Want to trade in stocks? Here is how your income will be taxed

Image of a stock price movement on a computer screeen to represent stock trading activity for which taxation is discussed in this article

Published: April 28, 2020 at 10:22 am

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Many taxpayers trade in stock and commodity markets, both in intra-day as well as Futures & Options (F&O). In this article, we will discuss the various taxation related aspects of such trading including head under which the income is to be reflected, audit requirements, the applicability of Section 44AD etc.

About the author: Anjesh Bharatiya is a 30+ taxman by profession and a Chemical Engineer by education. He has been an investor in the stock market since age 15! He likes to write about personal finance, stock markets, government policies, taxation, philosophy and football.

Head under which to reflect the income Whether the income from trading in security markets is to be treated as capital gains or business income really depends on the frequency with which you trade in the market. Capital gains are levied on investments and therefore, to justify showing trading profit as capital gains, the stocks/securities should be delivered and held for some time.

For non-delivery based trading, it is generally to be considered as business income (speculative business income for intraday trading and non-speculative business income for F&O trading). However, the classification of trading income between capital gains and business income has resulted in much litigation over the years and as such, CBDT has issued a circular No. 6/2016 dated 29th February 2016 which has offered some clarity as under:

  • If the taxpayer himself opts to treat his listed shares as stock-in-trade, the income shall be treated as business income irrespective of the period of holding of listed shares.
  • If the taxpayer opts to treat the income from the sale of listed shares held for more than 12 months as capital gains, the AO shall not put it to dispute. However, this stand once taken by a taxpayer in a particular assessment year shall be applicable in subsequent assessment years also. And the taxpayer will not be allowed to take a different stand in subsequent years.
  • In all other cases, the nature of the transaction (whether capital gains or business income) shall continue to be decided basis the concept of ‘significant trading activity’ and the intention of the taxpayer to hold shares as ‘stock’ or as ‘investment’.

Thus, it has been left to the taxpayer to decide on whether he wants to offer the income as business income or capital gains irrespective of holding period. However, the stand taken by the taxpayer needs to be consistent and should not be changed at a later date. If you are indulging in significant trading activity with multiple trades in a day or if share trading is a major source of your income, it is advisable that the income should be declared as business income in ITR-3.

You can reduce expenses incurred in the trading while reflecting the trading income in your tax return. Some examples of the deductible expenses are STT, brokerage, exchange charges, internet expenses, salary paid to anyone helping you trade, cost of newspapers etc. However, make sure that proper receipts of all expenses claimed are available with you.

Speculative and non-speculative business income

Income from intraday trading is considered a speculative business income. Income from F&O trading (both intraday and overnight) is considered as non-speculative business income. Income from delivery based trading (for holding up to 1 year) should also be disclosed as non-speculative business income if you are a frequent trader as described in the preceding section. BTST (Buy today Sell tomorrow) trades can be offered for tax as short-term capital gains if done only a few times a year but in case they are done regularly, it is best to treat the profit as speculative business income.

Speculative loss can be carried forward for 4 assessment years and can be set-off only against any speculative gains. Speculative loss can’t be offset with non-speculative gains, but the speculative gain can be offset with non-speculative loss.

Non-speculative loss can be set-off against any other income except salary income in the same year. Non-speculative loss can be carried forward for the next 8 assessment years. However, once carried forward, non-speculative losses can only be set-off against non-speculative gains for that year.

Audit requirements

Market traders are not advised to take benefit of Section 44AD (presumptive income) and should necessarily maintain accounts & prepare statements including Balance Sheet and P&L account at the end of the year if their turnover exceeds Rs 25 lakh in any of the 3 preceding years. Accounts that should be maintained are trading statements, receipts of expenses and bank statements.

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The requirement for an audit of your accounts depends upon the turnover calculated for the trading activity. From AY 2021-22 onwards, the turnover limit for mandatory audit of accounts has been raised to Rs 5 crore. If your turnover does not exceed Rs 25 lakh in any of the 3 preceding years, there is no need for maintenance of accounts or tax audit. The trading turnover is to be calculated as under:

Speculative business income(Intra-day trading)

  • For each trading transaction, there can be both positive and negative difference (profit or loss) that may arise. Each transaction resulting in a positive or negative difference is considered to be an independent transaction here.
  • All the differences arising during a year, whether positive or negative are aggregated by disregarding the negative sign in a loss-making transaction and the sum is the turnover for the year.

