Article

Taxation for Traders and Investors

  • 09-May-2023
  • 2 mins read

Overview

Indians are becoming more interested in investing in stock market instruments rather than traditional investment choices such as gold and fixed deposits. In the modern world, every financial transaction, whether involving buying or selling goods/services, attracts taxation. 

Taxation similarly applies to investments and may influence your choice of instruments. For instance, the period for which you held your investment is a good indicator of taxes applicable and the manner of handling taxes normally. Due to the same reason, the rate of taxation applicable to an investor holding securities for a long period might not be equally applicable to his friend who occasionally engages in intra-day trading. 

 Though we have some knowledge of the taxes levied on salary, business income, and other sources, among other things still, there is a lot of obscurities regarding taxation levied on stock market investments such as equity instruments, mutual funds, debt securities, and derivatives, etc. for which the length of time you have held an investment is a good indicator of the tax you might owe and how you might handle taxes in general. Investors need to constantly track fluctuations in the stock market to modify their portfolios following the latest regulations. As a result, understanding the concept of capital gains taxes and implementing methods for minimising taxes, which can affect portfolio growth, is continuously critical.

Whether you are a trader or an investor, you should have noted that every investment involves various aspects such as calculation of turnover, taxability of profits/gains, the applicability of tax audit, manner of filling the ITR, and many more. 

First, Identify yourself either as an investor/trader or both

It’s a known fact that every person with taxable income is under the obligation to calculate his tax liability, submit taxes and file ITR for the same. However, before that, it would be necessary to determine whether you are a trader, an investor, or maybe both. Though, in common parlance, the terms’ trader and investors are used alike, there are some key differences between them. 

While traders are the person who participates in the stock market by continuously entering and leaving the market, buying and selling securities, and benefitting from the opportunity to make smaller but frequent gains out of the price fluctuations and deduction of business expenses, which is the opposite to ‘investor’, who purchase securities and hold it over a long period during which their wealth increases and benefit from lower capital gains taxes while selling them. 

According to a circular from the income-tax department, regardless of when a person has owned the listed shares and securities, they can identify themselves as traders or investors by reporting their stock investments as capital gains or as business income (trading). However, once chosen, the taxpayer must stick with it in the coming years.

When trading or investing, you need to classify your income under one of these heads, broadly speaking they are –

  1. Long-term capital gain (LTCG)
  2. Short-term capital gain (STCG)
  3. Speculative business income
  4. Non-speculative business income
  5. Long-Term Capital Gain (LTCG) u/s 112A: Equity delivery-based investments with a holding period of at least a year or more and any profit realised from the sale of a long-term capital asset shall be regarded as long-term capital gains. For instance, if you buy any stock at Rs 60,000 and sell them for Rs 80000 after 1 year, the profit earned from the sale, i.e., Rs 20,000, shall be known as a Capital gain. Thus, LTCG could be understood as any gain/profit from purchasing and selling securities after either one year or more from the date of purchase. Since FY 2018-19, taxes on any gains realised and classified as LTCG (equity and equity MF) are 10% if they exceed Rs 1 lakh and are entirely free for the first Rs 1 lakh. However, the acquisition and selling of such shares must occur through a recognised exchange.
  6. Short-Term Capital Gain (STCG) u/s 111A: Any profit realised from the sale of a short-term capital asset with an equity delivery as an investment and a holding period of less than one year is regarded as a short-term capital gain. If you purchase equity-oriented mutual funds or listed stocks for Rs 60,000 today and sell them for Rs 64,000 within a year, the profit or gain of Rs 4,000 will be taxed as a short-term capital gain (STCG). In general, gains or profits obtained by investing in stocks or equities mutual funds for more than one day (also known as delivery based) and selling them within 12 months of acquisition can be classified as STCG. The current STCG tax rate in India is a flat 15% on the gain or profit from the sale of shares or equity-oriented mutual funds. If person purchases Nestle shares today for Rs 90,000 and sells them for 1,10,000 after 1 Month, he will be required to pay 20,000 X 15%= 3000 as an STCG tax. Hence, the transaction’s tax rate for short-term capital gains (on listed stocks) shall be 15%. 
  7. Speculative Business income: Gains from non-delivery or intraday stock or equity trading qualifies as speculative business income under section 43(5) of the Income Tax Act of 1961. Since there is no STT (apart from when using currency derivatives as a hedge), trading in currencies is also considered as speculative as capital gains tax has a fixed rate, any business income shall be added back to the remaining income and taxed as per the tax slab it falls into. Suppose a person has a financial income of Rs 4L and an intraday stock trading gain was a total of Rs. 1L for the financial year. So, his income in total would be Rs 5L. Accordingly, the person must tax the total sum as per the applicable tax slab rate of 500000 x5%= Rs 25000. Therefore, to determine your total tax liability, a taxpayer must combine his income from speculative business with other heads of income under “Income from other source”. After which, the total tax liability will depend on the concerned income tax slab, and once it is calculated, the taxpayer must submit tax and file an income tax return for it. 
  8. Non-Speculative Business Income: Revenue from trading futures and options on recognised exchanges (stock, commodities) qualifies as non-speculative business income under section 43(5) of the Income Tax Act of 1961. Trading in derivatives, equities F&O, commodities, and currencies are classified as non-speculative activity. Due to the absence of a fixed tax rate for business income, you must add all other sources of income, including non-speculative business revenue, to it and pay taxes in accordance with the appropriate tax slab. Assume, for example, that a businessman cum trader earns Rs 500,000 via F&O trading. Let’s also assume that his firm generates Rs 20,000,000. Hence his entire income for the financial year shall be Rs 25,00,000/-, for which the tax liability will be assessed as follows-
Tax Slab Taxable Amount Tax Rate Tax Liability
0 to Rs 250,000                Rs 2,50,000     0%        Nil
Rs 250,000 to Rs 500,000 Rs 2, 50,000 5% Rs 12,500
Rs 500,000 to Rs 1,000,000 Rs 5,00,000 20% Rs 1,00,000
Rs 10,00,000 to Rs 25,00,000 Rs 15,00,000 30% Rs 4,50,000

Applicable Tax Rates for Short-Term and Long-Term Capital Gains

Tax Type Condition Applicable Tax
Long-term capital gains tax (LTCG) Sale of: – Equity shares – units of equity-oriented mutual fund          Others 10% over and above Rs 1 lakh           20%
Short-term capital gains tax (STCG) When Securities Transaction Tax (STT) is not applicable   When STT is applicable                        Normal slab rates     15%.  
STCG/LTCG Debt Funds     Depending on the tax slab rate of the individual.
STCG/LTCG Equity Funds   15% for STCG   Or               10% over and above Rs 1 lakh without indexation (for LTCG)    
STCG Debt mutual funds Slab rates will be considered short-term irrespective of the holding period.

