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.
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.
Use our Robo-advisory Excel Tool for a start-to-finish financial plan! ⇐ More than 1000 investors and advisors use this!
- Follow us on Google News.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Join our YouTube Community and explore more than 1000 videos!
- Have a question? Subscribe to our newsletter with this form.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Explore the site! Search among our 2000+ articles for information and insight!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu gets a superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low volatility stock screeners.
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)