Module 7 Markets and Taxation

Chapter 3

Classifying Your Market Activity

194

3.1 – Are you a trader or investor or both?

Identifying yourself as a trader or an investor is the first step to file your income tax returns.

This may seem like an easy task, but here is what this circular from CBDT (Central board of direct taxes) says:
“If you buy shares with the intent of earning income through dividends you are an investor, and if you buy and sell shares with the intent to profit, you are a trader”:).

Yes, that is how vague it is, and this is a circular dated 2007, released after 18 years of the original circular. Numerous judicial pronouncements and government was still unable to clear this highly debatable issue. Thanks to the vagueness of this circular, it has given too much power in the hands of the assessing Income tax officer (AO) especially considering the fact that most of the stock purchases are done intending to profit from the price appreciation.

Updated 2nd March 2016

Finally the income tax department has brought in clarity in classifying yourself as a trader or an investor (equity delivery trades) through this CBDT circular.

It now says that an individual can decide on his own to either show his stock investments as capital gains or as a business income (trading) irrespective of the period of holding the listed shares and securities. Whatever is the stance once taken, the taxpayer will have to continue with the same in the subsequent years.

So before filing income tax returns, you will have to first classify yourself as an investor, trader, or both.  We will in this chapter help you figure this out in line with what most AO’s would be expecting. By income I mean both profits and losses.

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

Let us understand what each of these mean.

Long term capital gain (LTCG)

Assume you buy stocks or Mutual Funds today for Rs.50,000/- and sell the same after 365 days at Rs.55,000/-, then the profit or gain of Rs.5,000/- is considered as Long term capital gain. Generally speaking, gain or profit earned by investing into stocks or equity mutual funds, and selling after 1 year from date of purchase can be categorized under LTCG. Currently in India any gains realized and categorized as LTCG (equity & equity MF) is completely exempt from taxes. In other words, tax on LTCG is at 0%. Do note – the purchase and sale of shares has to be conducted via a recognized exchange.

Just to reemphasize – if you had bought Infosys shares worth Rs.1,00,000/- 10 years ago, and sold the same today for Rs 1 crore, you don’t have to pay any taxes on your gain or profit of Rs 99,00,000.

So, taxes on long term capital gain of Rs 99,00,000 = 0 (Zero) or exempt

If the investment and the consequent sale were done via an off-market transaction,

  • Non listed stocks – Tax on LTCG is 20% (for example purchase and sale of shares belonging to startup companies by Venture Capitalists)
  • Listed stocks – Tax on LTCG 10%

Short term capital gain (STCG)

Assume you buy listed stocks or equity oriented mutual funds today for Rs.50,000/- and sell the same within the period of 12 months, say at Rs.55,000/-, then the profit or gain of Rs.5,000/- is taxed as a Short term capital gain(STCG) .

Generally speaking, gain or profit earned by investing into stocks or equity mutual funds holding for more than 1 day (also called delivery based) and selling them within 12 months from date of purchase can be categorized under STCG.

Currently tax on STCG in India is flat 15% on the gain or profit from sale of shares or equity oriented mutual fund.

Therefore, if you buy Infosys shares worth Rs 100,000/- today and sell the same 10 days later for Rs.120,000/-, then you are liable to pay 15% on Rs 20,000 (STCG) or Rs 3000/- as taxes.

So, tax on short term capital gain = flat 15% of the gain/profit (listed stocks).

Speculative Business income

As per section 43(5) of the Income Tax Act, 1961, profits earned by trading equity or stocks for intraday or non-delivery is categorized under speculative business income.

There is no fixed rate like capital gains tax rate when you have a business income. If you have a business income, it has to be added to the rest of your other income and tax has to be paid as per the tax slab you fall in.

For example, assume for the financial year my profit from trading intraday stocks was Rs. 100,000/-, and my salary for the year was Rs.400,000/-. So my total income for the year is Rs 5,00,000, and I have to pay taxes on this as per my tax slab, Rs 25000 in this case as shown below.

SL No. Slab Taxable Amount Tax Rate Tax Amount
1 0 to Rs.250,000 2,50,000 0% Nil
2 250,000 to 5,00,000 2,50,000 10% 25000
Total Tax applicable Rs. 25,000

So the point here is that, one needs to club the speculative business income with other income source and identify the taxable amount. Once this is done, tax has to be paid based on the tax slab one belongs to.

Non – speculative Business income

Income from trading futures & options on recognized exchanges (equity, commodity, & currency) is categorized under non-speculative business income as per section 43(5) of the Income Tax Act, 1961.

Like discussed earlier, business income has no fixed tax rate, you are required to add the non- speculative business income to all your other income, and pay taxes according to the slab applicable to you.

