for intraday or BTST then you can declare self as an Investor and enjoy the benefits of an investor as per income tax rules. So, taxation for investor lies only for long and short term trading in stocks and if you trade stocks intraday or BTST or trade F&O, then you cannot declare yourself as an Investor.
An important consideration here is that if your short term trading is more frequent (i.e. many times within a week) then you have to call you short term trading as Business Income rather Short Term Capital Gain.
Another thing which is required to be considered here is that, if you are a full time trader (i.e. trading or investment is your only source of income) then it is better to consider your income as income from business.
All the taxation rules for an investor is illustrated and detailed in Section – I.
Who is a Trader?
Trading Activity as Business
A trader is someone who actively trades in the stocks, future & options, currency and commodities market. So, if you day trade or BTST in stocks (without taking delivery in your dmat), or trade in F&O segment (whether positional or intraday), then you have to declare self as a trader and your trading will be considered to be as business activity and will be taxed as per Business Income.
Read Tax Benefits & Implications of Declaring Trading as a Business Activity.
All the taxation rules for an investor is illustrated and detailed in Section – II.
Apart from the above, there are some other considerations required to be taken into account while classifying their trading activity as Business or Investment.
Who is both A Trader & An Investor?
The rules above are very much clear for those who trades actively in Futures & Options (Non-Speculaitve Business Income) and do Intraday trading (Speculative Trading). So those traders have to consider their trading as a business activity.
The taxation rules are clear for speculative day trading and non-speculative futures trading, as any income from these two sources will surely has to be declared as business income. Even for the salaried, such activity has to be considered as business and will be taxed as the Business Income.
The above criteria are very much applicable to those whose only source of income is trading business but if you are salaried or you have some other business income as your primary or core income source then it becomes easier to show your equity profits as capital gains.
For long term investments, all the stocks that you have sold after holding for more than one year can be declared as long term capital gain and thus exempt from tax while if you are trading stocks frequently then all these income should be declare as speculative rather than capital gain.
But another view on this lies with that if you are trading f&o and doing frequent short term equity then you have to declare self as a trader but even then you can declare your long term profits as long term capital gains and be exempt from taxes. So, you can be a trader as well as an investor at the same time.
Therefore, it becomes important to stay consistent with what you are declaring self while doing tax returns. So, consult a CA to determine what to declare self while filing tax returns to achieve your trading objectives in futures.
Income from Equity Trading – Business Income or Capital Gain? – Coming Soon
Section – I Taxation for Investors in India
Taxation on Trading Stocks in India for Investors
Long Term Trading Tax in India / Long Term Capital Tax on Stocks in India for Investors
Stock hold for more than 12 months – Long Term Capital Tax
Investments for more than one year are considered to be long term and attract no tax on profits. Profits arising out from selling a stock after holding it for 12 months will be treated as a long term capital gain (LTCG) which as per the section 10 (38) of the income tax act is exempt from tax (provided such a transaction is done through a recognized stock exchange for which Security transaction tax (STT) is paid). Enjoy 100% of the profits you made out of your long term investments.
While on the other hand, any loss arising from selling the stock after 12 months will not be adjusted against any short or long term capital gain from any source.
Suppose, Mr. Shrinivasan has bought 1000 shares of Tata Motors at Rs. 260 on April 9th 2013 and he sold it at Rs. 500 on Sept 17th 2014, then the total long term profit of Rs. 2.4 Lacs arising from this investment will be exempt from tax and he can enjoy the 100% profits and don`t have to pay any income tax on it.
While on the other hand, if he has bought 1000 shares of DLF at Rs. 230 on April 9th 2014 and sold it at Rs. 167 on Sept 17th 2014, then the total short term loss of Rs. 63,000 arising from this investment will not be adjusted against the profit made from Tata Motors or any other source.
If the investment and the consequent sale were done via an off-market transaction (transferring from one DP to another persons DP), then the Long Term Capital Gain Tax on:-
Listed stocks is 10%
Non listed stocks is 20%
Short Note for Taxation for Long Term Investing In India
#1. Profits or Losses from long term investments will be treated as Long Term Capital Gain or Loss.
#2. Profits from Long term investments will be tax free (Provided they are done through an exchange and sold after holding for more than one year, i.e. 365 days)
#3. Losses from Long term investments cannot be adjusted against any short term and long term profits.
#4. STT paid to the Govt cannot be claimed as expense for Investing.
Short Term Trading Tax in India / Short Term Capital Tax on Stocks in India for Investors
Stocks hold for less than 12 months – Short Term Capital Tax
Any profit arising out from selling a stock after holding it for less than 12 months will be treated as a short term capital gain and will be taxed at 15% provided you take the delivery of shares in your demat account (Exchange has a settlement time of T+2 working days, so any stock that you bought on Monday comes in your dmat account only on the 2nd day from date of purchase i.e. Wednesday).
While on the other hand, any loss arising out of the short term trading can be carry forwarded to a period of 8 years against any short term capital gain or long term capital gain, if these loses are declared while filling the income tax returns.
Suppose, Mr. Shrinivasan has bought 1000 shares of Tata Motors at Rs. 260 on April 9th 2013 and sold them at Rs. 420 on Mar 04th 2014, then he has to pay a short term capital gain tax of 15% (i.e. Rs. 24,000) on his profit of Rs. 1.6 Lacs.
While on the other hand, if he has bought 1000 shares of DLF at Rs. 230 on April 9th, 2013 and sold them at Rs. 140 on Mar 04th 2014, then the total loss of Rs. 90,000 arising from this investment can be netted against the profits made from Tata Motors or any capital gain arising within the period of 8 years.
Short Note for Taxation for Short Term Investing In India
#1. Profits or Losses from short term investments will be treated as short term capital gain or loss.
#2. Profits from short term investments (within one year) will be treated as short term capital gain and taxed at 15%.
#3. Loss from short term investments can be carry forwarded to a period of 8 years against any short term capital gain or long term capital gain, if these loses are declared while filling the income tax returns in respective years.
Investors should take a good note of the total holding period of any stock they are planning to sell, as any stock sold after holding it for even 364 days will be considered as short Term and not Long Term. So, to take the benefit of the long term capital gain keep a fair note on the holding period of the stock.
Another important point to consider here is that if you have bought and sold the same shares many times, then you will have to use FIFO method to calculate the holding period and in-turn your Capital Gains.
Section – II Taxation for Traders in India
Taxation on Long term Equity, Short term Equity & F&O Trading in India for Traders – Non-Speculative Business Income / Loss
Equity Delivery and F&O Trading – Taxed as per Income Tax Slab
If you are trading futures & options or day trading stocks on a recognized stock exchange, then you have to declare yourself as a Trader. So, equity trading for short term or long term will be considered as Business Trading and will be taxed just similar to taxation of ‘Futures & Options’.
