Fire your tax related queries and i would get it solved!!!
i have query , is STT can really deduct from short term capital gain tax. i have read below please check highlighted lines.
1. Due Dates: Irrespective of the nature of trades you carry out your income tax returns have to be filed before July 31 for individuals and September 30 for companies. In case your turnover exceeds Rs. 1 crore in a financial year, by turnover I mean the sum of settlement profits and losses in your trading account, then the book of accounts needs to be audited. In such cases the due date is September 30 to file your returns. 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.
***added on 8th June 2013
As per addition to section 44AD, everyone treating trading as a business will now need to have their books audited by CA. Explained at the end of the blog.
2. Tax Slabs: The slabs for individuals/HUF are as mentioned below; all persons above the age of 60 are considered as senior citizens. Upto age 60 (M/F) Age 60-80 Age 80 >
Income Range(Yr) Tax Income Range(Yr) Tax Income Range(Yr) Tax
0-2lks 0% 0-2.5lks 0 0-5lks 0
2-5lks 10% 2.5-5lks 10% 5-10lks 20%
5-10lks 20% 5-10lks 20% 10lks> 30%
10lks> 30% 10lks> 30%
These slabs are on your total income as an individual which is the sum of all your incomes, this may include salary, rental, trading profits, etc. So if I am a 35-year-old person whose net income is Rs 800,000, my income tax liability would be Rs 90,000 (0-2lks : Rs 0, 2-5lk : Rs 30,000 @10% of 300,000, 500,000-800,000: Rs 60,000 @ 20% of 300,000).
In case of companies, income tax is a flat 30% and no tax slabs exist.
Taxation while trading Stocks/F&O/Commodities
First, the most important thing to do is to take a stance on your trading before tax planning as the tax liability would change based on your activity in the markets, it is important to define your trading activity and the options are:
a. You are an investor, who buys/sells stocks once in a while and may also take a few occasional F&O trades in between, but your primary activity is not trading.
b. You are an active/professional trader and doing trading as a business.
It is your prerogative on if you call yourself as a trader or an investor, but if your are actively trading the markets, my advice would be to declare yourself as a trader.
Equity Trading:
1. Stocks that you hold as an investment for more than 1 year:
a. In Case of Profits:
As an investor, any profit you make by sale of shares that you have held for more than 1 year is considered as long-term capital gain and if this transaction is done through recognized stock exchanges for which the STT (Security Transaction Tax) is already paid, is exempt from Income tax under section 10 (38).
So what this means is that if you had bought 100 Reliance shares 2 years back at Rs 700 and sell it today at Rs 1000, you don't have to pay any tax on the profit of Rs 30,000.
Note: To prove this as long term capital gain, you can attach the contract notes for the buy/sell trades and the Demat statement which shows the credit/debit of shares, if required.
As a trader(actively trading), any income from buying and selling shares even if more than a year is considered as a business income. This gets added to your income and then taxes paid according to the above mentioned slabs . But since it is a business income you can show expenses in terms of internet, advisory charges etc, any charge that you have incurred for the business of trading and reduce your income liable to be taxed.
Long term capital gain tax for shares which are not trading on the exchanges is 20%.
b. In Case of Losses:.
If you are filing your returns as an investor, long term capital loss from shares where STT is paid cannot be adjusted against any long or short term capital gain from any source.
As a trader your long term loss is considered as a business loss and this could be set off against other business income which is explained below in the f&o section.
But if you are an investor, long term capital loss from shares where STT is paid cannot be adjusted against any long or short term capital gain from any source. But here is the catch though, if you do the same transaction without stock exchange( off the market transaction), i.e transfer of shares with demat slip, you can get your long term capital loss set off against long term capital gain of other asset.
2. Stocks that you buy and sell within 1 year (after taking delivery to your demat account):
In this case the taxation would vary based on the stance you take; if you are trading as an investor once a while or actively trading/trading like a business.
a. In case of Profits:
If you are an investor, any gain made by sale of shares through a recognized exchange is considered as a short term capital gain. Please note that it is considered short term capital gain only if you take delivery of the shares to your demat account and then sell the shares. Short term capital gain tax presently is at 15%.
If you are trading as a business/active trading, any such gain is considered as a business income. This will need to be added to your other income and you will be charged taxes based on the slabs mentioned in the table above. Yes, this could mean that you have to pay a higher tax than the 15% you pay as short term capital gain, but this is the right approach. Since it is a business income you can show business expenses to reduce the taxable income, for the business of trading some of the expenses can be broadband charges, rental charges, advisory charges, computer charges, electricity bill, professional fees, etc.
b. In case of losses:
As an investor any short term loss arising from the sale of shares can be net off against any short term capital gain or long term capital gain in the future (upto 8 years) provided you have declared the loss while filing the income tax.