For example, assume a trader cum hotelier earns Rs, 500,000 by trading F&O. Besides this assume he also earns Rs.20,00,000/- from his hotel business. Therefore his total income for the year is Rs 25,00,000/- (Rs.500,000 + Rs.20,00,000) and therefore his tax obligation is as follows

SL No. Slab Taxable Amount Tax Rate Tax Amount
1 0 to Rs.250,000 2,50,000 0% Nil
2 250,000 to 500,000 2,50,000 10% 25000
3 500,000 to 1,000,000 5,00,000 20% 1,00,000
4 10,00,000 to 25,00,000 15,00,000 30% 4,50,000
Total Tax applicable Rs.575,000

Effectively the business man here is paying 30% of his F&O profits as taxes.

You would be wondering why trading equity intraday is considered ‘speculative’ but trading F&O is considered ‘non speculative’?

When trading intraday there is no intention of taking delivery, and hence it is considered speculative business. F&O is defined as non-speculative by the government, maybe as they can be used for hedging and also for taking/giving delivery of the underlying contract (even though currently equity and currency derivatives in India are all cash settled, but by definition they give rise to giving/taking delivery. Certain commodity F&O contracts like gold have delivery option to it).

3.2 – Pros and cons of declaring trading as a business income

Let us look at the bright side first; here is a list of advantages of declaring trading as a business income

  1. Low tax – If the total income (trading + any other) is less than Rs.250,000/-, then there is no tax implication and if less than Rs.500,000/- effectively one has to pay less than 10% of income as tax.
  2. Claim expense – One can claim benefit of all expenses incurred for the business of trading (while for capital gains only charges on your contract note other than STT can be claimed). For example, brokerage charges, STT, other statutory taxes while trading, internet, phone, newspapers, depreciation of computers and electronics, research reports, books, advisory, etc.
  3. Offset the loss with gains – If one incurs any non-speculative F&O trading loss, this can be set-off against any income other than salary. For example, if I incur Rs 5,00,000 loss in trading F&O and my other income (like rent & interest, excluding salary) is Rs 10,00,000 , I will have to now pay tax only on Rs 5,00,000.
  4. Carry forward the F&O loss – If there is net loss any year (non-speculative F&O + any income other than salary), and if income tax returns are filed before due date, loss can be carried forward for the next 8 years. During the next 8 years, this loss can be set-off against any other business gain (non-speculative business income).For example, if you had net loss of Rs 5,00,000 this year trading F&O which was declared on time, you can carry forward this loss next year and assuming you made a profit of Rs 20,00,000 next year, you can set-off the previous year’s Rs 5,00,000 loss and pay taxes only on Rs 15,00,000.
  5. Carry forward your intraday equity loss – Any speculative or intraday equity trading loss can be set-off only against any other speculative gain (note: you cannot set-off intraday equity trading loss which is considered speculative with F&O trading which is considered non-speculative). Speculative losses can be carried forward for 4 years if the returns are filed on time.So assume an equity intraday trader makes a loss of Rs.100,000/- this year, he cannot off set this against any other business income. However, he can carry it forward to the next year (upto 4 years). Assume the next year he makes a profit of Rs.50,000/- by trading equity intraday, then in that case he can use the previous year’s Rs.100,000/- loss to offset the complete gains of this year (Rs.50,000). The balance loss of Rs.50,000/- can still be carried forward to the next 3 years. So do note, partial offset of losses is possible.

The following table summarizes the above points –

Head of income under which Loss is incurred Whether loss can be set- off within the same year Whether Losses can be carried forward and set-off in subsequent years Time limit for carry forward and set-off of losses
Under the same head Under any other Head Under the same head Under any other Head
Losses of F&O as a Trader Yes Yes Yes No 8 years
Speculation Business Yes No Yes No 4 years
Capital Gain (Short-Term) Yes No Yes No 8 years

Now, here is a set of drawbacks for declaring your business income –

  1. Potentially high taxes – If you fall under the 30% tax slab, you will effectively pay 30% of all your trading profits as taxes
  1. ITR Forms – Declaring business income would mean having to use an ITR3 (ITR 4 until 2016) or ITR 4 (ITR 4S until 2016), which would mean needing help of a CA to file your IT returns. This can be an added effort and cost especially for those salaried people who might have been using the very easy ITR 1 or ITR 2 (we will discuss more on this topic in the chapter on ITR forms)
  1. Audit – Having to maintain the book of accounts which will need to be audited if your turnover goes above Rs 2 crore  (was Rs 1 crore until FY 15/16) for a year or if your profit is less than 8% of your turnover (we will discuss more on this topic in the chapter on Turnover)

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3.3 – What are you? Trader, Investor, or Both?

Coming back to our original discussion, according to CBDT

Investor: anyone who invests with the intention of earning through dividends

Trader: anyone who buys and sells with the intention of profiting from the price rise.

As an investor, you can claim all your delivery based equity gains/profit to be capital gains. But as a trader, it becomes your business income which has its own pros and cons as discussed above.