The following table demonstrates the nature of a long-term capital gain tax on shares and other securities-

Particulars Tax rate
STT is paid on the sales of shares listed on a recognized stock exchange and mutual fund units. 10% on payments of more than Rs 1 L
STT paid on the sale of shares/bonds/debentures, and other listed securities. 10%
Sale of debt-oriented mutual funds 20% after indexation 10% without indexation

Tax Slab Rates for Investors/traders

For this financial year, the investor/trader has been given an option to either be under the old regime or the new tax regime. Accordingly, the slab rates have been provided below-

Income Tax Slab Rates for taxpayers opting under Old Regime

Taxable Income (INR)         Slab Rate
Up to Rs 2,50,000        Nil
Higher than Rs 2,50,000 but lesser than Rs 5,00,000 5%
Higher than Rs 5,00,000 but lesser than Rs 10,00,000 20%
Above Rs 10,00,000 30%

Note: Surcharge is due based on the prescribed surcharge slab rates for all income. Cess is payable at 4% of the total (base tax plus surcharge).

Income-Slab Rates for Taxpayers opts for New Tax Regime

Taxable Income (INR) Slab Rate
Up to Rs 2,50,000                   Nil
Higher than Rs 2,50,000 but lesser than Rs 5,00,000 5%
Higher than Rs 5,00,001 but lesser than Rs 7,50,000 10%
Higher than Rs 7,50,000 but lesser than Rs 10,00,000 15%
Higher than Rs 10,00,001 but lesser than Rs 12,50,000 20%
Higher than Rs 12,50,001 but lesser than Rs 15,00,000 25%
Above Rs 15,00,000    30%

Tax Audit for Trading Income

If a taxpayer receives money from trading in intraday equity, equity futures, options, commodities, or currency, they must declare that money as business income on their income tax return. The threshold for turnover to determine a tax audit under Section 44AB is Rs 10 crore starting in FY 2020–21 since every single transaction is digitised in nature. Below is a list of conditions in which a Tax Audit may be applicable:

Trading Turnover Limit Condition Whether or not Applicable
Up to Rs 2 crore If you have made profits of at least 6% of Trading Turnover. Tax Audit shall not be applicable.
Up to Rs 2 crore if you have incurred a loss or your profit is lesser than 6% of Trading Turnover. Tax Audit is applicable if your total income is more than Rs 2.5 lakh (basic exemption limit)
Higher than Rs 2 crore but lesser than Rs 10 crore Where profits form at least 6% of the trading turnover Tax audit shall be applicable if you don’t opt for the Presumptive Taxation Scheme under Section 44AD  
Trading Turnover is more than Rs 10 crore Irrespective of the profit or loss Tax audit is applicable

Advance Tax Payment for traders

Suppose the trader or investor’s tax liability is expected to exceed Rs 10,000. In that case, they must determine and submit Advance Tax to avoid interest payments under sections 234 B and 234C of the Income Tax Act. Every trader may either choose to opt for payment of advance tax through presumptive taxation and who do not choose for presumptive taxation and pay for liability in instalments as provided below-

For Traders Who Do Not Opt for Presumptive Taxation

Advance Tax Liability (where not opted for presumptive taxation)        Due Date
15% of Tax Liability    On or before 15th June
45% of Tax Liability On or before 15th September
75% of Tax Liability On or before 15th December
100% of Tax Liability  On or before 15th March

Advance Tax for Traders Choosing Presumptive Taxation 

If an intraday trader chooses presumptive taxation under Section 44AD and generates intraday gains, he or she must pay the entire advance tax amount in one lump sum by the deadline of March 15.

How would you treat losses in your income tax return?

Any short-term or long-term capital losses due to the sale of securities may offset any short-term or long-term capital gain. If any part/portion of the losses is not set off completely for any financial year, it could be carried forward for a total period of eight years and then adjusted against any short-term or long-term capital gains received during such period. 

However, it is important to know that the taxpayer shall only be able to set off his capital gain losses or carry forward them on the fulfilment of certain conditions. For instance, he should have submitted his tax return clearly mentioning the losses beared within the due date. Such a return must be filed even if his total income for the concerned fiscal year is less than the minimum taxable income.   

Treatment of Long-Term Capital Loss (LTCL)

Any losses resulting from such listed equities, shares, mutual funds, etc., can be carried forward. Accordingly, if an assessee bears any capital losses from the transfer of any stock/securities made either on or after April 1, 2018, it shall be allowed to be set- off, carried forward, and adjusted the same against any subsequent gains as per the relevant provisions of the Income-Tax Act 1961. 

Therefore, it is clear that the long-term losses are eligible to be adjusted against any subsequent long-term capital gains that arrive in the future, giving the taxpayer the ultimate benefit of tax savings. Though, the Act doesn’t allow the setting-off of long-term capital losses with any short-term capital gain. 

Further, any remaining portion of the long-term losses may be forwarded to be adjusted against any long-term gains for eight years. But, to be eligible, the taxpayer must have submitted ITR within the due date for the financial year.

Securities Transaction Tax (STT)

Securities Transaction Tax is a type of direct tax levied during the sale/purchase of securities such as Shares/bonds/derivatives/MFs, etc., listed on the stock exchange.