Profits arising out from selling a stock after holding it for 12 months or less than 12 months (excluding equity day trade or BTST) or from trading derivatives will be treated as a Business Income and added to your total income and taxed according to your new respective tax slab.
As these incomes are considered as business income, so you can offset it with business expenses you incur to earn it like depreciation, internet bills, advisory fees, software charges, and more.
While on the other hand, any loss arising from trading derivatives will be considered as Non Speculative Business Loss and can be offset against any other business income including speculative business income (Income from Day Trading) except salary in the same year. So you can set-off against bank interest income, rental income, capital gains, but only in the same year.
The balance, if any, can be carried forward and set off only against non-speculative business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.
For Example, In the year 2013-14, Mr. Shrinivasan has a annual salary of Rs. 6 lacs and he has incurred a total loss from derivatives of Rs. 1 lac and his income from day trading is Rs. 25000 and other business income (apart from salary) is Rs. 1.5 lacs then his loss from derivatives (1 Lacs) can offset from day trading income (25000) and other sources (75,000).
Therefore, his taxable income will be Rs. 6 lacs + [25000 + 1.5 lacs – 1 lac] is Rs. 6.75 Lacs and will be taxed according to his tax slab of 20%.
The above criteria are very much applicable to those whose only source of income is trading business but if you are salaried or you have some other business income as your primary or core income source then it becomes easier to show your equity profits as capital gains.
If you are trading F&O and doing frequent short term equity then you have to declare self as a trader but even then you can declare your long term profits as long term capital gains and be exempt from taxes. So, you can be a trader as well as an investor at the same time.
So, taxation rules are clear for speculative day trading and non-speculative futures trading, as any income from these two sources will surely has to be declared as business income.
But for long term investments, all the stocks that you have sold after holding for more than one year can be declared as long term capital gain and thus exempt from tax while if you are trading stocks frequently then all these income should be declare as speculative rather than capital gain.
Therefore, it becomes important to stay consistent with what you are declaring self while doing tax returns. So, consult a CA to determine what to declare self while filing tax returns to achieve your trading objectives in futures.
Short Note:
#1. Speculative Trading in Stocks or F&O trading requires you to declare yourself as a Trader.
#2. Profits or Losses from equity trading for long term or short term and derivatives trading will be taxed as Income from Business/Profession, if trading is your only source of Income.
#3. Profits will be added to your total income and taxed according to your respective tax slabs.
#4. Losses from derivatives trading cannot be deducted from salary income but can be offset against any other income (including day trading income) in same year.
#5. Losses can be carried forward and set off only against non-speculative business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.
#6. Business expenses including depreciation, internet bills, advisory fees, software charges, and more. can be offset against your profits income.
#7. ITR 4 should be used while filling taxation for individuals trading derivatives.
#8. The only thing that you’ll have to know is whether to get your books audited or not. So, If you turnover for the financial year is > 1 crore and your profits are less than 8% of the turnover, you have to compulsorily get your books audited. But if you total income is below the taxable limit, then there is no need to undergo tax audit.
#9. Taxation rules are clear for speculative day trading and non-speculative futures trading, as any income from these two sources will surely has to be declared as business income. If you are trading F&O and doing frequent short term equity then you have to declare self as a trader but even then you can declare your long term profits as long term capital gains and be exempt from taxes. So, you can be a trader as well as an investor at the same time.
Taxation on Intraday Trading (Equities) in India – Speculative Business Income / Loss
Equity Day Trading (Intraday Trading) or Non-Delivery Trading – Taxed as per Income Tax Slab
Any transaction where you buy and sell the shares on the same day is a Day Trade. Any profits and losses arising from any such transaction will be considered as speculative and will be added or netted of against your income from business/profession.
So, any profit from day trading (equities) will be considered as a speculative income and will be added to your other income under the head income from business / profession and will be taxed according to your total income slab.
Suppose, Mr. Srinivasan`s total salary income is Rs. 6 lacs and his day trading profits for the year is 1.5 lacs, then his total income will be 7.5 lacs and will be taxed as per 20% slab.
While on the other hand, any loss from the day trading will be considered as a speculative loss and can be carried forward against only speculative profit within the period of next 4 years and not against long term or short term capital gains or non speculative income (F&O Income) as per Section 73(1) of the Income Tax Act, 1961.
Suppose, Mr. Srinivasan had incurred a day trading loss of 1 lac and booked a short term profit of 2 lacs during the same year, then the 1 lac loss cannot be netted off against 2 lacs profit. So, he has to pay short term tax on 2 lacs profit and 1 lac loss can offset against any speculative profits within next four years.
Short Note:
#1. Profits or Losses from day trading equity will be considered as Speculative Profit or Loss.
#2. Profits from day trading equities will be considered as speculative income and will be added to other income and taxed as per your tax slab.
#3. Any loss from speculative (day trading equities) cannot be adjusted against short or long term profits or non speculative income (F&O Income) but can be offset against speculative profits within the next four years.
Set-off & Carry forward the Business Losses
To carry forward the losses in the subsequent years, the perquisite is that they should be filed in the same year the losses were incurred, else you cannot carry forward them in the subsequent years.
Speculative business losses (Equity Intraday Trading Losses) can be carry forward for a period of 4 years and can be set-off only against any speculative gains and not against non-speculative (F&O) gains,
Non-Speculative Business Losses (F&O Trading Losses) can be set-off against any other business income ( bank interest income, rental income, capital gains) except salary income in the same year and balance if any can be carry forward for the next 8 years and can set-off only against any non-speculative gains made in that period.
Mandatory Tax Audit for Traders
Any trader will have to undergo the audit of accounts if the Turnover for the financial year is greater than Rs. 1 crore (provided his annual income is more than 2.5 lacs). So, if your total income (trading + Salary or other business) is lesser than Rs 2.5 lacs, you don’t need an audit even if the turnover for the year is greater than 1 crore.
How to Calculate the Turnover for Tax Audit?
Turnover is being calculated to determine if you need a tax audit or not?
For Intraday equity — absolute sum of settlement profits and losses per scrip
For Delivery equity — sell side value of the stock
For F&O (Equity, Currency, Commodity) — absolute sum of settlement profits & losses for F&O) per scrip and the sell side value of option contracts
Suppose, you bought 1 lot (25 units) BankNifty futures at Rs. 17700 and sold it at 17800, then you made a profit of Rs. 2500 and say on some other day, you had a loss of Rs. 1500, then the total turnover will be summed up as 2500+1500 = Rs. 4000. So, all such settlement profits & losses added together (absolute) summed together forms up as turnover.
In case of Options,
Suppose you bought BankNifty 19,000 CA @ 100 and sold it @ 300, then turnover will be 25 x (300-100) = 5000.
In another case, suppose you bought BankNifty 19,000 CA @ 100 and sold it @ 50, then total turnover will be 25 x (100-50) = 1250.