If you are trading as a business/active trading, such a short term capital gain loss can be considered as a business loss and net off against any income other than salary for upto the next 8 years. What this means is that if you made a loss of Rs 100,000 doing short term trading and you made Rs 800,000 in a property transaction, your net tax liability would be only on Rs 700,000.
Basically if you make a profit, you need to pay the income tax the same year and if you make a loss you can carry forward the loss for the next 8 years and keep netting it off with any profits you make, provided you declare the losses when filing your returns.
3. Intraday/Day Trading Stocks (equity):
Any profits or losses from day trading are called Speculative; either Speculative Profits or Speculative Losses. A person doing intraday trading is automatically considered as someone who is either an active trader or trading as a business. There is no special tax rate for speculative profits, it is considered as a business income and taxed as per any other business activity.
In case of speculative losses, you can carry these forward for the next 4 years provided you have declared the same while filing your returns and net off only against any speculative profits over the next 4 years. So here is the tricky bit [Section 73(1) of the Income Tax Act, 1961], Speculative losses (day trading losses) can be netted off against only speculative profits (day trading profits) and nothing else. What this means is that if in a particular year, you have made a profit of Rs 100,000 from short term trading of stocks (delivery based trading) and a Rs 200,000 loss (from intraday trading), you cannot net it off and say I made a Rs. 100,000 loss and hence no profit. In this example, you can carry forward your speculative loss for 4 years (Rs 200,000) and pay taxes on the Rs 100,000 profit that you made.
Derivative Trading:
Derivative trading includes Futures and Options trading on the various stock, commodity and currency exchanges in India.
As long as the trading in derivatives is carried out on a recognized exchange, it is not considered as a speculative transaction like in intraday stock trading. A person trading derivatives is automatically considered as a person who is an active trader or trading as a business. In such a case any profit or loss from derivative trading is considered as "Profits and Losses of business or profession."
Any profit would be a business profit and you would have to pay taxes after adding it to your other income and according to the slabs mentioned on the table above. Because you are trading as a business, you can show business expenses and for trading it could include computer running costs, rental charges for the premises, internet costs, advisory charges, software tool charges, salary to a professional placing trades or any such expense that you could incur. Your net tax outgo will be on the business income - business expenses and as per the tax slabs mentioned in the table above.
Any loss is a business loss and this can be net off against any income other than salary either in the same year or if you file your losses in time anytime in the next 8 years. So if you made Rs 10,00,000 loss trading derivatives and Rs 20,00,000 in other income (excluding salary), your taxable income would be on Rs 20,00,000-Rs10,00,000 = Rs 10,00,000 only.
The issue of STT:
Security Transaction Tax (STT) is what we pay as taxes when trading stocks & derivatives on the stock exchanges. Back in 2004 Mr. P. Chidambaram our Finance Minister made the long term capital gain tax zero to attract investments in the country and to make up for this revenue loss to the exchequer STT was introduced.
Until the assessment year 2008-2009, STT was given as a rebate and was omitted from the assesment year 2009-2010. What this meant to traders like us was that until 2008-09, any STT paid could be deducted from our tax liability, but today paying STT gives us no such advantage. Hence the trading community has been pushing the finance ministry to reduce STT or atleast give a rebate like before.
Treatment of Brokerage, STT and Other costs
All your trading costs which includes brokerage and other costs(including STT) on the contract note is an expense for you so you can deduct it while calculating your net profitability. For example assume that you have bought 1000 shares at Rs 100 and sold them at Rs 110. If you check the Zerodha brokerage calculator you will see that all your other costs including brokerage and taxes is Rs 63.36 which is basically 0.03/share while buying and 0.03/share while selling. With the costs your average buying price becomes 100.03 and average selling price is 109.97. Your taxable profit in such a trade is not Rs 10,000 but Rs 9936(after all costs)
While calculating your net profit/losses for the year, you can add all these costs to reduce your profits(in case you have made profits in the year) or increase your losses(in case of loss during the year) so that this can be used to net off any future profits. This is similar while calculating your profits in equity, f&o, commodity and currency trading.
Which ITR Forms to use
If you are treating your trading as an investor ( you are doing long term or short term equity trading once in a while)
ITR 1 For individuals having Income from Salary and Interest
ITR 2 For individuals having Income from Salary, Interest and Rental.
If you are treating trading as a business( active trader in equity or you are an intraday equity trader or f&o trader)
ITR 4 For individuals and HUF's having income from a propreitory business or profession.
