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.
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.
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