The rule is very clear with respect to F&O trading, and intraday equity trading. F&O trading has to be considered as a non-speculative business, and intraday equity as a speculative business. So if you trade these instruments, you have to use ITR 3 for filing IT returns. So even if you are salaried, you have to compulsorily use ITR3 and declare this income (profit or loss) from trading as a business.

Unlike what most people think, losses also is recommended to be declared. Hiding trading activity on the exchange from the IT department could mean trouble, especially in case of any IT scrutiny (IT scrutiny is when the assessing income tax officer (AO) demands you to meet him and give an explanation on your IT returns). The chances of getting a call for scrutiny is higher when the IT department systems/algorithms pick up trading activity on your PAN, but the same not declared on your ITR.

For equity delivery based investments, if you are holding stocks for more than a year, you would have received some kind of dividend and even if you didn’t, you can show them all as investments and claim exemption under the long term capital gain. If you are buying and selling stocks frequently (yes it is an open statement, but there is no rule which quantifies ‘frequent’) for shorter terms, it is best to declare that as non-speculative business income instead of STCG.

Another thing to keep in mind is that if investing/trading on the markets is your only source of income, and even if your trading activity is moderate, it is best to classify income from all your equity trades as a business income instead of capital gains. On the other hand, if you are salaried or have some other business as your primary source of business, it becomes easier to show your equity trades as capital gains even if the frequency is slightly higher.

Thankfully one thing that the circular clarified was that you can be a trader and investor both at the same time. So you can have stocks meant as investment for long term, and stocks meant for shorter term trades. Just because you indulge in a lot of shorter term trades, wouldn’t necessarily convert all your longer term holdings or investments into trades and therefore bring those long term gains under business income. But it is important to clearly demarcate your trading and investment portfolio while filing returns.

Similarly, if you are trading F&O or intraday equity trading, you compulsorily have to classify yourself as a trader, but you can still show your long term investments under the capital gains head to get the benefit of LTCG being exempt from taxes.

So, you can be an investor, trader, or both, but make sure to keep the above points in mind, and do consult a chartered accountant before filing returns.

Even though this might seem confusing, rules are made for 1% of the population that is trying to break them. As long as your intent is right, you know the basic concerns of the IT department and keep those in mind while filing IT returns, it is quite simple. But stay consistent with the way you classify yourself, don’t keep switching between being an investor or trader to declare your equity short term trades.

If you follow these simple rules, let me assure you – there is no need to fear the taxman.

Before we wrap this chapter, here are some interesting links that you should read through.

CBDT circular on distinction between trades and investments.

Business Standard – Is your return from stocks capital gains or business income?

Economic Times – Are you a stock trader or an investor?

Taxguru – Income from share trading – Business or capital gain?

Moneycontrol- Investor or trader: The argument continues

Economic Times – Budget 2014 clarifies that commodity trading on recognized exchanges is non-speculative

Economic times – New data mining tool may access PAN-based information of taxpayers, help check evasion


Key takeaways from this chapter

  1. Trading F&O (Equity, currency, commodity) is considered non-speculative business
  2. Trading intraday equity is considered speculative business
  3. Equity holdings for more than 1 year is considered Long term capital gain (LTCG)
  4. Equity holdings between 1 day to 1 year with low frequency of trades is considered Short term capital gain (STCG), else in case of high frequency of trades it should be considered as non-speculative business income

 

Disclaimer – Do consult a chartered accountant (CA) before filing your returns. The content above is in the context of taxation for retail individual investors/traders only.

194 comments

  1. vishal patil says:

    Since my income was not taxable last year, I didn’t file returns. I’ll be filing returns first time this year. My question is Can I offsets gains in this year against the loss from last year, since I had not declared it last year?

    • Nithin Kamath says:

      Vishal, to carry forward loss it has to be filed within the due dates. So no, you cannot offset.

      • vishal patil says:

        Is it possible to file belated returns now.

        • Nithin Kamath says:

          Yes you can file belated returns which is advisable, but you can’t carry forward that loss.

          • Sri says:

            Hi Nithin,
            I have a similar question but bit different, I have filed the returns ontime with salary income details but have not disclosed trading losses for last 3-4 years, can I revise / rectify the returns now for those last 3-4 years and carry forward the losses to offset?

          • Nithin Kamath says:

            Sri, you can revise last two years, and since you have filed on time, so yeah you can declare the loss in the revised return and carry forward.

  2. Hi,first let me appreciate for detailed explanations provided in this article.i request you to put a snap shot of filled ITR forms for an investor,trader and both.i personally invest in delivery based equity and few i hold for more than a year and most i do positional trades plus investing in markets is my only source of income.Thanks in Advance.

  3. Kashmir singh says:

    my total income (salary+trading) profits less than 250000/ .it means I have no need to file tax return.

