Income from intra-day trading is considered as speculation income and taxed as such. While speculation losses can be set off only against speculation gains, non-speculation business losses may be set off against short/long-term capital gains.
KEY POINTS:
i. As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. Income from speculation gains is taxed at the normal rates.
ii. Speculation losses can be set off only against speculation gains and not against any other head of income or non-speculation business income.
iii. Short-term capital loss can be set off only against income from short/long-term capital gains.
iv. Non-speculation business loss can be set off against the Long Term or Short Term Capital Gains made during the said year
1. How profit on F&O taxed ?
If you are playing the F&O market, you are considered a trader. So profits from trading in the F&O market will be considered business income.
This will be added to your income under other heads and the total will be subject to axation at the applicable income tax slab rate.
As usual, expenses incurred on trading can be deducted.
The loss can be carried forward and set off over the next eight years.
2. Can losses in F&O be set off against profits from short-term trading gains or vice versa?
According to the provisions of Section 43(5) of the Income Tax Act, 1961, the gains or losses from an eligible transaction in ‘Options’ and ‘Futures’ will not be treated as a speculation gain or loss, and it will be taxed as Income from Business/Profession.
In case of the business loss not being a speculative loss, it can be set off against income from other sources or other heads. It cannot, however, be set off against income under the head ‘Salaries’. 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.
Thus, losses incurred in the F&O business can be set off against short-term trading gains.
3. Can profits from intraday trading be set off against losses in F&O or vice versa?
Income from intraday trading in shares is treated as speculative business income as the transaction is settled without delivery. Accordingly, it is charged under the head ‘Profit and gain of business or profession'. As per Section 43(5) of the Income Tax Act, 1961, speculative transaction means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips.
However, trading in derivatives, referred to in Section 2(ac) of the Securities Contracts (Regulation) Act, 1956, carried out on a recognised stock exchange is not deemed to be a speculative transaction. Recognised stock exchanges are NSE, BSE, the MCX Stock Exchange and the United Stock Exchange of India. The transaction will be treated as non-speculative business income.
It may be noted that though loss from a non-speculative business, i.e. F&O loss can be set off against income from speculation business i.e. Profit from Intra Day trading, but loss from a speculative business cannot be set off against income from non-speculation business
4. Is the profit from STCG and F&O added to my salary / business income to calculate the tax slab?
Short Term Capital Gains (STCG) on capital assets other than Securities Transaction Tax (STT) is paid as well as profit from F&O are taxed at normal rates. Hence, the same will be added to your salary income, and the tax would be determined after taking into account the slabs as applicable to non-specified individuals. However, if STT is paid on STGC on the sale of shares, a tax rate of 15 per cent is payable on such STGC as per the Income Tax Act.
5. What charges can I book as expenses to calculate my tax liability?
While you can get only deduction in respect of profession tax paid/deducted by the employer in respect of your income from Salaries, the deductions under the other heads of income are allowable as follows:
Short Term Capital Gains – The cost of acquisition/cost of improvement incurred on the capital asset.
Income from Business – Generally speaking, any expenditure is allowed as deduction under this head of income provided that:
i. The expense is in the nature of revenue expenditure (capital nature only if specifically allowed by the provisions of the Act).
ii. The expense is not a personal expense of the assessee.
iii. The expense is laid out or expended wholly or exclusively for the purpose of the business.
iv. The expense relates to the income earned.
v. The expense is incurred in the previous year.
vi. The expense is not for a purpose which is an offence or which is prohibited by law.
Thus, expenses such as postage, conveyance and telephone etc. incurred by you for carrying on the business can be claimed as deduction. Further, you may also claim depreciation on assets used for the business or profession.
STT is allowable as a deduction, as it is a direct expense.
Long Term Capital Gains (LTCG) in respect of securities for which STT is paid are exempt, and hence not taxable
6. Are intra-day transactions in the share market considered while calculating short-term gains/losses?
Intra-day trading is the trading of shares within the same day. Generally, delivery is not taken in case of intra-day trading, and thus, these are said to be speculative transactions. As per Section 43(5) of the Income Tax Act, 1961, the said transactions shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. However, if based the on facts and circumstances of your case, you can prove that though delivery was not actually taken it was within your normal business transaction, it could be treated as non-speculation business income or a short-term capital gain.
As regards taxation, the income from speculation gains is taxed at the normal rates. Your tax liability would thus depend upon your net taxable income. If the income is treated as non-speculation business income/short-term capital gain (Securities Transaction Tax not paid), the taxation is at normal rates. However, if the same is treated as a short-term capital gain and the STT is paid, the tax is chargeable at specified rate, viz. 15 per cent plus education cess/higher education cess as applicable.
It may be noted that in case of speculation loss, the same can be set off only against speculation gain and thus cannot be set off against any other head of income or non-speculation business income.
Short-term capital loss can be set off only against income from capital gains, whether long term or short term.Non-speculation business loss cannot be set off against salary income
It may also be noted that trading in derivatives (futures and options) is treated as non-speculation business even though delivery is not effected in such transactions.
7. What are the common mistakes investors/ traders make in their tax return?
The big mistake that traders do is they don’t declare the loss at the time of filing their returns. By doing so, the loss cannot be carried forward and set off against income from future years and it becomes a dead loss.
Apart from not declaring losses, erroneous calculation of the turnover is another common mistake that traders make. Turnover is not the contract value, but the sum of the settlement profit and settlement loss for intraday trades in equity. That is, if you make a profit of say ₹5,000 in one transaction and a loss of ₹5,000 in another transaction, then your turnover will be ₹10,000 (₹5,000 profit +₹5,000 loss).
A third error, is in choosing the wrong ITR form for filing a tax return. “If you have only long-term capital gains or losses, you need to use ITR 2. For traders, ITR 4 is to be used, but getting your books audited is mandatory if you use this form to file your returns.”
Auditing is also mandatory if your turnover is either greater than ₹1 crore, or if your turnover is less than ₹1 crore but your profit is less than 8 per cent of your turnover.
8. How profit on shares taxed if the same was held for investment purpose and not for trading purpose?
Any gain or loss made after holding the stock for more than 12 months is considered a long-term capital gain or loss. For an investor, long-term capital gains are completely exempt from tax.
But for a trader, the gains will be considered as business income and taxed at the normal slab rates of 10, 20 or 30 per cent. However, since this is business income, the expenses incurred on trading, such as internet connection charges and so on, can be excluded from the gains.
Gains made within 12 months of the sale of a stock are short-term capital gains, which are taxed at 15 per cent for investors. For traders, short-term gains are taxed the same way as long-term gains. In case of a loss, traders can set off/carry forward both short-term and long-term capital losses. In the case of investors, only the short-term capital loss can be carried forward and set off, with no provision for setting off or carrying forward a long-term capital loss. There is an eight year time limit for setting off a capital loss.
If you make a quick buck through day trading, the profit or loss from such intraday trades is treated as speculative activity. So if you make a profit, it will be added to your income and taxed as per your tax slab. A speculative loss can be taken forward for setting off, but only within the next four years and against speculative income
9. What will happen to unabsorbed speculation loss?
If there is unabsorbed speculation business loss, then such loss can be carried forward to be set off against the subsequent year's income from speculation business. Such loss cannot be carried forward for more than four assessment years (AY) immediately succeeding the AY for which the loss was first computed. Further, loss from trading in derivatives carried out on a recognised stock exchange should not be treated as speculation loss. Unabsorbed non-speculative business loss can be carried forward for eight years to be set off against business income of subsequent years.
In case you have any query, please feel free to write to me at taxbymanish@yahoo.com.
CAclubindia