Lastly. suppose you bought BankNifty 19,000 CA @ 100 and it expires worthless, then the total turnover will be 25 x (100-0) = 2500.
Difference between Trading Turnover and Settlement turnover for audit?
To understand the difference between the trading and settlement turnover calculation for audit, Refer to the illustration.
Suppose, Mr. Srinivasan bought 100 shares of Tata Motors at 400 and sold 100 shares at 380 then his trading volume will be Rs 78000 but his settlement turnover will be just Rs 100×20= Rs. 2000. So, All such settlement profits and losses summed up together if exceeds Rs 1 crore, only then is the audit required.
Short Key Notes:-
Salaried Traders
If you are a salaried person, then profits from derivatives will be added to your salary income and will be taxed according to your tax slabs. While on the other hand, losses from derivatives trading cannot be offset against the salary income but can be offset against any business income in next 8 years.
Supporting Documents Required while Filing Income Tax for Traders in India
#1. Profit & Loss Statement
#2. Contract Notes
#3. Depository Statements
#4. Bank Statements
Due Dates for Filing Income Tax Returns in India
Any individual trader carrying out trading activity be it long, short or day term are obligated under the income tax law to file their returns before July 31 (This year the date is extended to September 7, 2015) and it is September 30th for companies.
If the trade is a equity delivery trade, than a tax of 0.1% on the turnover is levied on both the buy side and sell sides of each trade. However, if the trade is squared off (closed) within the same trading day, meaning it is a intra-day transaction, then the STT rate applicable is 0.025% on the sell-side trade(s) only.
Which ITR Form to use for Traders & Investors in India?
For Investors
ITR 1 – Individuals having income from Salary and Interest
ITR 2 – Individuals having income from salary, Interest and Rental
For Traders
ITR 4 or ITR4(S) – Individuals and HUF’s having income from a proprietor business or profession
For Companies
ITR 6
Income Tax Slab – FY 2015-16
In case of companies, income tax is a flat 30% and no tax slabs exist.
Important Q&As while filing Taxation for Traders in India
# Is there any loss we can net off against salary?
No, we cannot offset any trading losses against salary income.
# Can we deduct long term capital loss from stocks with business income for computing income tax?
No, we cannot net off the long term losses against any income or gains.
# Can we carry forward the losses if not filed in the financial year?
To get the benefit of carry forwarding the losses, it has to be filed in your income tax before the due dates for the financial year to get any benefit. Otherwise, you cannot claim the benefit.
For Complete list of Q&As, Please Visit
Q&A : Taxation for Traders in India
This is in continuation to our complete tax guide article Part VIII – Getting Started With Trading – Tax Guide for Traders in India for traders to understand the taxation treatment of trading business in India.
In an attempt to make you task simple and easier while filing your income tax, we are writing these long list of Q&As to answer your many why`s and how`s of taxation for traders in India.
# Is there any loss that we can offset against salary income?
No, we cannot offset any trading losses against salary income.
# Can we deduct long term capital loss from stocks with business income for computing income tax?
No, we cannot net off the long term losses against any income or gains.
# Can we carry forward the long term capital loss?
No, we cannot carry forward any long term capital losses in the following years.
# Can we carry forward any profits in the following years to set off against any loss?
No, You cannot carry forward any profits for the following years, so you have to pay tax for the same in the same financial year.
# How long can you carry forward a short term capital loss?
Short term capital losses can be carry forwarded for a period of eight years against any short term term capital gain or long term capital gain, provided they are declared while filing the income tax returns.
# Can we carry forward the losses if not filed in the financial year?
To get the benefit of carry forwarding the losses, it has to be filed in your income tax before the due dates for the financial year to get any benefit. Otherwise, you cannot claim the benefit.
# Can we settle off the trading losses from derivatives against the salary?
No, the trading losses from derivatives or stocks cannot be adjusted against the salary income.
# Can we settle off trading losses from derivatives against business income or income from other sources?
Yes, trading losses from derivatives can be offset against business income, income from other sources or other heads except salaries and same can be carried forward and set off within eight assessment years.
# Can we set off day trading losses against capital gains?
No, day trading losses cannot be set off against the capital gains as they can only be carry forwarded and adjusted against the speculative profits within a period of four years and not against short or long term capital gains (Section 73(1) of Income Tax Act, 1961).
# Can STT be claimed as Business Expense?
If you an active trader (Trading F&O), then STT and other expenses (rent, electricity, software charges etc) & taxes can be claimed as a business expense.
Traders or investors are obligated under the income tax regulations to file their returns in right manner and pay taxes on their trading profits. So, it becomes important for any trader to understand the taxation treatment of trading business in India so that they can plan their trading activity accordingly and achieve their goals.
The first and foremost decision that any market participant has to make before starting filling Income tax is to declare whether he / she is an investor or a trader? Income tax regulations in India treats the activity of a trader and investor in different ways and have in-turn different taxation treatment and obligations.
We hereby in this article are outlining the benefits and implications for declaring self as a trader under the Income tax regulations. This is in-turn in continuation to our complete tax guide article Part VIII – Getting Started With Trading – Tax Guide for Traders in India for traders to understand the taxation treatment of trading business in India and Q&A : Tax Guide for Traders in India to answer many why`s and how`s of taxation for traders in India.
Who is a Trader?
A trader is someone who actively trades in the stocks, future & options, currency and commodities market. So, if you day trade or BTST in stocks (without taking delivery in your dmat), or trade in F&O segment (whether positional or intraday), then you have to declare self as a trader and not an investor.
If you are trading futures & options or day trading stocks on a recognized stock exchange, then you have to declare yourself as a Trader. So, equity trading for short term or long term will be considered as Business Trading and will be taxed just similar to taxation of ‘Futures & Options’.
Profits arising out from selling a stock after holding it for 12 months or less than 12 months or from trading derivatives will be treated as a Business Income and added to your total income and taxed according to your new respective tax slab.
Tax Benefits for a Trader
#1. Low Income Tax
If you are a trader, the total Income from trading and any other income is less than 2.5 Lacs then all the income will be tax free. This works in benefit for the full-time traders doing short term trading as they need not to incur the 15% tax on short term capital gain or those falling below the minimum tax bracket. While on the other hand, if you are an investor then even if your total income is less than the minimum tax bracket of Rs. 2.5 Lacs, you are mandated to pay 15% tax on short term trading gains.
#2. Set-off Losses with Other Income / Gains
Any loss arising from trading activity will be considered as a Business Loss and same can be offset against any other business income except salary.
Income from Rent, interest from saving bank account can be offset against the losses from trading.
For Example, In the year 2013-14, Mr. Shrinivasan has a annual salary of Rs. 6 lacs and he has incurred a total loss from derivatives of Rs. 1 lac and his income from other sources (rent, interest and other income apart from salary) is Rs. 1.5 lacs then his taxable income will be Rs. 6.5 Lacs (6 lacs + 1.5 lacs – 1 lac) and will be taxed according to his tax slab of 20% on 6.5 Lacs.