    • Nithin Kamath says:

      No need to file, but it is best you do. Will help you in the future to have income tax returns when applying for loans or any kind of credit.

  4. Vivek says:

    Thanks Nithin, Wonderful article.
    Would you help me in understanding if I can put Short term Equity-Delivery gains under the Capital gains head and Intraday+FnO under Business income while filing ITR4. Many Thanks.

    • Nithin Kamath says:

      Yep, that is the right way Vivek. Intraday equity trading has to be under speculative business income and F&O as a normal business income, but yes both under business income.

  5. James says:

    Hi Nithin,

    A Great initiative and an excellent tutorial. Thanks a ton for this. I love Pi by the way and I am much profitable trading options for this financial year with Pi.

    I have a question on carry forward loss.

    I am a NRI and I had filed my returns before to carry forward my F&O trading loss. The Income sources I have that are taxable are:
    1. Rental income from a flat and a shop (approx. Rs. 175,000 PA)
    2. Dividend from shares (Approx Rs. 12,500 PA)
    3. Short term F&O Trading Loss of Approx Rs. -211,000
    4. Interest on Fixed Deposits sitting in my NRE Account (Exempt from tax)

    My question is, what will be the carry forward loss in the above case? Will it be the net of 1, 2 and 3 above whice is Rs. 23,500 OR will it be the full amount of Rs. 211,000?

    Thanks so much for your time.

    • Nithin Kamath says:

      James,

      Dividend from shares is anyways exempt from taxes.

      But yes, you can netoff your rental and interest income with trading loss. So your carry forward loss would be -2.11 + 1.75 + interest on deposits

  6. Pearl says:

    what does off-market transaction mean? And what is meant by listed and non listed stocks?

    • Nithin Kamath says:

      Pearl, when you open a demat account, you also get something called a delivery instruction booklet (very similar to your cheque book that you get for a bank account). Similar to how you can transfer money using cheque book, you can transfer shares using this DIS (delivery instruction slips). This happens off the exchange, as no trade is recorded on the exchange. Hence called off-market transaction.

      Non-listed stocks are basically private companies which don’t trade on the stock exchanges.

  7. Dheeraj says:

    Thank You Sir for your wonderful effort.
    I want to ask one question.
    If I buy shares and sell with in 4-6 months ,can I show this as non-speculative business income?

    • Nithin Kamath says:

      Dheeraj, if you are not actively trading i.e buying and selling after 4 months, you can show it as short term capital gain. Business income only if you are doing this actively.

  8. Saravana Perumal says:

    Hi NIthin, I wish to thanks a lot for this wonderful effort. Good explanation about the market related taxation.

    And one doubt for me. If i trade (speculation & non-speculation) and Short term Gain/Profit though the buy & sell of stocks. then, i re-investment the whole amount (include my gain) and get profit again and so on. Should i pay the gain income tax. or The capital gain tax exempt like real estate short term reinvestment concept.

    • Nithin Kamath says:

      Saravana, Doesn’t work like real estate, you have to pay taxes on booked profits. All long term capital gain (stocks held for more than 1 year) is exempt from taxes.

      • Saravana Perumal Durai Pandiyan says:

        Thank you for your instant reply Nithin.

        “Equity holdings between 1 day to 1 year with low frequency of trades is considered Short term capital gain (STCG), else in case of high frequency of trades it should be considered as non-speculative business income”.

        One more doubt in the above statement. Equity holdings between 1 day to 1 year trading with Low frequency & High frequency means how many day or duration. Could you please explain the correct days or duration for (Low & High).

        Thanks in Advance.

        • Nithin Kamath says:

          Saravana, like I have mentioned in the chapter above, there is no such fixed number of trades to consider low or high. But a general rule to follow is that if trading is your primary business, then best to consider it as non-speculative business income. If trading is not your primary source of income, even if number of trades is a little higher, you can still show it under STCG. But best to consult your CA once.

  9. Hamid says:

    Hi,sir
    Can i take advantage for my loss in equity in all segment for my tex benifit.

  10. Tushar Sharma says:

    Thank you very much for all the informative articles. I have a few questions about filing my taxes.
    I have just started investing and trading since Feb 2015. The money (Rs 7,00,000) was given to me by my father since he wants me to get involved in trading . He is a Government employee and does not have time to trade himself.
    I have no other income since I am a student. I have incurred loss worth Rs 90,000.
    1. Which ITR form should I use?
    2. Should I show the Rs 7,00,000 that I have taken from father as my income or not? Or will it be treated as gift from family? We want to file legitimate returns and are not looking to divert my father’s funds in my name.
    3. I have no income. I made a few profitable trades but mostly losses, (net loss = Rs 90,000). Should I show this as Short Term Capital Loss or loss in business. Trading is not my business and in the future we will be making Long term investments only once I get a job.
    Thank you very much for all the hard work you are doing and the modules in Varsity have been very helpful. Thank you.

