I have been trading personally for a very long time and the tax filing times have always been the most painful part, sitting with a CA and accounting for profits, losses, expenses and others. I was in similar shoes as most of you would probably be in right now when it comes to taxation, “Confused”. There are a bunch of reasons for writing this post:
- Discussing the best practices filing returns when trading the markets, important because there are divergent views on many topics among traders and CA’s.
- Simplifying all the financial jargon CA’s use.
- Letting know the importance of filing returns on time and implications of misfiling or not declaring trading profits or losses.
Om Prakash Jain a brilliant Chartered accountant who is a Zerodha client and also runs TaxIQ will be assisting us in putting up the blog and also in answering queries. We will together try to keep the post and the answer to the queries as simple as possible. We would appreciate if the post and the queries are pertaining to Income tax and related topics while trading stocks, futures and options, currency and commodity. Do note that this is our view and recommend you to consult your CA before taking any decision.
To begin, couple of important things to know:
Due Dates for filing your returns:
Irrespective of the nature of trades you carry out your income tax returns have to be filed before July 31 for individuals and September 30 for companies. In case your turnover exceeds Rs. 1 crore in a financial year, by turnover I mean the sum of settlement profits and losses in your trading account, then the book of accounts needs to be audited or if any other reasons for having the books audited the due date is September 30 to file your returns. 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.
The slabs for individuals/HUF are as mentioned below; all persons above the age of 60 are considered as senior citizens.
|Upto age 60(M/F)||Age 60-80||Age 80 >|
|Income Range(Yr)||Tax||Income Range(Yr)||Tax||Income Range(Yr)||Tax|
These slabs are on your total income as an individual which is the sum of all your incomes, this may include salary, rental, trading profits and etc.
An example: If I am a 35-year-old person whose net income is Rs 800,000/yr, my income tax liability would be Rs 90,000 (0-2lks : Rs 0, 2-5lk : Rs 30,000 @10% of 3lks, 5lks-8lks: Rs 60,000 @ 20% of 3lks).
In case of companies, income tax is a flat 30% and no tax slabs exist.
Taxation while trading Stocks/F&O/Commodities
First most important thing to do for every trader is take a stance on your trading activity because the tax liability would change based on this. Following are couple of options you have
- You are an investor, who buys/sells stocks once in a while and you typically would hold the investments you make for a longer period of time.
- You are a trader, you either actively trade stocks or f&o or currency or commodity.
It is your prerogative on if you call yourself as a trader or an investor, but if your actively trading on stocks or even if occasionally dabbling in f&o,currency or commodity my advice would be to declare yourself as a trader.
While trading equity or Stocks
Stocks that you hold as an investment for more than 1 year:
a. In Case of Profits
Any profit you make by sale of shares that you have held for more than 1 year is considered as long-term capital gain and if this transaction is done through recognized stock exchanges for which the STT (Security Transaction Tax) is already paid, is exempt from Income tax under section 10 (38).
So what this means is that if you had bought 100 Reliance shares 2 years back at Rs 700 and sell it today at Rs 1000, you don’t have to pay any tax on the profit of Rs 30,000.
Note: To prove this as long term capital gain, you can attach the contract notes for the buy/sell trades and the Demat statement which shows the credit/debit of shares, if required.
Any income from buying and selling shares even if more than a year is considered as a business income. This gets added to your income and then taxes paid according to the above mentioned slabs . But since it is a business income you can show expenses in terms of internet, advisory charges etc, any charge that you have incurred for the business of trading and reduce your income liable to be taxed.
Note: Long term capital gain tax for shares which are not trading on the exchanges is 20%.
b. In Case of Losses
long term capital loss from shares where STT is paid cannot be adjusted against any long or short term capital gain from any source.
An interesting thing to note is that if you do the same transaction without stock exchange( off the market transaction), i.e transfer of shares with demat slip, you can get your long term capital loss set off against long term capital gain of other asset. This is a loop hole that exists in the system presently.
Your long term loss is considered as a business loss and this could be set off against other business income which is explained below in the f&o section.
Stocks that you buy and sell within 1 year (after taking delivery to your demat account)
a. In case of Profits
Any gain made by sale of shares through a recognized exchange is considered as a short term capital gain if bought and sold within 1 year. Please note that it is considered short term capital gain only if you take delivery of the shares to your demat account and then sell the shares. Short term capital gain tax presently is at 15%.
As a business/active trading, any such gain is considered as a business income. This will have to be added to your other income and you will be charged taxes based on the slabs mentioned in the table above. Since it is a business income you can show business expenses to reduce the taxable income, for the business of trading some of the expenses can be broadband charges, rental charges, advisory charges, computer charges, electricity bill, professional fees and etc.
Note that as a trader you are probably paying higher taxes than an investor, but this is the right approach to take. The benefit you get as a trader or trading as a business is that you can set off your expenses from the profit and also carry forward your losses to net off against any future profits, explained in the f&o section below.
b. In case of losses
Any short term loss arising from the sale of shares can be net off against any short term capital gain or long term capital gain in the future (upto 8 years) provided you have declared the loss while filing the income tax.
