fno trading and taxation - a guide for traders in india
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FNO Trading and Taxation - A Guide for Traders in IndiaTRANSCRIPT
4/26/2015 Getting Started With Trading – Tax Guide for Traders in India
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Part VIII – Getting Started With Trading – Tax Guide for Traders in
India
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(Updated as on Nov 2014)
Traders today have so much of compelling options to trade in the stock
market varying from stocks, futures, or options to manage their capital
more wisely and achieve their trading objectives. But on the other side,
they are obligated under income tax regulations to file their returns in
right manner and pay taxes on their trading profits. So, it becomes
important for any trader to understand the taxation treatment of
trading business in India on a whole so that they can plan their trading
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4/26/2015 Getting Started With Trading – Tax Guide for Traders in India
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activity accordingly and achieve their goals.
In an attempt to make you task simple and easier while filing your
income tax, we are writing these series of posts to help you understand
how we traders are obligated under the law to take care of filling of our
trading activity.
Taxation on Trading Stocks
Stock hold for more than 12 months – Long TermCapital Tax
Profits arising out from selling a stock after holding it for 12 months will
be treated as a long term capital gain which as per the section 10 (38) of
the income tax act is exempt from tax (provided such a transaction is
done through a recognized stock exchange for which Security
transaction tax (STT) is paid).
While on the other hand, any loss arising from selling the stock after 12
months will not be adjusted against any short or long term
capital gain from any source.
Suppose, Mr. Shrinivasan has bought 1000 shares of Tata Motors at Rs.
260 on April 9th 2013 and he sold it at Rs. 500 on Sept 17 2014, then
the total profit arising from this investment of Rs. 2.4 Lacs will be
exempt from tax and he can enjoy the 100% profits and don`t have to
pay any income tax on it.
While on the other hand, if he has bought 1000 shares of DLF at Rs. 230
on April 9 2014 and sold it at Rs. 167 on Sept 17 2014, then the total
loss of Rs. 63,000 arising from this investment will not be adjusted
against the profit made from Tata Motors or any other source.
Short Note:
Investments for more than one year are considered to be long term and
attract no tax on profits provided they are done on a stock exchange for
which STT is paid. Enjoy 100% of the profits you made out of your long
term investments.
Stocks hold for less than 12 months – Short Term
Trading – Tax Guide for (387)
What is BankNifty Index (CNX
Bank Nifty Index) & How to (386)
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Trading – How to… (351)
Part VII – Getting Started With
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Capital Tax
Any profit arising out from selling a stock after holding it for less than
12 months will be treated as a short term capital gain and will be taxed
at 15% provided you take the delivery of shares in your demat account
(Exchange has a settlement time of T+2 working days, so any stock that
you bought on Monday comes in your dmat account only on the 2 day
from date of purchase i.e. Wednesday).
While on the other hand, any loss arising out of the short term trading
can be carry forwarded to a period of 8 years against any short term
capital gain or long term capital gain, if these loses are declared while
filling the income tax returns.
Suppose, Mr. Shrinivasan has bought 1000 shares of Tata Motors at Rs.
260 on April 9 2013 and sold them at Rs. 420 on Mar 04 2014, then
he has to pay a short term capital gain tax of 15% (i.e. Rs. 24,000) on his
profit of Rs. 1.6 Lacs.
While on the other hand, if he has bought 1000 shares of DLF at Rs. 230
on April 9 , 2013 and sold them at Rs. 140 on Mar 04 2014, then the
total loss of Rs. 90,000 arising from this investment can be netted
against the profits made from Tata Motors or any capital gain arising
within the period of 8 years.
Important Note:
Any short term capital loss arising can be carry forwarded to a period of
8 years against any short term capital gain or long term capital gain, if
these loses are declared while filling the income tax returns in
respective years.
Day Trading (Intraday Trading) – Speculative Tax
Any transaction where you buy and sell the shares on the same day is a
Day Trade. Any profits and losses arising from any such transaction will
be considered as speculative and will be added or netted of against your
income from business/profession.
So, any profit from day trading will be considered as a business income
and will be added to your other income under the head income from
business / profession and will be taxed according to your total income
slab.
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While on the other hand, any loss from the day trading will be
considered as a business loss and can be carried forward against only
speculative profit within the period of next 4 years.
Important Note:Any loss due to speculative activity cannot be adjusted against short or
long term profits.
Taxation on Trading Future & Options
If you are trading futures & options on a recognized stock exchange,
then 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.
Any profit arising out from trading derivatives will be added to your
total income and taxed according to your new respective tax slab. As
this income is considered as a business income, so you can offset it with
business expenses you incur to earn it like depreciation, internet bills,
advisory fees, software charges, and more.
In case of any loss from trading derivatives, same can be offset against
income from other sources or other heads except salary. 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.
For Example, In the year 2013-14, Mr. Shrinivasan has a annual salary
of Rs. 10lacs and he has incurred a total loss from derivatives of Rs.
1lacs and his income from other sources (apart from salary) is Rs.
1.2lacs then his taxable income will be Rs. 10,20,000 (10lacs + 1.2lacs –
1lac) and will be taxed according to his tax slab of 30%.
Mandatory Tax Audit
Any trader will have to undergo the audit of accounts if the Turnover
for the financial year is greater than Rs. 1 crore.
4/26/2015 Getting Started With Trading – Tax Guide for Traders in India
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How to calculate the turnover for taxation
Turnover is being calculated to determine if you need a tax audit or not
For Intraday equity — absolute sum of settlement profits
and losses per scrip
For Delivery equity — sell side value of the stock
For F&O (Equity, Currency, Commodity) — absolute sum of
settlement profits & losses for F&O) per scrip and the sell
side value of option contracts
Suppose, you bought 1 lot (25 units) banknifty futures at Rs. 17700 and
sold it at 17800, then you made a profit of Rs. 2500 and say on some
other day, you had a loss of Rs. 1500, then the total turnover will be
summed up as 2500+1500 = Rs. 4000. So, all such settlement profits &
losses added together (absolute) summed together forms up as
turnover.
Short Notes:
Salaried Traders
If you are a salaried person, then profits from derivates will be added to
your salary income and will be taxed according to your tax slabs. While
on the other hand, losses from derivatives trading cannot be offset
against the salary income but can be offset against any business income
in next 8 years.
Supporting Documents required
Profit & loss statement
Contract notes
Depository Statements
Bank Statements
Due Dates for filing your returns
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Any individual trader carrying out trading activity be it long, short or
day term are obligated under the income tax law to file their returns
before July 31 and it is September 30th for companies.
In case your turnover exceeds Rs. 1 crore in a financial year, then the
book of accounts needs to be audited and the due date for filling
returns is September 30. Under section 271 B, failure to submit the tax
audit in time has a penalty of 0.5% of turnover or Rs 1.5 lakhs,
whichever is lesser.
Important Q&As
Can we carry forward the losses if not filed in the financial year?
To get the benefit of carry forwarding the losses, it has to be filed in
your income tax before the due dates for the financial year to get any
benefit. Otherwise, you cannot claim the benefit.
Can we carry forward any profits in the following years to set off
against any loss?
No, You cannot carry forward any profits for the following years, so you
have to pay tax for the same in the same financial year.
Can we settle off the losses from trading derivatives or stocks against
the salary?
No, losses can only be offset against income from other sources or
other heads except salaries. Same can be carried forward and set off
against business income within eight assessment years.
Disclaimer
Please note that the post series are our personal view and we advise
you to consult your chartered accountant before taking any decision.
KNOWLEDGE IS POWER!
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