    • Nithin Kamath says:

      1. Explained in the module Tushar, it depends on what you are trading. If you are doing only equity delivery trades than ITR2, otherwise ITR4.
      2. 7lks is not your income, it is a gift and hence no tax liability.
      3. As I said, if you have done intraday equity or F&O trading, it has to be shown as a business using ITR4. Do read up all the chapters, all details you know already there.

      Also since your net income for the year is negative for the year, you no mandatory to file returns. But it is preferable.

  11. KARTHIK says:

    HI NITHIN,
    > I AM A SALARIED EMPLOYEE. MY SALARY IS RS. 4,50,000.
    > I HAD TAKEN A PERSONNEL LOAN OF RS. 5,00,000 LAST YEAR.
    > I AM DEFINITELY A TRADER NOT AN INVESTOR, AS I ONLY TRADE IN F&O.
    > I LOST THE AMOUNT DUE TO MY LACK OF KNOWLEDGE IN TRADING. BUT, I DID MAKE PROFITS FEW TIMES WHICH I NEVER MOVED OUT OF MY TRADING ACCOUNT AND BY THE END OF THE YEAR I HAD LOST THE ENTIRE AMOUNT.
    > THIS HAPPENED LAST YEAR AND I HAD NOT FILED MY RETURNS LAST YEAR. AND I HAVE LOST SOME MONEY THIS YEAR AS WELL.
    > NET IN 2 YEARS MY LOSS WOULD BE MORE THAN RS. 6,00,000/-
    > CAN I DECLARE THE LOSSES OF PREVIOUS YEAR THIS YEAR??
    > WHAT ARE THE DOCUMENTS THAT I NEED TO PROVIDE FOR FILING THE RETURNS?? AND WHERE CAN I ACCESS THEM?? ((IS IT AVAILABLE IN A SINGLE DOCUMENT AS IN A CONSOLIDATED ANNUAL REPORT OF MY LOSSES AND PROFITS OR SOMETHING SIMILAR))
    > WILL I BE ABLE TO CARRY FORWARD THE LOSSES OF MY PREVIOUS YEAR TOO IF I DECLARE FOR BOTH THE YEARS??
    >>>>>> >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>><<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<<>>>>> BEEN TRADING FOR QUITE A LONG TIME, AND ZERODHA IS SIMPLY AWESOME <<<<>>>>> THANKS A TONNE FOR THE VALUABLE INFORMATION THAT YOU’VE BEEN SHARING EVERYWHERE <<<<<

    • Nithin Kamath says:

      Karthik, what do you mean by last year. If you are talking April 2014 to March 2015, then yes of course you can declare those losses when filing returns this year. But if you are talking April 2013 to March 2015, you can still file late returns, but you won’t be able to carry forward the loss. April 2015 onwards, you need to file returns only by next september. If you are trading at Zerodha, go to tax P&L, has everything you need. Do check out the other chapters, has everything you need to know about filing returns.

  12. KARTHIK says:

    Please accept my APOLOGY for the use of CAPS. That was seriously unintentional.

  13. Sonu says:

    Hi Nithin,
    Wonderful initiative from you and the team at Zerodha. All the articles and modules have been of great help. Thank you for such thoughtful and helpful content.I have a few questions revolving around carry forward of losses.
    1.) I am a trader and had a loss of 4 lacs in F&O. I had filed it in time and since there was no other source of income, it was carried over fully. Next year I made a profit of 1.5 lacs. Now how much is to be the brought forward loss. Is it 4 lacs or is it 2.5 lacs (4-1.5). There is no other income source. 1.5 being non taxable profit, can 4 lacs be carried forward? I understand it is for a maximum of 8 years.
    2.) If profit is 3 lacs (which is in taxable bracket), then how much is to be brought forward? Is there an argument that since the full loss cannot be reduced, the 4 continues to be brought forward?
    Thanking you in advance

    • Nithin Kamath says:

      1. You can carry forward only 2.5lks (4-1.5). Yes, you can carry forward for 8 years max.
      2. If profit is 3lks, you can carry forward 1lk (4-3). Only the net loss can be carried forward. 🙂

  14. dinkar says:

    Hi Nitin
    I am a trader & I trade both in F&O & short term equity.I also have long term holding.So do I have to add my LTCG to my income & pay tax accordingly or can I declare it as a LTCG & avail the benefit of 0% tax.

    • Nithin Kamath says:

      Dinkar, like I have mentioned in the post, this is a very grey area. But yes if you are investing activity is not very frequent, you can show all of that under capital gains and get benefit of 0% tax for long term. You can show F&O as business.

  15. dinkar says:

    that mean I can declare myself as a trader & investor at the same time.