For Companies: ITR 6
1. Due Dates: Irrespective of the nature of trades you carry out your income tax returns have to be filed before July 31 for individuals and September 30 for companies. In case your turnover exceeds Rs. 1 crore in a financial year, by turnover I mean the sum of settlement profits and losses in your trading account, then the book of accounts needs to be audited. In such cases the due date is September 30 to file your returns. 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.
***added on 8th June 2013
As per addition to section 44AD, everyone treating trading as a business will now need to have their books audited by CA. Explained at the end of the blog.
2. Tax Slabs: The slabs for individuals/HUF are as mentioned below; all persons above the age of 60 are considered as senior citizens. Upto age 60 (M/F) Age 60-80 Age 80 >
Income Range(Yr) Tax Income Range(Yr) Tax Income Range(Yr) Tax
0-2lks 0% 0-2.5lks 0 0-5lks 0
2-5lks 10% 2.5-5lks 10% 5-10lks 20%
5-10lks 20% 5-10lks 20% 10lks> 30%
10lks> 30% 10lks> 30%
These slabs are on your total income as an individual which is the sum of all your incomes, this may include salary, rental, trading profits, etc. So if I am a 35-year-old person whose net income is Rs 800,000, my income tax liability would be Rs 90,000 (0-2lks : Rs 0, 2-5lk : Rs 30,000 @10% of 300,000, 500,000-800,000: Rs 60,000 @ 20% of 300,000).
In case of companies, income tax is a flat 30% and no tax slabs exist.
Taxation while trading Stocks/F&O/Commodities
First, the most important thing to do is to take a stance on your trading before tax planning as the tax liability would change based on your activity in the markets, it is important to define your trading activity and the options are:
a. You are an investor, who buys/sells stocks once in a while and may also take a few occasional F&O trades in between, but your primary activity is not trading.
b. You are an active/professional trader and doing trading as a business.
It is your prerogative on if you call yourself as a trader or an investor, but if your are actively trading the markets, my advice would be to declare yourself as a trader.
Equity Trading:
1. Stocks that you hold as an investment for more than 1 year:
a. In Case of Profits:
As an investor, any profit you make by sale of shares that you have held for more than 1 year is considered as long-term capital gain and if this transaction is done through recognized stock exchanges for which the STT (Security Transaction Tax) is already paid, is exempt from Income tax under section 10 (38).
So what this means is that if you had bought 100 Reliance shares 2 years back at Rs 700 and sell it today at Rs 1000, you don't have to pay any tax on the profit of Rs 30,000.
Note: To prove this as long term capital gain, you can attach the contract notes for the buy/sell trades and the Demat statement which shows the credit/debit of shares, if required.
As a trader(actively trading), any income from buying and selling shares even if more than a year is considered as a business income. This gets added to your income and then taxes paid according to the above mentioned slabs . But since it is a business income you can show expenses in terms of internet, advisory charges etc, any charge that you have incurred for the business of trading and reduce your income liable to be taxed.
Long term capital gain tax for shares which are not trading on the exchanges is 20%.
b. In Case of Losses:.
If you are filing your returns as an investor, long term capital loss from shares where STT is paid cannot be adjusted against any long or short term capital gain from any source.
As a trader your long term loss is considered as a business loss and this could be set off against other business income which is explained below in the f&o section.
But if you are an investor, long term capital loss from shares where STT is paid cannot be adjusted against any long or short term capital gain from any source. But here is the catch though, if you do the same transaction without stock exchange( off the market transaction), i.e transfer of shares with demat slip, you can get your long term capital loss set off against long term capital gain of other asset.
2. Stocks that you buy and sell within 1 year (after taking delivery to your demat account):
In this case the taxation would vary based on the stance you take; if you are trading as an investor once a while or actively trading/trading like a business.
a. In case of Profits:
If you are an investor, any gain made by sale of shares through a recognized exchange is considered as a short term capital gain. Please note that it is considered short term capital gain only if you take delivery of the shares to your demat account and then sell the shares. Short term capital gain tax presently is at 15%.
If you are trading as a business/active trading, any such gain is considered as a business income. This will need to be added to your other income and you will be charged taxes based on the slabs mentioned in the table above. Yes, this could mean that you have to pay a higher tax than the 15% you pay as short term capital gain, but this is the right approach. Since it is a business income you can show business expenses to reduce the taxable income, for the business of trading some of the expenses can be broadband charges, rental charges, advisory charges, computer charges, electricity bill, professional fees, etc.
b. In case of losses:
As an investor any short term loss arising from the sale of shares can be net off against any short term capital gain or long term capital gain in the future (upto 8 years) provided you have declared the loss while filing the income tax.