Example:  For brevity’s sake, let us assume that you have done intra-day trading 3 times in a year and in these transactions, you incurred a loss of Rs 200, a profit of Rs 500 and a loss of Rs 100 respectively. Here, the turnover will be Rs 800 (Notice how the outcome of the trade i.e. profit or loss doesn’t matter in calculating the turnover).

Non-speculative business income (F&O)

  • For futures, turnover is calculated in the same manner as intra-day trading above.
  • For options, the premium on the sale of options is additionally included in the aggregate of positive and negative differences (ignoring the negative sign) to calculate the turnover.

Example 1: On 01.01.2020, you buy 100 units of Nifty Futures at Rs 10000 and sell them on 02.01.2020 at Rs 9900. Here, loss will be = (9900-10000)*100 = (-) Rs 10000

On 05.01.2020, you buy 100 units of Nifty Futures at Rs 10100 and sell them on 06.01.2020 at Rs 10200. Here, profit will be = (10200-10100)*100 = Rs 10000

Total Turnover = 10000+10000 = Rs 20000

Example 2: On 01.01.2020, you buy 100 units of Nifty Options at Rs 20 and sell them on the same day at Rs 30. Here, profit will be = (30-20)*100 = Rs 1000

On 05.01.2020, you buy 100 units of Nifty Options at Rs 40 and sell them on the same day at Rs 30. Here, loss will be = (30-40)*100 = (-) Rs 1000

Total Turnover = 1000+1000+100*30+100*30 = Rs 8000

Non-speculative business income (delivery-based trading)

  • Actual sales value is considered a turnover.

Example: You buy 100 shares of Company A for Rs 10 on 01.01.2020 and sell them for Rs 12 on 15.01.2020. You also buy 100 shares of Company B for Rs 15 on 10.01.2020 and sell them for Rs 10 on 17.01.2020. Here, the turnover will be 100*12 + 100*10 = 2200 for the above transactions.

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  1. My friend got into a problem and I had to spend much time trying to resolve his problem with Income Tax Dept. unsuccessfully.
    He got moved by sales pitch of Brokers and probably watching Business Channels which treats markets as horse racing and gives 5 minutes trend opinions. Encourages F&O.
    So he opened an F&O account with a broker and started trading in Nifty Futures. He hardly traded for 2 months and when he was making small loses he quit trading.
    He filed ITR – 4 form and declared his non-speculative losses before the due filing date.
    One year later he got a love letter from CPC Bangaluru stating that his return is considered defective u/s 139(9). With Error code 32 which states “Tax payer has claimed loss … he has not filed balance sheet and Profit and Loss Account . In case he falls under section 44 AD he has additionally got to get his books Audited”.
    He was given 15 days time to upload xml file on the website.
    It took him more than 15 days to do all these formalities.
    When he tried to upload the site would not accept his data stating account frozen due to delayed response.
    He ran to local ITO 2 ot 3 times but could not get his job done as ITO did not intimate Bangaluru to open the site.
    Then I took him to my Income Tax Consultant who advised him as below.
    1. It is the discretion of the AO at Bangaluru to decide if your trades are big and are frequent or not. Unfortunately although my friend trades only for one or two months he was punished by subjective judgement. He was advised to forget to claim losses and hereafter stop F&O trading or even short term trading in Equities.
    2. There is a Supreme Court ruling that states even if the trades are minimal it has to treated as speculative or non speculative income and ITR 3 or 4 has to be filed.
    3. F&O trades are not meant for retail even though media and brokers mislead you. Please stay away from them. Even in case of short term capital gains don’t buy and sell within 3 or 6 months and don’t do it frequently.

    1. ITR 3 should have been filed. The return takes 2-3 years to get transferred from CPC to local ITO. Currently, only returns for AY 2017-18 have been transferred. So, for later returns, AO can’t do rectification. I think the AO took a wrong view and should have accepted the explanation offered.

    2. Regarding calculations of turnover for future and options, our broker CNBC Tax Guru and says that it should be total of both sides I. E purchase and sales. For e. g in Jan 2020 Nifty (lot 75shares) bought @Rs 12000 and sold @12100. Then turnover will be 12000*75 + 12100*75= 1807500

      Please explain with CBDT circular

    1. For business income, the income is taxed as per slab. For short term capital gains, tax rate is 15%. For long term capital gains, the tax rate is 10% and gains upto 1 lakh are exempt. The long term capital gains earned before 31 January 2018 are grandfathered i.e. exempt from tax.

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