  16. sameer chandra jha says:

    sir, if i trade in F&o only then suppose if my turnover remains less than a crore and profit over 8% of my turn over but my income is below 2.5lacs and my source of income is only from trading , then will i have to file it return ?
    2. if my income is between 2.5 <income<5, then i have to as usual 10% ?

    Waiting anxiously for your reply sir .

    • Nithin Kamath says:

      1. Not mandatory to file the return if ur net income is below 2.5lks. But it is best if you did.
      2. Yes 10% of your income above 2.5lks if ur income falls between 2.5 to 5.

  17. Indra says:

    Hello Nithin, From the employers perspective is it fine if I trade in intraday and F&O and file ITR4. Why I ask is most of the companies say for the full time positions the employee should not indulge in a business activity. Also I am a central govt. public sector employee and can I trade in intraday and F&O( I know I should consult HR, but I am not getting convincing answer). Many thanks

  18. Deepika says:

    Nithin,
    Thanks for the detailed explanations. I am house wife. My husband given 10lacs rupees to do investment in stock market. And I am doing stock investment actively ( so frequently buying/selling every month). Shall I show the profit as non speculative business income?. Whether I have to show the initial source of money 10lacs also income?. My husband already paid tax for this money.And in the article you mentioned about Audit, what kind of audit I have to maintain. Currently I didn’t have any such practice. Please guide me on this

    Regards,
    Deepika

  19. Ananta Nag Sahu says:

    Sir, My query is regarding different Mutual Funds offering Monthly Income Plans, does they remit any proceedings every month may it depend on respective applicable NAV ? one more thing, often they use some terms like 1) direct & 2) SWP, what r these mean, kindly clarify.

  20. vikrant says:

    I am a daily stock market trader. i do intraday & take short term (4-5 days) deliveries also. But this time due to bad market condition, i am holding my short term position in a specific stock for more than 2 months and i have incurred heavy loss in that scrip. i have bought different quantity at different point of time at different prices
    now i find it difficult to do accounting for them and show that as my investment for long term, as i have done intraday trading in them and short term trading also. now i plan
    to keep this stock for more than 1 year.should i sell my current holding in this stock at on a given day at a price and book them as short term capital loss. and buy
    same stock at a price the very next day and keep that for more than one year to claim long term capital gain.

    Thereofore can i be a intraday trader with loss(which is to be carry forward for 4 year) and have short term capital loss(to be carry forward for 8 years)
    and also have long term stocks (to be kept for more than 12 months). secondly, in the above description, can i show shore term capital loss in this stock and long this same
    stock for long term(more than 12 month),so that i claim short term loss to be carry forward for next 8 years and benefit long term capital gain for this stock to be hold
    more than 12 month.

    Please Advice, you will be highly appreciated.

    Thanking you

    you sincerely.

  21. JAYANTHY KANAKA DURGA says:

    I HEARD THERE ARE SOME SOFTWARES THAT HELP AUTOMATIC DOWNLOAD OF CONTRACT NOTES AND THE SOFTWARE TAKES CARE OF THE REST. CAN YOU SUGGEST ONE.

    • Nithin Kamath says:

      If you are a Zerodha client, our reporting platform Q already has this feature to generate Tax P&L statements.

  22. SARAVANA PERUMAL D says:

    Hi Nithin,

    I confuse on the sentence on “irrespective of the period of holding the listed shares and securities”. it is indicate long-term capital Gain also consider as business or capital gain tax and that’s also fall on tax slab or remain 0% for (Long-term Capital Gain)

    • Nithin Kamath says:

      It means that even if you are investing very actively, you need not be worried about it being considered as a business income.

  23. Sameer Nagpal says:

    Hi Nithin,
    Given the latest circular, can we declare our trading income (less than 12 months) as business income and still have a separate portfolio for for long term holdings and make use of LTCG exemption when we eventually sell them.

    • Nithin Kamath says:

      After the new circular, yes you can. But you need to maintain separate books (tab of expenses) so there is no confusion.

  24. sangeeta says:

    Hello sir,
    In 2014, my income from salary was 3 lac and income from equity trading was RS. 91000. Will I be allowed to file return now?

  25. Unni says:

    Hi Nithin,

    I have a very basic question. I wish to classify myself as both trader and investor. I will show all my F&O and intraday activities as Business income and all equity deliveries as Long/Short term Capital Gains. Is this OK to follow this pattern?

    Secondly, If I follow the above approach, how can I divide the cumulative expense shown in “Tax P&L” report between Long Term capital gains, Short term capital gains and Business income?

    • Nithin Kamath says:

      After the latest CBDT circular, yes you can.

      You will need to divide this expense on your own. We are working on a new tax P&L which will do this, but will take some more time.