#3. Set-off Trading Expenses to reduce Taxable Income
For an active trader, all the income from trading is considered to be a business income so you can offset that trading income with the business expenses you incur to earn it.
Business expenses including STT, Rent, Brokerage Charges, Internet Charges, Advisory Fees, Computer Depreciation, Electricity Bill, Telephone Bills, Research Reports, Newspaper, Books, Software and Data Feed Charges etc can be used to reduce the taxable income from Speculative/Business Income. You can mention any other expenses that is incurred for undertaking your trading activity under the section “Other Expenses”.
In case of depreciation of assets, the purchase cost of assets cannot be treated as business expense as they are an asset and not an expense. But you can claim depreciation for assets (computer, laptop) during a course of time and offset it against the business income or profits to reduce your tax liability.
There are no limits for the business expense that can be claimed but any amount that is claimed need to be justified and supporting proofs must be presented and justified that they are incurred for conducting the trading activity, if asked by the Income Tax department. So, for any expenses you mention maintain the supporting documents for any future reference.
While in case of a capital gain (Short term or long term), only charges in contract notes other than STT and these business expenses cannot be claimed as an expense to reduce your taxable income.
#4. Carry forwarding the Business Losses & Speculative Business Losses in Subsequent Years
Any loss arising from the non speculative trading activity (Trading F&O`s) will be considered as Business Loss and can be offset against any other business income except salary. The balance, if any, can be carried forward and set off against business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.
For Example, In the year 2013-14, Mr. Shrinivasan has a annual salary of Rs. 6 lacs and he has incurred a total loss from derivatives of Rs. 1 lac and his income from other sources (rent, interest and other income apart from salary) is Rs. 50,000 then he can offset his loss against Rs. 50,000 income and can carry forward the remaining loss of Rs. 50,000 for the next year.
While any loss from the day trading will be considered as a Speculative Business Loss and can be carried forward against only speculative profit within the period of next 4 years.
Suppose, Mr. Srinivasan had incurred a day trading loss of 1 lac and booked a short term profit of 2 lacs during the same year, then the 1 lac loss cannot be netted off against 2 lacs profit. So, he has to pay short term tax on 2 lacs profit and 1 lac loss can offset against any speculative profits within next four years.
To get the benefit of carry forwarding the losses, it has to be filed in your income tax before the due dates for the financial year to get any benefit. Otherwise, you cannot claim the benefit.
Implication for a Trader
#1. High Taxes
Traders who fall under the higher tax bracket of 20% or 30% has this implication of paying more taxes on their trading profits as they don`t get the benefit of the tax free return on Long term capital gains on stocks or 15% on Short Term Capital Gains on Stocks.
#2. Audit
Traders with higher trading volumes are obligated under tax laws to undergo the audit of accounts if the Turnover for the financial year is greater than Rs. 1 crore and if your profit are less than 8% of your turnover.
#3. Implications of Filling Tax
Traders under the income tax laws are required to file their tax returns under forms ITR 4 or ITR4(S) which will require the need of a chartered account to file while the filling is more easy for investors to file via ITR forms ITR1 & ITR2.
justtrading.in
Part VIII – Getting Started With Trading – Tax Guide for Traders in India
Just Trading
(Updated as on Aug 2015)
Traders today have so much of compelling options to trade in the stock market varying from stocks, futures, or options to manage their capital more wisely and achieve their trading objectives. But on the other side, they are obligated under income tax regulations to file their returns in right manner and pay taxes on their trading profits. So, it becomes important for any trader to understand the taxation treatment of trading business in India so that they can plan their trading activity accordingly and achieve their goals.
In an attempt to make your task simple and easier while filing your income tax, we are writing these series of posts to help you understand how we traders are obligated under the law to take care of filling of our trading activities.
Classification of Trading / Investment Income
Income from trading or investment activity can be classified into four different sets:-
Long Term Capital Gain
Stocks sold after holding for more than 365 days – Tax Free
Investments for more than one year (365 Days) are considered to be long term and profits arising out from selling a stock after holding it for 12 months will be treated as a long term capital gain (LTCG) which as per the section 10 (38) of the income tax act is exempt from tax provided such a transaction is done through a recognized stock exchange for which Security transaction tax (STT) is paid. Enjoy 100% of the profits you made out of your long term investments.
Short Term Capital Gain
Stocks sold after holding for more than one but less than 365 days – 15% Tax
Any profit arising out from selling a stock after holding it for less than 12 months will be treated as a short term capital gain and will be taxed at 15% provided you take the delivery of shares in your demat account (Exchange has a settlement time of T+2 working days, so any stock that you bought on Monday comes in your dmat account only on the 2nd day from date of purchase i.e. Wednesday).
Speculative Business Income
Equity Intra-Day or Non-Delivery Trading – Taxed as per Tax Slab
Any transaction where you buy and sell the shares on the same day is a Day Trade. Any profits and losses arising from any such transaction will be considered as Speculative Activity.
Traders today have so much of compelling options to trade in the stock market varying from stocks, futures, or options to manage their capital more wisely and achieve their trading objectives. But on the other side, they are obligated under income tax regulations to file their returns in right manner and pay taxes on their trading profits. So, it becomes important for any trader to understand the taxation treatment of trading business in India so that they can plan their trading activity accordingly and achieve their goals.
In an attempt to make your task simple and easier while filing your income tax, we are writing these series of posts to help you understand how we traders are obligated under the law to take care of filling of our trading activities.
Classification of Trading / Investment Income
Income from trading or investment activity can be classified into four different sets:-
- Long Term Capital Gain
- Short Term Capital Gain
- Speculative Business Income
- Non-Speculative Business Income
Long Term Capital Gain
Stocks sold after holding for more than 365 days – Tax Free
Investments for more than one year (365 Days) are considered to be long term and profits arising out from selling a stock after holding it for 12 months will be treated as a long term capital gain (LTCG) which as per the section 10 (38) of the income tax act is exempt from tax provided such a transaction is done through a recognized stock exchange for which Security transaction tax (STT) is paid. Enjoy 100% of the profits you made out of your long term investments.
Short Term Capital Gain
Stocks sold after holding for more than one but less than 365 days – 15% Tax
Any profit arising out from selling a stock after holding it for less than 12 months will be treated as a short term capital gain and will be taxed at 15% provided you take the delivery of shares in your demat account (Exchange has a settlement time of T+2 working days, so any stock that you bought on Monday comes in your dmat account only on the 2nd day from date of purchase i.e. Wednesday).
Speculative Business Income
Equity Intra-Day or Non-Delivery Trading – Taxed as per Tax Slab
Any transaction where you buy and sell the shares on the same day is a Day Trade. Any profits and losses arising from any such transaction will be considered as Speculative Activity.