Section 36 of the Income-Tax Act 1961 provides that where the taxpayer has paid STT, it shall be allowed as a business expense which could be a valid deduction under the income head “Profits from Business or Profession” under the Income-Tax Act. However, determining taxes on capital gains is not permitted as a cost of acquiring the stock/shares or equity. 

Here is a list of the various STT charges applicable to various transactions-

Type of securities transaction STT rates (by percentage) Person under obligation Total value at which STT is to be paid.
Delivery purchase of equity shares. 0.1 Buyer  The market price of the equity share at the time of purchase.
Delivery sale of an equity share. 0.1       Seller   Sale Price at which equity share is sold.
Delivery sale of a unit of an oriented mutual fund.   0.001 Seller   Sale Price at which MF unit is sold.
Apart from actual delivery or transfer, the sale of equity shares/units of equity-oriented mutual funds on a recognized stock exchange, as well as intraday traded shares. 0.025 Seller   Sale Price at which equity share/ unit is sold.
Derivative – Sale of an option in securities            0.017 Seller   Option premium
Derivative – Sale of an option in securities where the option is exercised        0.125 Buyer  Settlement price
Derivative – Sale of futures in securities            0.01 Seller   Price at which such futures is traded
Sale of units of equity-oriented funds to MF ETFs. 0.001 Seller   Price at which unit is sold.
Sale of unlisted shares under a public offer for sale that comprises an initial public offering (IPO), wherein such shares are subsequently listed on stock exchanges.      0.2 Seller   Price at which such shares are sold.
Purchase Of Units of Equity Oriented Mutual Funds Nil       Buyer  NA

Due Date of filling ITR FY 2020-21 Onwards

Particulars Due Date
Traders to whom Tax Audit is not applicable July 31st

Different ITR forms applicable to Investors/Traders

Regardless of whether you are an investor or trader, every taxpayer should file ITR within its due date. Your selection from different ITR forms shall depend upon the kind of taxpayer (individuals, HUFs, corporations, etc.). You select the ITR based on the existence and type of income and overall income. Here are some examples of the relevant ITR forms-

i. ITR 1 – You can utilise ITR 1 forms to file your income tax returns (total income up to Rs 50 lakhs) if you earn a salary, interest income, or rental income from only one residential property. This is the most frequent variety, but if you have capital gains or trading as a business income, you cannot use this ITR form.

ii. ITR2- For people and HUF not engaged in business or profession, you can use ITR 2 if you have a salary, interest income, real estate income, or capital gains. So, if you are an individual who only invests in the market (remember, investor, thus capital gains), you must use ITR2.

iii. ITR3- When you have a salary, interest income, income from real estate, income from capital gains, and income from a business or profession, you can use ITR 3 (ITR 4 was renamed ITR 3 in 2017). Therefore, you must use ITR 3 if you are an individual reporting trading as a source of income for your business. Investors and traders can report trading under business income and investments under capital gains on the same ITR 3 form.

iv. ITR 4– This form is identical to ITR 3 but has a presumption scheme if sections 44AD and 44AE are utilised for calculating business income. If losses must be carried forward or any capital gains must be reported, ITR 4 cannot be used. Accordingly, you can use ITR 4 only if you have business income (speculative and non-speculative), but it is best avoided if using this form will reduce your tax liability.

Treatment of Expenses incurred concerning the Transfer/Sale of SharesAre there any expenses you could claim as a trader in your Income Tax Return?

All costs directly associated with the trader’s business are allowable deductions from income. Any expenses incurred must be directly related to company and professional income only. Hence, whenever a taxpayer sells any securities, he/she must consider all the costs and expenses incurred to gain such income. So, when it comes to calculating the tax liability for the financial year, then along with such trading income, such income could be applied for an eligible deduction. Then the remaining income could be taxed as per the relevant income-tax slabs. 

Here is a list of certain expenses which could be claimed against the income from trading-

  1. Rent Expense- If a trader has an office on a rented property, he may deduct the rent as a reasonable expense. He must also save a copy of the rental agreement and receipts as verification.
  2. Insurance Expense- Traders may deduct insurance costs for items used in their operations.
  3. Office Supplies- Expenses like stationery, printing, coffee, and tea expenses, among others, are allowed as a valid deduction from income. 
  4. Electricity Costs- Electricity bills of the office premises also qualify as a business expense. If the traders work from home, then the electricity expenses could be allowed as a deduction.  
  5. Membership Fees- Any expenses incurred by the trader towards payment of membership of the trading platform could be claimed as a business expense. For instance, a trader may deduct the membership price they paid to join the club, but these expenses shall not be allowed for costs expended for recreational or entertainment purposes. 
  6. Legal and Professional- These fees are eligible for income tax deductions. Professional fees are any fees given to a person for their services. This includes submitting tax returns, auditing taxes, seeking legal counsel, hiring consultants, etc.
  7. Books and Subscriptions- If a trader pays for magazine subscriptions or buys trading books, he can. Depreciation entails claiming the asset’s cost as an expense throughout the asset’s life. According to the Income Tax Act, we cannot deduct the asset’s cost as an expense. However, you may deduct the asset’s depreciation as an expense. For instance, you spent Rs 10 lakh on a top-of-the-line computer. 60% is the depreciation rate. As a result, you are eligible to deduct Rs 6 lakhs (Rs 10000, divided by 60%) in the first year. And may carry over the remaining Rs 4 lakh to subsequent fiscal years.
  8. Mobile and Internet Expenses- Traders may deduct costs incurred to cover internet, phone, and mobile service fees. If the expenditure was made for business purposes, it is deductible as a legit expense. 
  9. Financing Costs- If you have borrowed money for trading purposes, the interest payments shall be allowed as a deduction. 
  10. Other Trading Expenditures- The trader may deduct any fees and costs incurred for trading as legitimate business expenditures. Accordingly, brokerage, turnover fees, clearing fees, exchange transaction fees, STT, stamp duty, GST, etc., are allowed as a deduction. 

