Aif license by sebi

Can there be an LLP which has partners trading in derivatives? Will that be recognised as Capital Gains or Business Income? Also, is it necessary for the LLP to be an NBFC?
Replies (5)

Yes...the LLP can trade in Derivatives...and it depends on the nature of transactions that whether the gains will be capital gains or business income. As far as NBFC status is concerned, an LLP cannot work as an NBFC.

Could you elaborate on the nature of transaction which would classify as business income or capital gains? 

Thanks a lot.

If the derivatives transactions are frequent in nature and unrelated to the shareholding or the share transactions, generally such derivatives transactions would be regarded as having been carried out for earning short-term profits and income from such transactions would, therefore, be taxable as business income.

But where the derivatives transactions are closely linked with share investments, say, hedging transactions to safeguard against fall in share prices of existing share investments, one can’t say that the derivatives transactions are in the nature of a business. The issue then is: whether income from these transactions would be taxed as capital gains or as income from other sources? While it is possible to take a view that the income from such derivatives transactions is taxable as capital gains, it is possibly a safer approach to treat such income as income from other sources. In any case, the rate of tax for both these types of income is the same (your slab rate) since the capital gains are short-term capital gains on securities other than equity shares or units. Therefore, other than for the purpose of setting off of loss, there is no difference if such income is taxed as capital gains or as income from other sources.

Thank you so much for the reply. Just one last question. 

Will long term capital gains be exempt if I buy shares in the LLP? Or will that be regarded as a Business Income?

If you keep shares as an investment, then capital gains will be calculated accordingly...and if it is kept as stock in trade, then the same would be business income.

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