Trading in itself is a tough and challenging path for a trader as well as investor where we have to keep on dealing with the changing market situations, managing and learning the art of trading, dealing with the feeling of WOW from sequential profits with feeling of SH*T after multiple consecutive losses in various phases of our trading career. Throughout the year, we traders try to keep up our pace with the market moves and changing situations to be profitable and in turn make a living out of trading while this all are mounted up in July month of every year with another challenge of scrambling and filling our trading activity as per the tax rules.
As, Income tax regulations in India differentiates the taxation of the market participant as whether we are a Trader or an Investor and the same has in-turn different taxation obligations and treatments which still are a lot ambiguous and unclear in many terms
# Whether to declare short term equity trading activity as investments or business?
# Whether to declare self as an investor if we don`t trade in f&o segment?
# Whether to declare self as an investor if you don`t trade in f&o segment but engaged in trading as a full time business? and many many more..
To help make your task more simple we will try to answer a lot of questions so that you can decide and understand how to declare your trading activity in different trading situations while filling income tax.
Who is an Investor?
Trading Activity as Investment
An investor is someone who participates in Equity segment, 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 and 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.
Also, 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.
All the taxation rules for an investor is illustrated and detailed in Section – I of the article Part VIII – Getting Started With Trading – Tax Guide for Traders in India
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 a business activity and will be taxed as Business Income.
Also, if you are a full time trader (i.e. trading or investment is your primary source of income) then it is better to consider your income as income from business / profession.
All the taxation rules for an trader is illustrated and detailed in Section – II of the article Part VIII – Getting Started With Trading – Tax Guide for Traders in India
Read Tax Benefits & Implications of Declaring Trading as a Business Activity.
Apart from the above, there are many other considerations which are required to be taken into account while classifying our 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.
Important considerations for declaring yourself as InvestTrader (An Investor as well as a Trader)
Any trader who trades for short term in stocks & F&O, and invest in stocks for long term can declare self as an InvesTrader. Therefore, all the income from long term stock investments can be considered as Long Term Capital Gains (LTCG) while all other income from F&O, intraday and short term trading in stocks as Business Income.
So, it is important for trader to remain consistent on how you declare your income as trading and business in your income tax returns.
New circular from the Ministry of Finance published on Feb 29th, 2016:-
# the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income.
# In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years
Download the Circular here
The clause I states that the trader if chooses so, can declare in the income tax returns all the profits arising from selling the shares whether they are from day trading, short term trading or long term trading as Business income. So if you would like to show all the income from trading as business income and pay tax as per your tax slab then the income tax laws allows you to do so.
The clause II states that the trader if chooses so, can declare the profits from his long term investments as capital gains, but he has to be consistent while declaring the same in tax returns in the subsequent years. So, you can be exempt from paying tax on profits from your long term investments, if you would like to show all your long term profits as capital gains in all the subsequent income tax returns including the current one.
Therefore, the income tax laws allows you to declare your long term profits as capital gains but same has to declared in the similar fashion in the subsequent years and all your short term trading as your business income if the trader wishes so. This is wide suited for those whose income falls below 5lacs per annum as they can declare their long term investments as capital gains and declare the profits from day trading or short term trading as business income and add them to your other income and pay 10% tax on them instead of 15% capital gain tax on short term trading profits.
The factors to be taken into account while classifying our trading activity as Business or Investment:-
# Nature of Trading Activity
Any trader who buy shares and sell it after taking the delivery in his dmat account, do not trade in F&O segment and do not trade stocks for intraday or BTST then he can declare self as an Investor and enjoy the benefits of an investor as per income tax rules.
The taxation rules are very clear for speculative day trading (Intraday or BTST) and non-speculative futures trading (F&O), 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.
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.
# Frequency of Trading
There are no such specific rules as per income tax department on what frequency of trading will be considered as business or capital transaction. But if you are actively trading in stocks i.e. 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. Also it is very important to be consistent over the years of what you are declaring yourself in your income tax returns.
Income tax regulations in India takes into consideration the objective of trading activity to conclude whether it should be considered as an Investment or Business activity.
So, if trading or investing is your only source of income then you have to consider all your income from equity trading as business income and not capital gains.
But on the other hand, if you are salaried or your primary source of income is some other business then you can classify your equity trading as investment rather than business income.
# Consistency of Declaring Self in Subsequent Tax Returns
The investor or trader should plan out how they would like to file their trading transactions in their income tax returns as it becomes important to stay consistent with what you are declaring self – An Investor or A Trader and more importantly how you are treating your short term trading or long term investments?
So, even tax authorities give you the freedom to choose so but requires you to account it some considerations (we discussed above) and remain consistent while declaring them in your subsequent tax returns. So, if you would like to show all your short term trading as business income (that you fall under 10% tax bracket or below taxable limit) then be consistent in the next years tax returns. So, a number of consideration and consistency in filling tax returns is required to be accounted to stay free from receiving a lot of notices from income tax departments.
For New Traders, Here are a couple of articles to help you to learn more about the taxation treatment of trading business in India to make your task easier while filing tax returns.
# Part VIII – Getting Started With Trading – Tax Guide for Traders in India
# Q&A : Tax Guide for Traders in India
# Income from Equity Trading – Business Income or Capital Gains?
# How to use HUF Account to Save More Tax?
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