Things to consider while claiming business expenses by taxpayers

  • The invoice must be issued in the trader’s name, and the due date must occur within the applicable fiscal year.
  • A trader may deduct a reasonable part of an item incurred for personal and business purposes.
  • The trader must keep all bills, invoices, and other documentation that serves as verification of payments which will be used as proof to the CA while conducting a tax audit and likewise will support claims expenses if the Income Tax Department issues a notification.
  • A trader must deduct TDS in accordance with the relevant TDS clause if they utilise one of the listed services. For instance, X, a trader, hired a qualified CA to audit his books of accounts and file an ITR. X must deduct TDS under Section 194J when paying the Chartered Accountant. He must submit TDS Return Form 26Q together with the TDS deposit.
  • As much as possible, the trader should not pay for expenses through cash; even where it does, the payments should not exceed Rs 10,000.
  • The trader shall be eligible to claim expenses while assessing their income tax obligations under Chapter VI-A of the Income-Tax Act 1961; this includes deductions for LIC premiums under Section 80C, the medical insurance premium under Section 80D, the interest on a student loan under Section 80E, etc.
  • If your business or professional income exceeds Rs 1,50,000 or your total sales or gross receipts in any of the three years before that exceed INR 25 lacs, you must keep books of accounts to assist the Assessing Officer in determining your taxable income in accordance with the Income Tax Act.
  • In the P and L Statement, a trader with business income should list reasonable business expenses. They must also create financial statements and submit ITR-3 forms. The trader must also compute the trading turnover and establish whether a Tax Audit is applicable to submit an ITR.

Types of Trading or Investment  

  1. Intraday Equity Trading

Equity intraday trading occurs when a trader buys equity shares and sells them within the same day to profit from price fluctuations over a single day. Since there is no actual delivery or transfer of ownership, it is referred to as intraday equity trading. The principal benefit of Intra-day trading for Intra-day trading is that it allows the trader to deduct all reasonable business expenses, reducing the tax liability, which could be set off and carried forward. Any trader engaged in intra-day trading, filing an ITR and paying income tax must determine Trading Turnover to accurately estimate the profit or loss from intraday equity trading and the related tax liability.

  • Turnover for Intraday Trading = Absolute Profit 

Turnover could be defined as the aggregate or absolute sum of both positive and negative differences from trades for all speculative transactions. Therefore, if you purchase 100 shares of Reliance at 800 in the morning and sell them at 820 in the afternoon, you will have made a profit or positive difference of Rs 2000, which can be regarded as the turnover for this trade.

For example- Reema purchases 100 ITC shares for 70 and sells them for Rs 75 later that day. The following day, she purchases 200 shares of Paytm for 500 rupees which are sold for Rs 460. 

Gain from First Trade = (70-70) X 100 = Rs 500

Loss from Second Trade = (460-500) X 200 = -8,000

Net Profit: 500 + 8,000 = 8,500.

  • Tax Liability Calculation for Intraday Trading

Income Tax on trading income is calculated by adding the income generated from intraday equities to the total income as a speculative business income rather than capital gains. Then, the total amount shall be taxed within the applicable tax bracket, as provided in point number 3 above. 

  • Income Tax on Intraday Trading: Income Head, Applicable ITR, Due Date of Submission

Intraday revenue or loss is a speculative business income or loss under the Income Tax Act. It must be recorded under the head business income under the head PGBP (Profits/ Gains from Business or Profession). Alternatively, the trader (individuals and HUFs with PGBP Income) must submit Form ITR-3 on the Income Tax Website and other financial statements within the due date (i.e., 30th July or 30th October), respectively. 

  • Advance Tax for Intraday Trading

As per the Income Tax provisions, a taxpayer whose taxable income from all the sources during the financial year exceeds INR 10,000 shall be liable to payment of Advance Tax. Suppose an intraday trader does not choose presumptive taxation under Section 44AD and has intraday earnings. In that case, he or she must pay Advance Tax in four instalments within the timelines specified in point no. 5 above.

  • Set off and Carry Forward Loss for Intraday Traders

If a tax audit has been conducted by a qualified chartered accountant in practice, then an equity intraday trader may claim, set off, and carry forward the losses. The income tax payable can be decreased by carrying this loss to succeeding years and using it to offset upcoming profits. Furthermore, a loss from intraday equity trading is considered a speculative business loss and could be set off only against Speculative Business Profits. An intraday trader could only carry forward such losses for four years. 

However, in case the intra- day trader opts to pay taxes under the new tax regimes as provided in point no. 3 above, he shall be disqualified from setting off or carrying forward losses against business incomes in the coming years. 

  • Delivery Trading 

Delivery trading is said to have occurred when a person purchases securities and keeps them for at least one day. To qualify as delivery trading, an investor cannot purchase and sell securities on the same day in a delivery transaction. To determine whether such business income shall be taxable as a trading income or capital gains shall rely on several aspects such as transaction volume, frequency, average holding period, etc. For example, if a person purchases a share daily and sells it at the end of the week, it will be assessed as delivery trading. There will be no change in the fact that it is delivered trading even if he sells it the following week, month, year, or years after. 

For example, Karan bought 2 Nestle shares for 5700 each on 14.11.2021 and sold the same for 6000 each on 26.11.2021. On 10.03.2022, he bought 9 shares of Nestle for 5900 each, which were sold for 4500 each. 

  • Calculate Trading Turnover for Equity Delivery Trading
Business Quantity of stock bought Date of purchase/sale Purchase price Date of sale Selling price Actual profit/loss
Nestle 2 14/11/2021 5700 26/11/2021 6000 300
Nestle 9 10/02/2022 5900 10/03/2022 4500 -1400

Absolute Profit = Trading Turnover for Equity Delivery Trading

Tradewise Turnover = 300+ 1400 = Rs 1700

Scripwise Turnover = – 1100 = Rs 1100

  • Calculation of Tax Liability on Delivery Trading

Keeping track of how many days have passed since you bought your stock holdings is crucial for investors. Suppose you have bought the same stock more than once within the holding period. In that case, the period will be calculated using the FIFO (First in, first out) approach, which will effectively calculate the difference between LTCG and STCG that is applicable. As an illustration, if you sold equities 360 days after purchasing them, you would be required to pay STCG taxes on 15% of the total gain. But, if the stock is held for equal to or more than five days, the entire gain shall not attract tax (exempt up to 1L). 