As per section 43(5) of the Income Tax Act, 1961, profits earned by trading equity for intraday or non-delivery is categorized as Speculative Business Income and will be added to your other income under the head income from business / profession and will be taxed according to your total income slab.
Non-Speculative Business Income
Futures & Options Trading – Taxed as per Tax Slab
Income from trading Futures & Options (F&O) on a recognized exchanges (Equity, Commodity or Currency) will be considered as Non-Speculative Business Income. These income must be added to your total income and taxed according to your new respective tax slab.
As these incomes are considered as business income, so you can offset it with business expenses you incur to earn it like depreciation, internet bills, advisory fees, software charges, and more.
Are You an Investor or a Trader?
The first and foremost decision that any market participant has to make before starting filling Income tax is to declare whether he / she is an investor or a trader? Income tax regulations in India treats the activity of a trader and investor in different ways and have in-turn different taxation treatment and obligations.
Who is an Investor?
Trading Activity as Investment
An investor is someone who participates in Equity segment and buy shares of companies and sell it after holding it for some period of time. So, if you buy shares and sell it after taking the delivery in your dmat account, do not trade in F&O segment, or do not trade stocks for intraday or BTST then you can declare self as an Investor and enjoy the benefits of an investor as per income tax rules. So, taxation for investor lies only for long and short term trading in stocks and if you trade stocks intraday or BTST or trade F&O, then you cannot declare yourself as an Investor.
An important consideration here is that if your short term trading is more frequent (i.e. many times within a week) then you have to call you short term trading as Business Income rather Short Term Capital Gain.
Another thing which is required to be considered here is that, if you are a full time trader (i.e. trading or investment is your only source of income) then it is better to consider your income as income from business.
All the taxation rules for an investor is illustrated and detailed in Section – I.
Who is a Trader?
Trading Activity as Business
A trader is someone who actively trades in the stocks, future & options, currency and commodities market. So, if you day trade or BTST in stocks (without taking delivery in your dmat), or trade in F&O segment (whether positional or intraday), then you have to declare self as a trader and your trading will be considered to be as business activity and will be taxed as per Business Income.
Read Tax Benefits & Implications of Declaring Trading as a Business Activity.
All the taxation rules for an investor is illustrated and detailed in Section – II.
Apart from the above, there are some other considerations required to be taken into account while classifying their trading activity as Business or Investment.
Who is both A Trader & An Investor?
The rules above are very much clear for those who trades actively in Futures & Options (Non-Speculaitve Business Income) and do Intraday trading (Speculative Trading). So those traders have to consider their trading as a business activity.
The taxation rules are clear for speculative day trading and non-speculative futures trading, as any income from these two sources will surely has to be declared as business income. Even for the salaried, such activity has to be considered as business and will be taxed as the Business Income.
The above criteria are very much applicable to those whose only source of income is trading business but if you are salaried or you have some other business income as your primary or core income source then it becomes easier to show your equity profits as capital gains.
For long term investments, all the stocks that you have sold after holding for more than one year can be declared as long term capital gain and thus exempt from tax while if you are trading stocks frequently then all these income should be declare as speculative rather than capital gain.
But another view on this lies with that if you are trading f&o and doing frequent short term equity then you have to declare self as a trader but even then you can declare your long term profits as long term capital gains and be exempt from taxes. So, you can be a trader as well as an investor at the same time.
Therefore, it becomes important to stay consistent with what you are declaring self while doing tax returns. So, consult a CA to determine what to declare self while filing tax returns to achieve your trading objectives in futures.
Income from Equity Trading – Business Income or Capital Gain? – Coming Soon
Section – I Taxation for Investors in India
Taxation on Trading Stocks in India for Investors
Long Term Trading Tax in India / Long Term Capital Tax on Stocks in India for Investors
Stock hold for more than 12 months – Long Term Capital Tax
Investments for more than one year are considered to be long term and attract no tax on profits. Profits arising out from selling a stock after holding it for 12 months will be treated as a long term capital gain (LTCG) which as per the section 10 (38) of the income tax act is exempt from tax (provided such a transaction is done through a recognized stock exchange for which Security transaction tax (STT) is paid). Enjoy 100% of the profits you made out of your long term investments.
While on the other hand, any loss arising from selling the stock after 12 months will not be adjusted against any short or long term capital gain from any source.
Suppose, Mr. Shrinivasan has bought 1000 shares of Tata Motors at Rs. 260 on April 9th 2013 and he sold it at Rs. 500 on Sept 17th 2014, then the total long term profit of Rs. 2.4 Lacs arising from this investment will be exempt from tax and he can enjoy the 100% profits and don`t have to pay any income tax on it.
While on the other hand, if he has bought 1000 shares of DLF at Rs. 230 on April 9th 2014 and sold it at Rs. 167 on Sept 17th 2014, then the total short term loss of Rs. 63,000 arising from this investment will not be adjusted against the profit made from Tata Motors or any other source.
If the investment and the consequent sale were done via an off-market transaction (transferring from one DP to another persons DP), then the Long Term Capital Gain Tax on:-
Listed stocks is 10%
Non listed stocks is 20%
Short Note for Taxation for Long Term Investing In India
#1. Profits or Losses from long term investments will be treated as Long Term Capital Gain or Loss.
#2. Profits from Long term investments will be tax free (Provided they are done through an exchange and sold after holding for more than one year, i.e. 365 days)
#3. Losses from Long term investments cannot be adjusted against any short term and long term profits.
#4. STT paid to the Govt cannot be claimed as expense for Investing.
Short Term Trading Tax in India / Short Term Capital Tax on Stocks in India for Investors
Stocks hold for less than 12 months – Short Term Capital Tax
Any profit arising out from selling a stock after holding it for less than 12 months will be treated as a short term capital gain and will be taxed at 15% provided you take the delivery of shares in your demat account (Exchange has a settlement time of T+2 working days, so any stock that you bought on Monday comes in your dmat account only on the 2nd day from date of purchase i.e. Wednesday).
While on the other hand, any loss arising out of the short term trading can be carry forwarded to a period of 8 years against any short term capital gain or long term capital gain, if these loses are declared while filling the income tax returns.
Suppose, Mr. Shrinivasan has bought 1000 shares of Tata Motors at Rs. 260 on April 9th 2013 and sold them at Rs. 420 on Mar 04th 2014, then he has to pay a short term capital gain tax of 15% (i.e. Rs. 24,000) on his profit of Rs. 1.6 Lacs.
While on the other hand, if he has bought 1000 shares of DLF at Rs. 230 on April 9th, 2013 and sold them at Rs. 140 on Mar 04th 2014, then the total loss of Rs. 90,000 arising from this investment can be netted against the profits made from Tata Motors or any capital gain arising within the period of 8 years.