  26. Abhilash says:

    Hi Nithin Sir,
    Thanks for very nice info about TAX.
    I am a fresher in Tax related things. However, My doubt is my annual income only from F&O Trading is 6 Lakhs. So I have to pay a total of 45000 as TAX [ 25000 + 20000 ]. But my total expenses from all these
    ” Brokerage / CTT / STT Total / Service Tax / SEBI charges / Total transaction charge and etc…. ” are 50000. So what could be the state ?
    How much I have to pay ?

  27. Akaash says:

    Hi, Great article!
    I have few questions:
    1. If I am trading in F&O using my friend’s account, any tax on the business income will be paid my friend right?
    2. What if he want to give me profit share/commission post tax deduction for my perpetual help,will I also need to pay tax on this income generated? Assume that this income to me will run in several lacs per annum.

    • Nithin Kamath says:

      1. yep
      2. Any money that comes to you either has to be as income or loan. If it is an income, yeah you have to pay taxes as per the IT slabs. But whatever money you get as income, your friend can show that as an expense and hence not have to pay taxes on that.

  28. Surbhi says:

    Hi Nitin Sir, is central govt. employee allowed to do intra day trading in shares and if yes then what things to be kept in mind?

    • Nithin Kamath says:

      Check this brochure which is intended to serve as a guide.

      No Government servant shall speculate in any stock, share or other investment:
      Provided that nothing in this sub-rule shall apply to occasional investments made through stock brokers or other persons duly authorised and licensed or who have obtained a certificate of registration under the relevant law.

  29. Ankita says:

    Hi Nithin,
    i am Employee in private company and have a salary 7lpa. I have opened trading account in nov-15 , i have invested 6000 RS and started learning trading. Most of trading i have done Intraday and some delivery based also which i kept less than 4 days. I suffer loss in delivery based trading and turnover is 21000 and intraday turnover is 700.
    I wanted to know do i required to audit and record audit-book as its less than 8% of turnover, which form i have to fill for income tax return and which category is best for me as trader (Business Income), Invester (Capital Gain) or both.

    Thanks in advance.

    • Nithin Kamath says:

      Use ITR4, yeah you will need an audit because you have intraday trading where your profit is less than 8% of the turnover. Alternatively, if your intraday trading is very less, instead of showing a loss, declare a profit of 8% of the turnover and get away from need of an audit. So if your intraday turnover is Rs 1lk, show 8% as profit, which Rs 8000. The tax slab you are in, you will need to pay 20% of this as tax, or Rs 1600. This will be cheaper than going for an audit which might cost anywhere between 5k to 15k.
      Ideal way would be to get an audit done.

      • Ankita says:

        Dear Sir,
        Thank you for your reply.

        My short term capital gain turnover is 21270.10 and loss is (-) 1657.50 and intraday turnover is 475.65 with profit is 113.65 which is more than 8%.

        Can i show (-) 1657.50 under STCG and 113.65 under Business Income so i think i can avoid audit.
        Please assist me

        Thanks
        Ankita

  30. Yogesh Bharti says:

    Sir
    Pl go through Point No. 4.of the key take aways.
    you have given it as the non-speculative income
    The income from the high frequency intraday equity will be considered as speculative income.

    • Nithin Kamath says:

      All intraday equity trading has to be considered as speculative. The 4th point just talks about F&O trading.

      • Muralidhar says:

        Sir, I think Yogesh is correct here, you need to change below to speculative business income as you are talking about high frequency of trades (not Futures&Options).
        “Equity holdings between 1 day to 1 year with low frequency of trades is considered Short term capital gain (STCG), else in case of high frequency of trades it should be considered as non-speculative business income”

        • Nithin Kamath says:

          If you buy stocks for delivery and sell, since you have taken delivery it is not speculative. It is speculative when you trade without taking delivery.

          • Muralidhar says:

            Thank you sir for your reply , I got it now
            Trading Stocks Intraday – Speculative Business Income
            Trading F&Os – Non speculative Business Income
            High Frequency trading stocks – Non speculative Business Income (not STCG)

  31. Sai Kiran says:

    I am salaried person. I have not yet started investing in stocks directly(only in MF). I don’t intend to do Intraday trades. If I do Delivery based and F&O, then all the trades done through Delivery should be considered as Capital Gains(Short and Long term), whereas any F&0 trade has to declared as business income. Am I right..?
    Only issue would be with STCG, if the frequency is more and holding duration is less, then it should be considered as business income.. Am I right..?

    • Nithin Kamath says:

      Yes all F&O has to be declared as non-speculative business income.

      If you see the post above, I have given link to an updated CBDT circular from this year. It says that irrespective of how often you do delivery based trades, you can still show it as capital gains if you wish. You can also show as business income, but whatever you show, you have to continue showing it based on the same logic in the future.

  32. Manhar Kothari says:

    i was trying various website to clear my doubt about F & O and how to treat it while filing ITR. To file TR 2 or 4 .
    By reading Zerodha articles my doubt get cleared and also learn other things which has in hence my financial understanding.
    Thanks a lot for such simple and clear articles.