For instance, Ameen purchased 100 shares of Tata Ltd. on June 10, 2014, at an average price of Rs 840, and on July 11, 2015, he purchased another 120 shares at an average price of Rs 860. A year later, on September 1, 2016, he sold 130 shares at a price of Rs 930. Then, on October 14, 2016, he sold 100 shares purchased on June 10, 2014, and 30 of the 100 purchased on July 11, 2015, which should be considered on a FIFO basis. 

Therefore, for shares purchased on June 10, 2014, gains equal Rs 120 (920-800) x 100 (Rs 12,000) (LTCG, and thus no tax). Gain = Rs 100 (920-820) x 50 = Rs 5,000 (STCG and 15% tax) for shares purchased on July 1, 2015. 

  • Income Tax on Delivery Trading: Income Head, Applicable ITR, Due Date of Submission.

According to the Income Tax Act, income from delivery trading must be reported under the business income heading under the PGBP (Profits/ Gains from Business or Profession) heading as a gain or loss. If the investor has business income or capital gains, they must report it on Form ITR-3. But, if they only have capital gains, they must be reported in Form ITR-2. 

  • Advance Tax for Delivery Trading

Every taxpayer who has business income or short-term capital gains that have been realised (profit booked) is obligated to pay advance tax. It should be noted that every eligible assessee shall be required to assess his income/gain on the business/ capital gain and submit taxes on an estimated basis within the due date. And any failure to do the same shall result in the levy of 12% annualised interest and a penalty for the delay period. 

  • Set off and carry forward

STCL/LTCL from delivery trading, if reported in the ITR, shall be eligible to be carried forward and adjusted against any gains generated during that time. For instance, a person suffering a short-term capital loss of Rs 1 lakh for the year could be carried forward with the short-term capital gain in the next year, i.e., 15% of the gain could be offset against the carried forward losses. The remaining losses could additionally be carried forward for seven years. 

Furthermore, after April 2018, every assessee is eligible to set off his long-term losses suffered against any long-term gains generated by him in the subsequent years. Nonetheless, it is understood that only a long-term capital loss shall qualify to be adjusted against a long-term capital gain. However, a short-term capital loss can also be adjusted to a short-term as well as long-term capital gain.  

  • Future and Options Trading

If you trade futures and options, you must file a tax return to report your profits or losses. Futures and Options are considered derivatives. Hence Futures and options trading (commonly referred to as F&O) refers to the buying and selling of these products. Equity, commodity, and foreign exchange (Forex) futures and options trading are all included in F&O Trading. Unless you only make a small number of deals (say, only 2-3 trades) during the financial year, it is important to trade futures and options as a business. This also holds for people who have not been properly established as a business or other legal organisation but generate money from their businesses. This also applies to unincorporated assesees or any other legal entity generating taxable income.  

For instance, a person wishing to invest in silver may buy physical silver or a future contract allowing him to trade silver at a pre-decided future rate. Accordingly, a futures contract is a derivative whose value shall be based on the price of any particular asset it signifies as its underlying asset.

  • Calculation of Turnover for Future and Options: Trading Turnover

Turnover can be calculated using either the script-by-script method or the trade-by-trade method. For instance, on May 5, 2021, Rahul purchased 200 futures of Hero MotoCorp Futures for Rs 100. On August 5, 2021, he offered these contracts for sale for Rs 90. On July 9, 2021, Rahul purchased 150 Nifty Futures contracts at a price of Rs 45. On 12/09/2021, he sold these contracts for Rs 50.

Loss on Trade 1 = (90-100) X 200 = Rs -2,000

Gain from Deal 2 = (50-45) X 150 = Rs 750

Total profit = Rs 2,750.

  •  F&O Trading- Income Head, Applicable ITR Return & Due Dates

In accordance with the Income Tax Act, F&O Income or Loss is a non-speculative business income. As a result, it must be declared as business income under the heading PGBP (Profits & Gains from Business and Profession). Since F&O Income is a business income, the F&O trader should prepare financial statements and file Form ITR-3 (ITR for Individuals and HUFs with PGBP Income) on the Income Tax Website.

  • Due Date for Filing ITR Returns

Taxpayers engaged in F&O trading (individuals and HUFs with PGBP Income) must submit Form ITR-3 on the Income Tax Website and other financial statements within the due date (i.e., July 31 or October 31), respectively.

  • Tax Audit Applicability for F&O Trading (refer to point no. 4 above)

Like any other taxpayer, a person in F&O trading shall be subject to a tax audit. Thus, if the trading turnover doesn’t exceed Rs 1 crore. However, if the turnover exceeds Rs 2 crore, irrespective of the profit/loss declared, then Tax Audit u/s 44AB is mandatory. For more information, see point number 4 above.

  • Tax Liability Calculation on F&O Trading

The trader can pay tax on F&O trading as per the Income slab rates, either opting to pay under the old tax regime or the new tax regime as provided in point number 3 above. However, those F&O traders opting to pay taxes under the New Tax Regime under Section 115BAC of the Income Tax Act shall be required to comply with the following conditions-

  • Traders cannot claim Chapter VI-A deductions. 
  • The trader cannot set off any brought forward business loss. 
  • Tax liability should be assessed according to the slab rates adopted in the new tax regime.
  • The trader cannot carry forward the company loss to subsequent years.
  • Form 10IE must be submitted on the income tax website.
  • Advance Tax provisions for F&O Trading 

If a person has income from F&O trading and does not opt for presumptive taxation under Section 44AD, they must pay Advance Tax in the previously mentioned four instalments. Nevertheless, if the taxpayer holding F&O business income wishes to pay tax based on presumptive taxation, he must be paid in a single payment on or before March 15. For more information, see point no.5 above.  

  • Carry Forward Loss for F&O Trading

If a tax audit has been carried out with a qualified chartered accountant in practice, the trader may claim, set off, and carry forward the losses under F&O Trading. The amount of income tax owed can be decreased by carrying this loss to succeeding years and using it to offset upcoming profits.

