Taxation of stock market profit and loss

Many Trader of stock market, trading in NSE/BSE are facing difficulties in getting actual treatment of taxation of stock market gain or loss. I am just sharing my knowledge here with the hope it will be helpful to understand the tax issue in stock market trading.

Stock Market Profit and Loss is divided into three parts:

1. Capital Income (It may be short term or long term)

2. Speculative Business Income

3. Normal Business  Income

Now the Main question arises how we can bifurcate:

1. If your intention is investment and holding the stock for capital appreciation and earning dividend and transaction frequency is low then it will treated as capital Income. Capital gain may be short term or long term depending upon period of holding of stock. If you hold any stock for below 12 month then it will be short term capital gain taxable @15% and if your holding is more than 12 month then it will be long term capital gain which is exempted from tax.

2. If your intention is not to hold stock for capital appreciation but you just want to get benefit of price speculation OR your number of transaction is high and holding period is low you are just doing full time or much time trading then it will be treated as business income and taxed under the head of PGBP. And here turnover will be cal

NOTE: you must bifurcate your portfolio into 'stock in trade' and 'investment'. The shares in the 'stock in trade' portfolio are meant for trading and the shares in the 'investment' portfolio are meant for investment. So, you will be liable to pay business income only if you sell shares in the 'stock in trade' portfolio.

3. If you have traded intraday i. e. you have bought and sold shares on the same day then the same is treated as intraday gain/loss and will be treated as speculative business income from the point of view of income tax. Accounting of the same will on profit & loss basis only and the said loss can be set off against such profit only and not any other.
 

4. Most Important thing is trading in Future and Option segment and its taxability. If you are doing trades in future and option segment then it will be considered as business income and taxed under PGBP income.

Following point should be considered if your Trading profit and loss covered under the head of business income:

If there is a loss, provisions of section 44AD will apply and accordingly audit of books of accounts will also be required. The provision of this section mandates disclosure of at least 8 % of net profit on the gross turnover.

So, in case the assessee does not discloses the same (less than 8 per cent or loss) , the assesse will be required to maintain books of accounts and is required to get tax audit under provisions of section 44AA and 44AB. Thus, pursuant to this change, income from business cannot be below 8 per cent of the gross turnover in any circumstances.

So, if there is a profit and you are disclosing 8% or more of total turnover as profit then only the income has to be declared as business income and accordingly ITR has to be filed. There will be no need to maintain books of accounts and of audit.

Now, here comes the point calculation of turnover.

Turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:

1. The total of positive and negative or favourable and unfavourable differences shall be taken as turnover.

2. Premium received on sale of options is to be included in turnover.

3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.

Here, it makes no difference, whether the difference is positive or negative. All the differences,  whether positive or negative are aggregated and the turnover is calculated.

Turnover in case of Intraday:  sum of settlement profits and losses per scrip

Turnover in case of Delivery Equity: sell side value of the stock

If the total sales/turnover for the previous year relevant to assessment year exceeds Rs. 100 lacs then it’s mandatory to get books of accounts audited.

Disclaimer: All the Information given by me is only for information purpose and i am not providing any assurance about its correctness and accuracy and legality. Please take expert opinion for ITR. If it includes any mistake please inform the author.

Author: M.N.JHA

(M.com, CA-Final Student & Part time stock market trader)

Email id: mnjhastock@gmail.com,

id : mnjha777, Twitter : @mnjha777