Short Note for Taxation for Short Term Investing In India
#1. Profits or Losses from short term investments will be treated as short term capital gain or loss.
#2. Profits from short term investments (within one year) will be treated as short term capital gain and taxed at 15%.
#3. Loss from short term investments can be carry forwarded to a period of 8 years against any short term capital gain or long term capital gain, if these loses are declared while filling the income tax returns in respective years.
Investors should take a good note of the total holding period of any stock they are planning to sell, as any stock sold after holding it for even 364 days will be considered as short Term and not Long Term. So, to take the benefit of the long term capital gain keep a fair note on the holding period of the stock.
Another important point to consider here is that if you have bought and sold the same shares many times, then you will have to use FIFO method to calculate the holding period and in-turn your Capital Gains.
Section – II Taxation for Traders in India
Taxation on Long term Equity, Short term Equity & F&O Trading in India for Traders – Non-Speculative Business Income / Loss
Equity Delivery and F&O Trading – Taxed as per Income Tax Slab
If you are trading futures & options or day trading stocks on a recognized stock exchange, then you have to declare yourself as a Trader. So, equity trading for short term or long term will be considered as Business Trading and will be taxed just similar to taxation of ‘Futures & Options’.
Profits arising out from selling a stock after holding it for 12 months or less than 12 months (excluding equity day trade or BTST) or from trading derivatives will be treated as a Business Income and added to your total income and taxed according to your new respective tax slab.
As these incomes are considered as business income, so you can offset it with business expenses you incur to earn it like depreciation, internet bills, advisory fees, software charges, and more.
While on the other hand, any loss arising from trading derivatives will be considered as Non Speculative Business Loss and can be offset against any other business income including speculative business income (Income from Day Trading) except salary in the same year. So you can set-off against bank interest income, rental income, capital gains, but only in the same year.
The balance, if any, can be carried forward and set off only against non-speculative business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.
For Example, In the year 2013-14, Mr. Shrinivasan has a annual salary of Rs. 6 lacs and he has incurred a total loss from derivatives of Rs. 1 lac and his income from day trading is Rs. 25000 and other business income (apart from salary) is Rs. 1.5 lacs then his loss from derivatives (1 Lacs) can offset from day trading income (25000) and other sources (75,000).
Therefore, his taxable income will be Rs. 6 lacs + [25000 + 1.5 lacs – 1 lac] is Rs. 6.75 Lacs and will be taxed according to his tax slab of 20%.
The above criteria are very much applicable to those whose only source of income is trading business but if you are salaried or you have some other business income as your primary or core income source then it becomes easier to show your equity profits as capital gains.
If you are trading F&O and doing frequent short term equity then you have to declare self as a trader but even then you can declare your long term profits as long term capital gains and be exempt from taxes. So, you can be a trader as well as an investor at the same time.
So, taxation rules are clear for speculative day trading and non-speculative futures trading, as any income from these two sources will surely has to be declared as business income.
But for long term investments, all the stocks that you have sold after holding for more than one year can be declared as long term capital gain and thus exempt from tax while if you are trading stocks frequently then all these income should be declare as speculative rather than capital gain.
Therefore, it becomes important to stay consistent with what you are declaring self while doing tax returns. So, consult a CA to determine what to declare self while filing tax returns to achieve your trading objectives in futures.
Short Note:
#1. Speculative Trading in Stocks or F&O trading requires you to declare yourself as a Trader.
#2. Profits or Losses from equity trading for long term or short term and derivatives trading will be taxed as Income from Business/Profession, if trading is your only source of Income.
#3. Profits will be added to your total income and taxed according to your respective tax slabs.
#4. Losses from derivatives trading cannot be deducted from salary income but can be offset against any other income (including day trading income) in same year.
#5. Losses can be carried forward and set off only against non-speculative business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.
#6. Business expenses including depreciation, internet bills, advisory fees, software charges, and more. can be offset against your profits income.
#7. ITR 4 should be used while filling taxation for individuals trading derivatives.
#8. The only thing that you’ll have to know is whether to get your books audited or not. So, If you turnover for the financial year is > 1 crore and your profits are less than 8% of the turnover, you have to compulsorily get your books audited. But if you total income is below the taxable limit, then there is no need to undergo tax audit.
#9. Taxation rules are clear for speculative day trading and non-speculative futures trading, as any income from these two sources will surely has to be declared as business income. If you are trading F&O and doing frequent short term equity then you have to declare self as a trader but even then you can declare your long term profits as long term capital gains and be exempt from taxes. So, you can be a trader as well as an investor at the same time.
Taxation on Intraday Trading (Equities) in India – Speculative Business Income / Loss
Equity Day Trading (Intraday Trading) or Non-Delivery Trading – Taxed as per Income Tax Slab
Any transaction where you buy and sell the shares on the same day is a Day Trade. Any profits and losses arising from any such transaction will be considered as speculative and will be added or netted of against your income from business/profession.
So, any profit from day trading (equities) will be considered as a speculative income and will be added to your other income under the head income from business / profession and will be taxed according to your total income slab.
Suppose, Mr. Srinivasan`s total salary income is Rs. 6 lacs and his day trading profits for the year is 1.5 lacs, then his total income will be 7.5 lacs and will be taxed as per 20% slab.
While on the other hand, any loss from the day trading will be considered as a speculative loss and can be carried forward against only speculative profit within the period of next 4 years and not against long term or short term capital gains or non speculative income (F&O Income) as per Section 73(1) of the Income Tax Act, 1961.
Suppose, Mr. Srinivasan had incurred a day trading loss of 1 lac and booked a short term profit of 2 lacs during the same year, then the 1 lac loss cannot be netted off against 2 lacs profit. So, he has to pay short term tax on 2 lacs profit and 1 lac loss can offset against any speculative profits within next four years.
Short Note:
#1. Profits or Losses from day trading equity will be considered as Speculative Profit or Loss.
#2. Profits from day trading equities will be considered as speculative income and will be added to other income and taxed as per your tax slab.
#3. Any loss from speculative (day trading equities) cannot be adjusted against short or long term profits or non speculative income (F&O Income) but can be offset against speculative profits within the next four years.
Set-off & Carry forward the Business Losses
To carry forward the losses in the subsequent years, the perquisite is that they should be filed in the same year the losses were incurred, else you cannot carry forward them in the subsequent years.
Speculative business losses (Equity Intraday Trading Losses) can be carry forward for a period of 4 years and can be set-off only against any speculative gains and not against non-speculative (F&O) gains,
Non-Speculative Business Losses (F&O Trading Losses) can be set-off against any other business income ( bank interest income, rental income, capital gains) except salary income in the same year and balance if any can be carry forward for the next 8 years and can set-off only against any non-speculative gains made in that period.