Losses from F&O trading fall under the category of Non-Speculative Business Losses. Other than salaried income, such losses could be used to offset any sort of income in the current year. Further, such losses could be set off against business income (both speculative and non-speculative), which could be carried forward for an additional 8 years.

But the traders who have opted for the New Tax regime cannot carry forward or adjust against business incomes, and they shall be unable to carry over the business loss to succeeding years.

  • Grandfathering Clause 

It’s a known fact that long-term capital gains were tax-free before the amendment in 2018. After 2018, the taxes on Long-term capital gains were levied at a rate of 10%. For example, what happens if someone purchases a certain equity MF unit in 2014 and sells the same in 2023? Will his 2014 purchase price be used to calculate his gain? Or another thing? The grandfathering provision or clause for income tax is now in place. The grandfathering clause allows an old rule to continue to be used in some current circumstances while a new rule will be used in all future instances. People exempt from the new rule are referred to as having grandfather rights, acquired rights, or having been grandfathered in. When Section 10(38), which would have taxed the long-term capital gains of the following, was removed, Section 112A included securities like shares, equity-oriented funds, business trusts, etc. There is no indexation benefit, and the LTCG tax is applied at 10% on gains exceeding Rs 1 lakh annually. Simply put, the grandfathering rule ensures that the tax imposed on gains is prospective and imposed commencing on the day that such tax was imposed to safeguard the interests of taxpayers. For instance, Ram invested a lump sum of Rs 25 lakhs in shares of a listed company in June 2005; the FMV of those shares as of January 31, 2018, is Rs. 45 lakhs. Ram sold all of his investments in June 2020 for Rs 55L, making a profit of Rs 25L. The grandfathering provision, however, would limit Ram’s taxable gain to just Rs 3 lakhs.

It is to be noted that the total tax liability LTCG of Rs 1 lakh is tax-free every year. Thus, the tax burden will be 10% (plus any applicable surcharge and cess) once Rs 1 lakh has been subtracted from the overall tax gain. Furthermore, on January 31, 2018, the FMV would be the price quoted at the highest level on the recognized stock exchange. If the aforementioned asset is not traded on that stock market, the highest price on the day before January 31, 2018, shall be considered the FMV. In practice, the taxpayer can apply the highest price quoted on the recognized stock exchange on January 31, 2018, as the COA and deduct that amount.

  • Grandfathering Clause Formula

The following formula is used to determine the acquisition cost:

  • Value I is either equal to the FMV as of 31.01.2018 or the actual selling price, whichever is lower.
  • Value II is the same as Value I, or the actual purchase price, whichever is higher.

Value of LTCG = Sales Value – Cost of Acquisition

Value of LTCL = Sale Price – COA revisions as made on 31.1.2018

The manner of calculation has been further explained through the examples provided below-

Example 1– Naina bought equity shares on 20th October 2018 for Rs 10,000 at an FMV of Rs 15,000 as of 31st March, 18. He sold the shares on 10th June of the same year for Rs 18000. What will be the value of the final LTCG/LTCL?

Cost of Acquisition (COA) shall be-

  • Highest of – Original COA i.e., Rs 10,000, and 
  • Lowest of – FMV on 31.1.18 i.e., Rs 15000, and

Sale Price i.e., Rs 18,000

Hence, COA = Higher of (Rs 10,000 or Rs 15,000) Rs 15,000

Total LTCG/LTCL = Sale Price – Cost of Acquisition

Rs 18,000 – Rs 15,000= Rs 3,000

Example 2- Atif purchased equity shares on 13th Feb 2016 for Rs 13,000. FMV of the shares was Rs 9,000 as of 31st Jan 2018. Later on, 17th March 2019, the shares were sold for a sum of Rs 27000. What will be the value of the final LTCG/LTCL?

Cost of Acquisition (COA) shall be-

Higher of –Original COA i.e., Rs 13000, and 

Lower of – FMV on 31.1.18 i.e., Rs 9,000, and

Sale Price i.e., Rs 26,000

Hence, COA = Higher of (Rs 13,000 or Rs 9,000) Rs 13,000

Total LTCG/LTCL = Sale Price – Cost of Acquisition

=Rs 27000- Rs 13000

=Rs 14,000

Example 3- Ravi bought equity shares on 9th October 2015 for Rs 18550. FMV of the shares was Rs 13000 as of 31st March 2018. These shares were later sold on 13th July 2018 for Rs 12000. What will be the value of the final LTCG/LTCL?

Cost of Acquisition (COA)

Highest of –Original COA i.e., Rs 18,500, and 

Lowest of – FMV on 31.03.2018 i.e., Rs 13,000, and Sale Price i.e., Rs 11,000

Hence, COA = Higher of (Rs 18,550 or Rs 13,000) Rs 18550

Total LTCG/LTCL = Sale Price – Cost of Acquisition

Rs 12000– Rs 18550 = Rs (6550)

  • Taxation on Shares Purchased on IPO

When shares of a private firm are offered to the public as part of a new stock issuance, it’s known as an initial public offering (IPO). An investor may submit a share application for an IPO. The business starts the initial public offering (IPO) allotment on the day of the company’s listing on the recognized stock market. Though no tax is levied if the shares are received through IPO allotment, the tax treatment is identical to tax on the sale of listed equity shares when the investor sells these shares. The Capital gains are recognized as income from the sale of shares acquired through IPO allotment.

  • Calculation of Capital Gains Tax on IPO Listing

Under the income tax Act 1961, any profits/gains generated from the sale of securities shall be known as capital gains. The rate of taxation on the capital gain for the purposes of calculation shall be measured by features of the concerned security and the period of holding the same. As in the case of listed securities, normally, the holding period is more than 12 months. Thus, if a taxpayer purchases equity shares through an IPO and sells them in the same year, it shall be known as a short-term capital gain. Nevertheless, if they sell them after a year, it shall be counted as a long-term capital gain. 