If you are trading as a business/active trading, such a short term capital gain loss can be considered as a business loss and net off against any income other than salary for upto the next 8 years. What this means is that if you made a loss of Rs 100,000 doing short term trading and you made Rs 800,000 in a property transaction, your net tax liability would be only on Rs 700,000.
What this means is a trader if you make a profit, you need to pay the income tax the same year and if you make a loss you can carry forward the loss for the next 8 years and keep netting it off with any profits you make be it trading or otherwise, provided you declare the losses when filing your returns within due date.
Intraday/Day Trading Stocks (equity)
While day trading the rules stay the same if you have declared yourself as an investor or trader.
Any profits or losses from day trading is called Speculative; either Speculative Profits or Speculative Losses. A person intraday trading is automatically considered as someone who is either an active trader or trading as a business.
a. In case of Profits
Profits from intraday trading is considered as a business income, so this will have to be added to your other income and pay the tax accordingly. So if you have earned a profit of Rs 1lk from day trading and Rs 4lks from your salary and other sources, your total income would be Rs 5lks and taxes has the be paid accordingly. But you can show the expenses you incur towards trading to reduce the net tax outgo.
b. In case of Losses
Speculative losses or loss from intraday trading can be carry forwarded for the next 4 years provided you have declared the same while filing your returns within due date. Important to note with speculative losses is that it can be net off only against any other speculative profit you make within the next 4 years and not against any other profits (Section 73(1) of the Income Tax Act, 1961). So assuming while trading this year you made profit of Rs 1lk from short term trading and Rs 1lk loss from intraday trading, you cannot net off both these. You will have to pay taxes for the Rs 1lk profit and carry forward this loss of Rs 1lk for intraday and net it off against any other intraday profit you make in the next 4 years.
While Trading Derivatives or F&O – Equity, Currency and Commodity (NSE, BSE, MCX-SX, MCX)
If you are trading F&O on any recognized stock or commodity exchange, profits or losses have to be considered as business profits or business losses respectively. What this basically means is that if you trade F&O, you have to compulsorily consider yourself as a ” Trader” and not an investor.
a. In case of Profits
Any profit made from trading derivatives is considered as a business profit. You would have to add this income with all your other income and pay tax according to the slabs mentioned above. But since trading income is now considered as a business income, you can show all expenses that you incur to earn this income and reduce your net tax outgo. Expenses like computer depreciation, internet bills, advisory bill, software tool, salary you pay to people whom you have hired and more.
b. In case of Losses
Any loss is a business loss and this can be net off against any income other than salary either in the same year or if you file your losses in time anytime in the next 8 years. This loss would include the trading loss and sum of all expenses that you have incurred towards trading.
What this means is that if you have had a Rs 10lk loss trading derivatives and earned Rs 20lks in any other business (other than your salary), your taxable income would be only Rs 10lk (Rs 20lk – Rs 10lk)
Calculation of turnover is to determine if you need your books audited or not, so audit by a CA is required if:
- Turnover for financial year is > ₹1 crore
- If turnover < ₹1 crore and profitability is less than 8% of turnover (Section 44 AB)
- Also note that if your total gross total income (trading + Salary or other business) is lesser than Rs 2lks, you don’t need an audit even if your profit is less than 8% of your turnover or if turnover for the year is > ₹1 crore
Turnover is being calculated here just 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
Brokerage, Trading Costs STT and other
Security Transaction Tax (STT)
STT is what we pay as taxes when trading stocks & derivatives on the stock exchanges to the central government. Back in 2004 Mr. P. Chidambaram our Finance Minister made the long term capital gain tax zero to attract investments in the country and to make up for this revenue loss to the exchequer STT was introduced.
Until the assessment year 2008-2009, STT was given as a rebate and was omitted from the assesment year 2009-2010. What this meant to traders like us was that until 2008-09, any STT paid could be deducted from our tax liability, but today paying STT gives us no such advantage. Hence the trading community has been pushing the finance ministry to reduce STT or atleast give a rebate like before.
Brokerage and other Trading Costs
All your trading costs including brokerage can be shown as an expense on your gross income.
Which ITR Form to use
Investor: Either ITR 1 (for individuals having income from Salary and Interest) or ITR 2 (for individuals having income from salary, Interest and Rental)
Trader: Either ITR 4 or ITR4(S) (for individuals and HUF’s having income from a propreitory business or profession)
Companies: ITR 6
*There has been a sudden rush of notices that traders have received from the income tax department recently, if you are one of them do read this blog ” Notice under Section 139(9)? – Possible Reason”.
I have tried my best to keep this blog simple and do away with all the financial lingo that chartered accountants use. To end this very serious topic with a little rhyme and humor:
Profits or losses, make sure you declare it every year.
Otherwise there could be implications in the very near.
If you haven’t started filing returns better late than never.
Post your questions here, Om and I will try to answer it at the earliest. Please note that the post and the answers to the queries are our personal view and advise you to consult your chartered accountant before taking any decision.
source : zerodha