Mandatory Tax Audit for Traders
Any trader will have to undergo the audit of accounts if the Turnover for the financial year is greater than Rs. 1 crore (provided his annual income is more than 2.5 lacs). So, if your total income (trading + Salary or other business) is lesser than Rs 2.5 lacs, you don’t need an audit even if the turnover for the year is greater than 1 crore.
How to Calculate the Turnover for Tax Audit?
Turnover is being calculated to determine if you need a tax audit or not?
For Intraday equity — absolute sum of settlement profits and losses per scrip
For Delivery equity — sell side value of the stock
For F&O (Equity, Currency, Commodity) — absolute sum of settlement profits & losses for F&O) per scrip and the sell side value of option contracts
Suppose, you bought 1 lot (25 units) BankNifty futures at Rs. 17700 and sold it at 17800, then you made a profit of Rs. 2500 and say on some other day, you had a loss of Rs. 1500, then the total turnover will be summed up as 2500+1500 = Rs. 4000. So, all such settlement profits & losses added together (absolute) summed together forms up as turnover.
In case of Options,
Suppose you bought BankNifty 19,000 CA @ 100 and sold it @ 300, then turnover will be 25 x (300-100) = 5000.
In another case, suppose you bought BankNifty 19,000 CA @ 100 and sold it @ 50, then total turnover will be 25 x (100-50) = 1250.
Lastly. suppose you bought BankNifty 19,000 CA @ 100 and it expires worthless, then the total turnover will be 25 x (100-0) = 2500.
Difference between Trading Turnover and Settlement turnover for audit?
To understand the difference between the trading and settlement turnover calculation for audit, Refer to the illustration.
Suppose, Mr. Srinivasan bought 100 shares of Tata Motors at 400 and sold 100 shares at 380 then his trading volume will be Rs 78000 but his settlement turnover will be just Rs 100×20= Rs. 2000. So, All such settlement profits and losses summed up together if exceeds Rs 1 crore, only then is the audit required.
Short Key Notes:-
Salaried Traders
If you are a salaried person, then profits from derivatives will be added to your salary income and will be taxed according to your tax slabs. While on the other hand, losses from derivatives trading cannot be offset against the salary income but can be offset against any business income in next 8 years.
Supporting Documents Required while Filing Income Tax for Traders in India
#1. Profit & Loss Statement
#2. Contract Notes
#3. Depository Statements
#4. Bank Statements
Due Dates for Filing Income Tax Returns in India
Any individual trader carrying out trading activity be it long, short or day term are obligated under the income tax law to file their returns before July 31 (This year the date is extended to September 7, 2015) and it is September 30th for companies.
In case your turnover exceeds Rs. 1 crore in a financial year, then the book of accounts needs to be audited and the due date for filling returns is September 30. Under section 271 B, failure to submit the tax audit in time has a penalty of 0.5% of turnover or Rs 1.5 lakhs, whichever is lesser.
STT, Brokerage & other Expenses for Traders
Business expenses including Brokerage Charges, Internet Charges, Advisory Fees, Research Reports, Computer & electronics Depreciation, Electricity Bill, Telephone, Software & Data Feed Charges, Newspaper, Books, STT and rent, etc can be used to reduce the taxable income from Speculative/Business Income. You can mention any other expenses that is incurred for undertaking your trading activity under the section “Other Expenses”. So, for any expenses you mention maintain the supporting documents for any future reference.
STT, or Securities Transaction Tax, is a tax levied on securities trades (excluding commodities or currency trades). Different STT rates are applicable for Equity (cash) and Futures and Options (F&O) transactions.
STT, Brokerage & other Expenses for Traders
Business expenses including Brokerage Charges, Internet Charges, Advisory Fees, Research Reports, Computer & electronics Depreciation, Electricity Bill, Telephone, Software & Data Feed Charges, Newspaper, Books, STT and rent, etc can be used to reduce the taxable income from Speculative/Business Income. You can mention any other expenses that is incurred for undertaking your trading activity under the section “Other Expenses”. So, for any expenses you mention maintain the supporting documents for any future reference.
STT, or Securities Transaction Tax, is a tax levied on securities trades (excluding commodities or currency trades). Different STT rates are applicable for Equity (cash) and Futures and Options (F&O) transactions.
STT is levied on trades on the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and other recognized stock exchanges. For commodities, CTT (Commodities Transaction Tax) is levied.
If the trade is a equity delivery trade, than a tax of 0.1% on the turnover is levied on both the buy side and sell sides of each trade. However, if the trade is squared off (closed) within the same trading day, meaning it is a intra-day transaction, then the STT rate applicable is 0.025% on the sell-side trade(s) only.
Which ITR Form to use for Traders & Investors in India?
For Investors
ITR 1 – Individuals having income from Salary and Interest
ITR 2 – Individuals having income from salary, Interest and Rental
For Traders
ITR 4 or ITR4(S) – Individuals and HUF’s having income from a proprietor business or profession
For Companies
ITR 6
Income Tax Slab – FY 2015-16
| For Men/Women below 60 years of age | For Senior Citizens (Age 60 years or more but less than 80 years) | For Senior Citizens (Age 80 years or more) | |||
|---|---|---|---|---|---|
| Income Level | Tax Rate | Income Level | Tax Rate | Income Level | Tax Rate |
| Rs. 2,50,000 | Nil | Upto Rs. 3,00,000 | Nil | Upto Rs. 5,00,000 | Nil |
| Rs. 2,50,001 – Rs. 500,000 | 10% | Rs. 3,00,001 – Rs. 500,000 | 10% | Rs. 5,00,001 – Rs. 10,00,000 | 20% |
| Rs. 500,001 – Rs. 10,00,000 | 20% | Rs. 500,001 – Rs. 10,00,000 | 20% | Above Rs. 10,00,000 | 30% |
| Above Rs. 10,00,000 | 30% | Above Rs. 10,00,000 | 30% | ||
Important Q&As while filing Taxation for Traders in India
# Is there any loss we can net off against salary?
No, we cannot offset any trading losses against salary income.
# Can we deduct long term capital loss from stocks with business income for computing income tax?
No, we cannot net off the long term losses against any income or gains.
# Can we carry forward the losses if not filed in the financial year?
To get the benefit of carry forwarding the losses, it has to be filed in your income tax before the due dates for the financial year to get any benefit. Otherwise, you cannot claim the benefit.
For Complete list of Q&As, Please Visit
Q&A : Taxation for Traders in India
This is in continuation to our complete tax guide article Part VIII – Getting Started With Trading – Tax Guide for Traders in India for traders to understand the taxation treatment of trading business in India.
In an attempt to make you task simple and easier while filing your income tax, we are writing these long list of Q&As to answer your many why`s and how`s of taxation for traders in India.
# Is there any loss that we can offset against salary income?
No, we cannot offset any trading losses against salary income.
# Can we deduct long term capital loss from stocks with business income for computing income tax?
No, we cannot net off the long term losses against any income or gains.