Capital Gain = Sale price of security-Issue price

The tax treatment is as follows:

Holding period of security Capital Gain Applicable Tax Rate
Where the holding period for the security is more than 12 months Long-Term Capital Gain 10% above INR 1 lac under Section 112A
Where the holding period is either equal to or lesser than 12 months. Short-Term Capital Gain 15% under Section 111A  

Taxpayers considered residents under the laws governing residential status can profit by comparing their special rate income to their basic exemption limit to pay less in taxes. Therefore, if your total taxable income falls below the basic exemption level, you can apply special rate income, such as STCG under Section 111A and LTCG under Section 112A, against the gap in the basic exemption limit and pay tax only for the remaining sum. 

QEF, a listed company, announces an initial public offering (IPO). Atif receives 102 shares as part of the 2021 IPO allocation. The market price of an equity share on the day of a listing is Rs 1800, whereas the issue price is Rs 1200. Let’s consider two scenarios:

On the same day, A sold these shares. A short-term capital gain is realized upon selling shares within a year.

STCG = 102 shares X (1800 – 1200) = Rs 61,200.

Tax Liability = 15% X 61200 = Rs 9,180

Within a year, the market price of the shares reaches Rs. 2200. Now, Atif sells these shares. 

As shares are sold after 1 year of acquisition, the gain will be considered long-term. 

LTCG equals 102 shares X (2200-1800) = Rs 40,800

Tax Liability= Nil (Exempt up to 1L) 

  • Treatment of IPO Listing Loss

Long-Term Capital Loss is the loss on the sale of listed equity shares held for longer than a year. Short-term capital losses are the losses incurred upon the sale of listed equity shares held for up to 12 months. In accordance with the income tax regulations regarding the set-off and carryover of losses, STCL and LTCL could be set off only against long-term capital gains, respectively. The residual loss (STCL and LTCL) may only be carried forward for 8 years and offset against upcoming capital gains.

  • Applicable ITR form for reporting IPO Gains 

According to Schedule CG of the ITR, the taxpayer must declare capital gains from selling IPO shares. Thus, taxpayers who have received profits/gains from the sale of shares acquired through IPO listing shall be required to report their capital gain income in ITR-2 and ITR-3. Further, the taxpayer shall also be required to submit the following information- 

  • Full value of consideration, i.e., Sales Value.
  • Deductions are allowed by Section 48 of the Income Tax Act.
  • Purchase value, which represents the cost of acquisition; 
  • Transfer expenses represent the sole and entire outlay for the transfer.
  • Capital Gain on shares whether STCG/LTCG automatically computed
    • Dividend on Equity Shares and Preference Shares

‌ A dividend pay- out occurs when a company distributes its profits to its shareholders, who may hold either stock or preference shares. Up until 31 March 2020 (FY 2019–20), the dividend received from an Indian company was exempt. Due to the fact that the corporation issuing the dividend had already paid dividend distribution tax (DDT) before payment, this was the case.

However, the Finance Act of 2020 altered the method of dividend taxation. From this point forward, the investor or shareholder is responsible for paying taxes on any dividend received on or after 1 April 2020. 

Mutual funds and businesses are no longer subject to DDT responsibility. Section 115BBDA’s tax on dividends received by individuals, HUFs, and companies exceeding Rs. 10 lakhs have been abolished. 

  • Tax Treatment of Dividend Income
Dividend Taxability of Income-Tax Provisions
Dividend from Domestic Company From FY 2020–21 onward, dividend income is subject to slab rates of taxation under the heading Income from other sources. If the total dividend paid out during the financial year exceeds Rs 5000, the corporation is required under Section 194 to deduct TDS at a rate of 10%. In case the payee fails to submit his/her PAN, the company shall deduct TDS at a rate of 20%.
Dividends from Foreign Companies Such a dividend is taxed at slab rates under the heading Income from Other Sources. Furthermore, in cases where overseas dividends are received, an investor may only deduct interest costs up to a maximum of 20% of the gross dividend income. Dividends received from a foreign corporation are added to the taxpayer’s overall income and are subject to tax at the taxpayer’s rates.
  • Deduction of costs from dividend income

Moreover, interest costs incurred against the dividend are allowable under the Finance Act 2020 for up to 20% of the dividend income. However, any additional expenses, such as commission or salary costs, incurred to earn the dividend income are not eligible for a tax deduction.

  • Form 15G/15H Submission-

A resident individual receiving dividends whose projected annual income is less than the exemption limit may submit Form 15G to the corporation or mutual fund delivering the dividend. Similarly, a senior citizen who estimates their annual tax liability to be zero might file Form 15H to the organization disbursing the dividend.

In order to claim dividend income without TDS, the corporation or mutual fund must receive form 15G or form 15H from the shareholder and notify them of the dividend declaration via registered mail.

  • Advance Tax on Dividend Income 

If the total liability of a taxpayer exceeds Rs 10,000 in a particular financial year, the provisions related to advance tax shall be applicable. When an obligation related to advance tax payment is not fulfilled on time, the Income-Tax Act 1961 specifies certain interests and penalties for the default on the concerned taxpayer. 

  • Tax Implications of Bonus Issue-

Since bonus shares are generally free to shareholders and distributed to them based on a predetermined ratio on a record date, they usually do not need to pay anything in exchange for these shares. As a result, no taxes are collected when shares are allocated.

  • Taxability of Bonus Shares upon Sale 

When the investor sells the bonus shares, an LTCG at the rate of 10% and STCG at the rate of 15% will be taxed on the excess over Rs 1 lakh. The holding length for original and bonus shares must be determined separately to assess STCG/LTCG. 

For instance, on 12-7-2018, Harish bought 230 shares of a corporation at 55 rupees each. On 11.09.2019, the company distributed bonus shares in a 1:1 ratio. The corporation distributed bonus shares in a 1:1 ratio on September 11, 2019. To put it simply, this indicates that the company will issue 1 bonus share for every share owned. 

