Income tax requirements for the assesses dealing in shares and commodities & their respective derivatives
Income tax has recently started issuing notices to the non-filers as well as mis-filers of income tax return who trade on recognised stock exchanges. Assesses are also not clear on accounting as well as tax treatment of transactions done on the exchanges.
This article may help you to do proper tax treatment whenever we have transactions related to stock, currency or commodity exchanges.
Traders & Investors dealing in markets very well know that we can do maximum three types of transactions on an exchange:-
- Intraday trading: – Trading in spot market (Cash Market) & Squaring off the position in that day only.
- Delivery based trading: – Trading in spot market (Cash Market) & squaring them at a later date.
- Trading in Derivatives: – Trading in Futures & Options (Calls & Puts).
Income tax department clarifies that these transactions are to be separately assessed under different heads:-
Treatment of INTRADAY TRADING: – Intraday Trading is regarded as a speculative transaction whether it is done on a recognised stock exchange or not. Income Derived from intraday trading is regarded as speculative business transaction. Loss from intraday trading can only be settled from other speculative income only.
Treatment of DELIVERY BASED TRADING: – Delivery trades have to be assessed on the quantum & purpose of trades. If the purpose of the trades was to invest in the securities then it will be assessed under the head capital gains. If trades are done frequently in cash segment then it has to be assessed as business profit/loss. The treatment & taxability aspect on various cases has been described as follows:-
If the purpose is to invest in shares
- Then the income arising from sale of equity shares will be assessed under income from capital gains/loss.
Where sale transactions are done on recognised stock exchange & STT thereon is paid
1.1 Tax on Short Term Capital Gain: – The equity shares which are sold in less than one year of purchase , the profit/loss on that particular security is treated as short term capital gain/loss. Income Tax on these gains has to be assessed flat @ 15%. Remember that the sale of security would have been done on recognised stock exchange & STT thereon should be paid.
1.2 Tax on long term capital gains: – the equity shares which are sold after one year from the date of purchase, the profit/loss on that particular security is treated as long term capital gains. Income tax on sale of long term equity shares was exempt till shares sold till 31/03/2018,but after that finance bill levied the tax @10% without indexation on sale of shares of equity shares if holding period is more than one year. And exemption of rs 1,00,000.00 long term capital gains arising on sale of equity shares has been has been given on which no tax has to be paid by the investor.
Grandfathering has been allowed for purpose of calculating cost of acquisition in case of long term capital gain. The record date for grandfathering has been fair market value as on 31/01/2018. It means that actual price paid for shares which were purchased before 31/01/2018 or fair market value as on 31/01/2018 (market rate) whichever is higher will be accepted as cost of acquisition while calculating Long term capital gains.
NOTE :- While calculating Capital Gains on shares we have to exclude STT from the cost of acquisition & while claiming expenses in sale or purchase of shares.
When sale transaction are done other than on recognised stock exchange & STT thereon is not paid.
- Tax on Short Term Capital Gain: – The equity shares which sold on over the counter basis and are sold before one year from date of purchase then slab rates are applicable to assesses.
- Tax on long term capital gains:- The equity shares which are sold on over the counter basis and are sold after one year from date of purchase then flat 20% is applicable to assesses after considering the Cost Inflation index.
If the purpose is to trade in shares
If the purpose is to trade in shares then profit/ loss arising from such transactions will be treated as Income from Business & Profession. Guidelines for business income are as follows:
- While calculating gains/loss from trading in shares all expenses such as telephone expenses, internet expenses or any other expenses incurred in running trading business can be claimed as expenses and are deductible from gross Profit/loss from trading business.
- If the total turnover of trading of shares exceeds rs. One Crore then audit is compulsory under section 44AB of income tax Act otherwise a penalty of Rs 150000.00 Or 0.5% of the turnover will be levied by CBDT.
- If the total turnover of trading does not exceeds Rs.One Crore then Provisions of Section 44AD is levied in which 8% of the turnover is treated as profit whether there is loss in trading so it is now clear that even If the turnover is less than Rs. One Crore audit is compulsory.
Note: -Turnover in case of cash market transactions is the total monetary value of shares sold during the financial year.
!! Is Set off available in case there is a loss from sale of shares !!
As the nature of loss is Business income hence it is available for setoff first from any other business income (intra head setoff).If after that unabsorbed loss is there it can be setoff through other heads except income from salaries. If After that too any loss remains unabsorbed then the loss can be carried forward for next 8 years if the return is filed before due date.
Treatment of Derivatives: – Trading in derivatives has to be treated as Income from Business & Profession hence ITR 3 will be applicable.
Where transactions are done on recognised stock exchange & STT thereon is paid
The income arising from Futures and Options are treated as normal business income as section 43(5) of the income tax specifically explains that trading in futures & options is not a speculative transaction if it is done through recognised stock exchange..So it is now clear that if trading is done through recognised stock exchange then it is treated as normal business income. In that case too ITR 3 will be filed.
Therefore applicability of tax audit will be as follows in case of F&O trading.
- In case of profit from F&O trading
· In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. 1 crore.
· Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 6% of the turnover from such transactions.
- In case of loss from F&O trading
In case of Loss from derivative trading, since profit (Loss in this case) is less than 6% of the turnover, therefore Tax Audit will be applicable u/s 44AB read with section 44AD.
!! Is Set off available in case there is a loss from derivative trading !!
The answer to the setoff is YES as section 43(5) which exempts derivative trading as business income as it can set off through each head except income from salary. Only loss can be carried forward which can be settled only against derivative income in subsequent 8 years.
!!Calculation of turnover in case of derivative trading!!
As turnover in derivative can easily cross Rs.one Crore as volumes in the business is high because transactions in derivatives are cash settled. So Mechanism of calculating turnover is different as in calculation of normal business.
1. Turnover in case of Futures Trading is aggregate sum of mark to mark profit/Loss. So whether there is profit or loss it has to be treated as turnover.
Suppose there is a loss of ITC futures is Rs.20000.00 and profit on NTPC futures is Rs.50000.00 then profit will be 30000.00 but turnover in that case will be 70000.00 (50000.00+20000.00).
- Turnover in case of Options is aggregate sum of premium received from sale of options.
Suppose ITC 300 Call Option was purchased at Rs. 3*1000 shares lot and has been sold at Rs. 6*1000 shares lot. Turnover will be Rs.6000.00 and profit will be Rs3000.00 per lot.
So in a nutshell to summarise the article :-
- Intraday trading is a speculative business and has to treated as same in income tax whether it is done through recognised stock exchange or not.
- Delivery of shares can be treated both ways either in capital gains or business income as the case maybe and relevant provisions and tax will be applicable depending upon its nature.
- Derivative trading is to be treated as business income if it is done through recognised stock exchange & tax audit is mandatory in case of high turnover or in case there is a loss from derivative trading. In case of turnover less than Rs. One Crore 8% of the turnover will be taken profit for calculating profit If tax audit is not conducted.
So Dear investors and traders, Be careful while assessing your profits/loss from stock market as income tax department is now vigilant about the tax treatment of transactions done on stock exchanges. So make necessary arrangements to file your income tax return before time & get tax audit done because failure to comply may lead to unnecessary harassment from income tax department.
Author – CA Ram Kohli
Mo; – +91-9140972712