# Can we carry forward the long term capital loss?
No, we cannot carry forward any long term capital losses in the following years.
# Can we carry forward any profits in the following years to set off against any loss?
No, You cannot carry forward any profits for the following years, so you have to pay tax for the same in the same financial year.
# How long can you carry forward a short term capital loss?
Short term capital losses can be carry forwarded for a period of eight years against any short term term capital gain or long term capital gain, provided they are declared while filing the income tax returns.
# Can we carry forward the losses if not filed in the financial year?
To get the benefit of carry forwarding the losses, it has to be filed in your income tax before the due dates for the financial year to get any benefit. Otherwise, you cannot claim the benefit.
# Can we settle off the trading losses from derivatives against the salary?
No, the trading losses from derivatives or stocks cannot be adjusted against the salary income.
# Can we settle off trading losses from derivatives against business income or income from other sources?
Yes, trading losses from derivatives can be offset against business income, income from other sources or other heads except salaries and same can be carried forward and set off within eight assessment years.
# Can we set off day trading losses against capital gains?
No, day trading losses cannot be set off against the capital gains as they can only be carry forwarded and adjusted against the speculative profits within a period of four years and not against short or long term capital gains (Section 73(1) of Income Tax Act, 1961).
# Can STT be claimed as Business Expense?
If you an active trader (Trading F&O), then STT and other expenses (rent, electricity, software charges etc) & taxes can be claimed as a business expense.
But if you are taking the net profit and loss from your contract note then same would be netted off so you can only claim other expenses. Suppose, You bought 100 stocks at Rs 1000 and all your costs (including brokerage, STT etc) adds upto Rs 300, then your actual buying price becomes 1003. If you sell this stock at 1020, the actual cost becomes 1017 (including all costs). Hence your net profit is Rs 1400 and not Rs 2000.
While in case of a capital gain (Short term or long term), STT cannot be claimed as a business expense.
#How much STT is charged on Equity trades?
If the trade is a equity delivery trade, than a tax of 0.1% on the turnover is levied on both the buy side and sell sides of each trade. However, if the trade is squared off (closed) within the same trading day, meaning it is a intra-day transaction, then the STT rate applicable is 0.025% on the sell-side trade(s) only.
# How the BTST – Buy Today Sell Tomorrow (selling equity before taking delivery) will be taxed?
Profits/loss from BTST will be a considered as speculative income or loss. It is still important to see the DP transaction statement, because if delivery is taken then it won’t be speculative anymore and will be considered as short term capital gain or loss.
# Is there any difference in taxation rules for intraday derivatives trading and derivatives trading with carryover position? Is F&O trading for intraday considered speculative?
Trading in derivatives has only single rule, that they will be counted as business income and will be added to salary and taxed accordingly. So, whether you carry your position or square it intraday, there is no difference. It is business income or loss and not speculative.
# Can income from rent be offset against trading losses or Can we set off trading losses against rental income?
Yes, rent income can be offset against the F&O and short term trading losses and not against the day trading losses (Speculative losses).
# Can trading losses be adjusted against the savings bank interest?
Yes, trading losses can be adjusted against the saving bank interest. For savings bank interest, any interest above 10,000 is taxable. (Deduction of up-to Rs 10,000 interest income under section 80 TTA is available). No such deductions is there for Fixed Deposits.
#How much STT is charged on Equity trades?
If the trade is a equity delivery trade, than a tax of 0.1% on the turnover is levied on both the buy side and sell sides of each trade. However, if the trade is squared off (closed) within the same trading day, meaning it is a intra-day transaction, then the STT rate applicable is 0.025% on the sell-side trade(s) only.
# How the BTST – Buy Today Sell Tomorrow (selling equity before taking delivery) will be taxed?
Profits/loss from BTST will be a considered as speculative income or loss. It is still important to see the DP transaction statement, because if delivery is taken then it won’t be speculative anymore and will be considered as short term capital gain or loss.
# Is there any difference in taxation rules for intraday derivatives trading and derivatives trading with carryover position? Is F&O trading for intraday considered speculative?
Trading in derivatives has only single rule, that they will be counted as business income and will be added to salary and taxed accordingly. So, whether you carry your position or square it intraday, there is no difference. It is business income or loss and not speculative.
# Can income from rent be offset against trading losses or Can we set off trading losses against rental income?
Yes, rent income can be offset against the F&O and short term trading losses and not against the day trading losses (Speculative losses).
# Can trading losses be adjusted against the savings bank interest?
Yes, trading losses can be adjusted against the saving bank interest. For savings bank interest, any interest above 10,000 is taxable. (Deduction of up-to Rs 10,000 interest income under section 80 TTA is available). No such deductions is there for Fixed Deposits.
Assuming, you have a interest income of Rs 30000 and loss of 50,000, you will get a 10,000 deduction under section 80TTA and can offset 20000 loss against interest income and can carry forward the remaining Rs 20,000 of the loss to the next year.
# Is there any limit to the business expense that can be claimed?
No, there are no limits for the business expense that can be claimed but any amount that is claimed need to be justified and supporting proofs must be presented and justified that they are incurred for conducting the trading activity, if asked by the Income Tax department.
# Can laptop, computer or internet instrument cost be treated as business expense?
No, the purchase cost of assets cannot be treated as business expense as they are an asset and not an expense. But you can claim depreciation for assets (computer, laptop) during a course of time and offset it against the business income or profits to reduce your tax liability.
# Are dividends taxable?
Dividends are distributed to the investors after cutting down taxes by the distributing comapny. So they are tax free for the investors.
# Should we take the Net Profits (Gross Profits – Brokerages – Other Taxes) or Gross Profits while calculating the Profit / loss for income tax?
While calculating profit/loss for income, you can either do it based on gross or net profits. You can take the gross profits and show expenses like brokerage, turnover charges, other expenses and then deduct it from your gross profits or just take the net profit.
# Is there any limit to the business expense that can be claimed?
No, there are no limits for the business expense that can be claimed but any amount that is claimed need to be justified and supporting proofs must be presented and justified that they are incurred for conducting the trading activity, if asked by the Income Tax department.
# Can laptop, computer or internet instrument cost be treated as business expense?
No, the purchase cost of assets cannot be treated as business expense as they are an asset and not an expense. But you can claim depreciation for assets (computer, laptop) during a course of time and offset it against the business income or profits to reduce your tax liability.
# Are dividends taxable?
Dividends are distributed to the investors after cutting down taxes by the distributing comapny. So they are tax free for the investors.
# Should we take the Net Profits (Gross Profits – Brokerages – Other Taxes) or Gross Profits while calculating the Profit / loss for income tax?
While calculating profit/loss for income, you can either do it based on gross or net profits. You can take the gross profits and show expenses like brokerage, turnover charges, other expenses and then deduct it from your gross profits or just take the net profit.
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