As a result, in the case above, since Harish owns 230 shares, he would also receive 230 shares as a bonus. Therefore, as of September 11,2019 he had 460 shares in total. Now, on 3-07-2020 he sold all 430 of his shares for Rs 260. In this situation, the original shares and bonus shares would be separately calculated for calculating the capital gains, as detailed below-

  • Capital Gains on the sale of the original 230 shares purchased at the price of Rs 55 each
Particulars Amount
Selling Price (230X 260) Rs 59800
Cost of Acquisition (230X55) Rs 12650
Expenses on Transfer (assumed Nil)  Nil
Capital Gains on Sale of Original Shares            Rs 7250
  • Deduction of costs from dividend income

Moreover, interest costs incurred against the dividend are allowable under the Finance Act 2020 for up to 20% of the dividend income. However, any additional expenses, such as commission or salary costs, incurred to earn the dividend income are not eligible for a tax deduction.

  • Form 15G/15H Submission-

A resident individual receiving dividends whose projected annual income is less than the exemption limit may submit Form 15G to the corporation or mutual fund delivering the dividend. Similarly, a senior citizen who estimates their annual tax liability to be zero might file Form 15H to the organization disbursing the dividend.

In order to claim dividend income without TDS, the corporation or mutual fund must receive form 15G or form 15H from the shareholder and notify them of the dividend declaration via registered mail.

  • Advance Tax on Dividend Income 

If the total liability of a taxpayer exceeds Rs 10,000 in a particular financial year, the provisions related to advance tax shall be applicable. When an obligation related to advance tax payment is not fulfilled on time, the Income-Tax Act 1961 specifies certain interests and penalties for the default on the concerned taxpayer. 

  • Tax Implications of Rights Issue of Shares

A corporation would typically issue right shares to its existing shareholders at a certain ratio on the record date, as is well known.  For instance, HEF Ltd., a publicly traded firm, announced the issuing of right shares at a price of Rs 200 or 1:5, at a market price of Rs 350. Therefore, 5 additional shares may be purchased at Rs.  200 for each share that a shareholder currently possesses. The sum paid for the relevant shares, which are exempt from taxes, is the cost of acquisition. In order to determine the acquisition’s entire cost for capital gains calculations, the taxpayer can raise the purchase price by the sum paid to acquire the rights entitlement. However, the gains from the sale of these right shares will be taxed as long-term capital gains as well as short-term capital gains over the amount of Rs. 1 lakh. It is important to keep in mind that the period of holding for original shares and right shares should be determined separately.

  • For example, Capital Gains on the Sale of 250 Shares Bought on 12-2-2020 and sold on 2-07-2023

Selling Price (250X70) = Rs 17500

Purchase Price (250X 50) = Rs12,500 Transfer Costs (assumed Nil)

(Purchased on 2-07-2023 and held for more than a year) Period of Holding= Nil

Long-Term Capital Gains on Sale of Original 250 Shares Rs 5000 Tax to be Paid at the rate of 10% Rs 500.

  • Capital Gains on sale of 100 Right Shares purchased on January 5, 2020, and sold on Feb 11, 2020

In case of a split off of a share, the date of purchase of such split shares shall be considered the same as the date of the purchase of the original shares. Hence, the capital gains for the same shall be assessed in the manner as provided below-

Selling Price (100X70) = Rs 7000

Cost of Acquisition (100X 50) = Rs 5000

Transfer costs (assumed to be Nil) = Nil

Period of Holding = Nil

(Purchased on 1/5/2020 and held for less than a year)

Capital gains made on the sale of rights shares= 7000-5000= Rs 2000

Tax Rate = As per tax slab.

  • Capital Gains Tax on the Sale of Split Shares

When a stock split is sold by the investor, the date of the purchase of the split shares shall be considered the same as the date of the purchase of the original shares. Having a stock split would result in the original and the split share an equal share in the cost of acquisition.

In case where the shares are purchased on different dates and only a portion of them has been sold then they will be assumed to have sold through the FIFO method, which implies that the shares that were purchased first will be assumed to be sold first, and the cost of acquisition for these shares will be measured for the calculation of capital gain.

Therefore, the capital gains would be determined in the manner shown below: –

Ex: On January 4, 2020, Y pays Rs 60 per share for 500 shares of a company. The corporation declares on 1/8/2021 that it has split its shares in a 1:1 ratio, meaning that for every share you already own, you will also receive one additional split share. As a result, X now owns a total of 1000 shares, which includes 500 original shares and 500 bonus shares.

  • Capital Gains on sale of 500 Split Shares issued on 9-8-2020 and sold on 1-10-2021

Y sells all 1000 shares at Rs 70 apiece on January 10, 2022. In this case, the capital gains tax would be determined as provided below-

In this case, the Cost of Acquisition would be calculated in accordance with the manner described below:

Total COA= 500 X 60 = Rs 30,000

Total number of shares post allocation of split shares= 1000

Amount to be allocated for the cost of acquiring the original and split shares = 30000/1000, or Rs 30 per share.

Taxes applicable on the sale of the original 500 shares

Selling price (500X70) = 35000

COA = (60X 30) = 18000

Costs of Transfer (assumed to be Nil)

Capital gain on sale of shares = Rs 17000

Purchased on January 10, 2022, and held for a duration of more than a year.

LTCG on the sale of the original 500 shares will be = Rs 17,000X 10% = Rs 1700

The holding period for split shares shall be considered similar to that of the original shares, and the acquisition costs would be distributed proportionally.

Selling Price (500X 70)            = Rs 35000

Cost of Acquisition – Proportioned proportionately (50X30) =         Rs 18000

Expenses on Transfer (assumed Nil) =           Nil

Period of Holding (Considered to be purchased on 9-8-2020 and hold for more than 1 year)

Capital Gains on sale of original 500 shares = Rs 17000 X 10%= Rs 1,700

Conclusion

Making the right investing choices is essential for both capital management and growth. When it comes to investing in listed securities, the correct investment instrument depends on a variety of aspects, including your investment aim, time horizon, risk-reward analysis and risk appetite, liquidity, tax incidence, and value buying. And since when it comes to making investments or trading, it is highly recommended to have the right knowledge about the applicable taxes, expenses that could be allowed as deductions, and the right time to file ITR. Whether your trading activity/investing turnover is small or large, having the right knowledge could help you to save more money and grow your wealth over time.


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