If you are trading as a business/active trading, such a short term capital gain loss can be considered as a business loss and net off against any income other than salary for upto the next 8 years. What this means is that if you made a loss of Rs 100,000 doing short term trading and you made Rs 800,000 in a property transaction, your net tax liability would be only on Rs 700,000.
Basically if you make a profit, you need to pay the income tax the same year and if you make a loss you can carry forward the loss for the next 8 years and keep netting it off with any profits you make, provided you declare the losses when filing your returns.
3. Intraday/Day Trading Stocks (equity):
Any profits or losses from day trading are called Speculative; either Speculative Profits or Speculative Losses. A person doing intraday trading is automatically considered as someone who is either an active trader or trading as a business. There is no special tax rate for speculative profits, it is considered as a business income and taxed as per any other business activity.
In case of speculative losses, you can carry these forward for the next 4 years provided you have declared the same while filing your returns and net off only against any speculative profits over the next 4 years. So here is the tricky bit [Section 73(1) of the Income Tax Act, 1961], Speculative losses (day trading losses) can be netted off against only speculative profits (day trading profits) and nothing else. What this means is that if in a particular year, you have made a profit of Rs 100,000 from short term trading of stocks (delivery based trading) and a Rs 200,000 loss (from intraday trading), you cannot net it off and say I made a Rs. 100,000 loss and hence no profit. In this example, you can carry forward your speculative loss for 4 years (Rs 200,000) and pay taxes on the Rs 100,000 profit that you made.
Derivative Trading:
Derivative trading includes Futures and Options trading on the various stock, commodity and currency exchanges in India.
As long as the trading in derivatives is carried out on a recognized exchange, it is not considered as a speculative transaction like in intraday stock trading. A person trading derivatives is automatically considered as a person who is an active trader or trading as a business. In such a case any profit or loss from derivative trading is considered as "Profits and Losses of business or profession."
Any profit would be a business profit and you would have to pay taxes after adding it to your other income and according to the slabs mentioned on the table above. Because you are trading as a business, you can show business expenses and for trading it could include computer running costs, rental charges for the premises, internet costs, advisory charges, software tool charges, salary to a professional placing trades or any such expense that you could incur. Your net tax outgo will be on the business income - business expenses and as per the tax slabs mentioned in the table above.
Any loss is a business loss and this can be net off against any income other than salary either in the same year or if you file your losses in time anytime in the next 8 years. So if you made Rs 10,00,000 loss trading derivatives and Rs 20,00,000 in other income (excluding salary), your taxable income would be on Rs 20,00,000-Rs10,00,000 = Rs 10,00,000 only.
The issue of STT:
Security Transaction Tax (STT) is what we pay as taxes when trading stocks & derivatives on the stock exchanges. Back in 2004 Mr. P. Chidambaram our Finance Minister made the long term capital gain tax zero to attract investments in the country and to make up for this revenue loss to the exchequer STT was introduced.
Until the assessment year 2008-2009, STT was given as a rebate and was omitted from the assesment year 2009-2010. What this meant to traders like us was that until 2008-09, any STT paid could be deducted from our tax liability, but today paying STT gives us no such advantage. Hence the trading community has been pushing the finance ministry to reduce STT or atleast give a rebate like before.
Treatment of Brokerage, STT and Other costs
All your trading costs which includes brokerage and other costs(including STT) on the contract note is an expense for you so you can deduct it while calculating your net profitability. For example assume that you have bought 1000 shares at Rs 100 and sold them at Rs 110. If you check the Zerodha brokerage calculator you will see that all your other costs including brokerage and taxes is Rs 63.36 which is basically 0.03/share while buying and 0.03/share while selling. With the costs your average buying price becomes 100.03 and average selling price is 109.97. Your taxable profit in such a trade is not Rs 10,000 but Rs 9936(after all costs)
While calculating your net profit/losses for the year, you can add all these costs to reduce your profits(in case you have made profits in the year) or increase your losses(in case of loss during the year) so that this can be used to net off any future profits. This is similar while calculating your profits in equity, f&o, commodity and currency trading.
Which ITR Forms to use
If you are treating your trading as an investor ( you are doing long term or short term equity trading once in a while)
ITR 1 For individuals having Income from Salary and Interest
ITR 2 For individuals having Income from Salary, Interest and Rental.
If you are treating trading as a business( active trader in equity or you are an intraday equity trader or f&o trader)
ITR 4 For individuals and HUF's having income from a propreitory business or profession.
For Companies: ITR 6
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