  33. K.Venkateswarlu says:

    The CBDT circular (2 Mar 2016) shows the following:
    “Where the assessee itself, irrespective of the period of holding the listed shares and
    securities, opts to treat them as stock-in-trade, the income arising from transfer of
    such shares/securities would be treated as its business income”.

    I understand that the assesse has the option of treading the income as business income but it doesn’t give the choice to the assesse to treat it as Capital gains. Is my understanding correct?

  34. K.Venkateswarlu says:

    The CBDT circular given in this chapter talks about “shares & securities” but in this chapter “stocks or Mutual Funds” is used in many places.
    Does this mean whatever is written in all these chapters is applicable for mutual Funds also, especially equity Mutual Funds?

  35. K.Venkateswarlu says:

    Hi Nithin,

    Following is what is written in red in the beginning of the chapter:
    “It now says that an individual can decide on his own to either show his stock investments as capital gains or as a business income (trading) irrespective of the period of holding the listed shares and securities. Whatever is the stance once taken, the taxpayer will have to continue with the same in the subsequent years”.

    Does this mean that the individual can decide to show gains from frequent(say twice a week) high volume stock trading as capital gain and maintain that stand in the future?

  36. Sai Sreedhar says:

    Hi Nithin!
    Can all expenses related to Trading be shown as part of the business expenses. Eg. The brokarage, STT & Others related to delivery based equity BUY or SELL be shown as expenses towards non-speculative business income? (while we are involved in both investing and trading)

    • Nithin Kamath says:

      Yes, all expenses while trading can be added as cost of your acquisition while calculating capital gains.

  37. Ankit says:

    Hi Nithin
    I want to know about Margin Intraday Future Trading comes in Speculative or Non-Business Speculative Income.??

  38. Gaurav Agarwal says:

    In light of the this CBDT circular can you guys please upload a sample ITR4 specially the balance sheet schedule for an investor who invests in listed securities, take delivery and sell later. Your sample ITR4 does not deal with this. Thanks

  39. Maddy says:

    Excellent article. I have a question. Is LTCG not taxable under all circumstances even for AY 2014 15?
    If I declare myself as a trader/business income person, I don’t have any salary, will my LTCG also become taxable?

    • Nithin Kamath says:

      It depends on how you declare, if you declare it as LTCG, then no tax. If you declare it as non-speculative business, then yeah u need to pay.

      • Madhavan says:

        If I submit ITR 4 , will I be still be able to declare LTCG as non taxable? I don’t have salary income. I have small intraday gains, some STCG gains and huge LTCG for AY 2014 15 ( last assessment year, not filed yet). What is the correct form for me?

        • Nithin Kamath says:

          Intraday gains can be shown only on ITR4. Yes on ITR 4 you can declare capital gains and get exemption on long term capital gains.

  40. Paurush Govadia says:

    Dear Nithin

    I am transferred by my company out of India & I am having demat account in which i am trading in F&O and also doing investment in share for short term and long term from my normal savings account but since i am transferred out of India can I continue with my this demat account and do trading in F & O and invest for short term and long term from same normal bank savings account or i will have to open new demat account and do it from my NRO or NRI account. Please advice on my query on my e-mail so that i can keep it for my future reference. What about shares lying in my demat account. E-MAIL ID : [email protected] please reply on this e-mail ID.

    Thanks & Regards

  41. Naresh says:

    Dear Nithin, You are blessed. Depth of knowledge combined with simplicity of expression is just great. Makes life simple for many.

  42. Naresh says:

    Dear Nithin, Just 2 querries or rather reconfirmations (a) Am I correct in position all mutual funds as an investor and give myself the benefit of LTCG/STCG whereas anything to do with stocks/FnO/delivery/intraday etc. under business head ? (b) Is STT to be treated as a business expenses ? Thanks

  43. mvhemanth says:

    Pls move this new comment box to the top
    Pls darken the text colours…. Light grey is very difficult to read….. a minor alteration in the css file should do it

  44. Arun says:

    Dear Nithin
    Suppose I do 500 trades a year including these (Equity intraday, equity delivery and F&O). I don’t have any other source of income. Now if I come under 30% tax slab, and acc. to the new CBDT circular…
    1.) I can show this income either as ‘Business’ or ‘STCG’…Right?
    2.) And does it mean that I can not change my instance (whether Business or STCG) ever in future once taken? Or can we change this stance after 3-4 years?
    3.) What instance would you prefer should I take?
    4.) Whatever instance I choose…my LTCG is not disturbed (i.e. I have to pay no tax on this)… Right?

    • Arun says:

      Or Equity Intraday and F&O can not come under STCG and compulsorily have to be shown as business income?

    • Arun says:

      Basically the main confusion is can I show certain part of my delivery trades as STCG or not?

    • Nithin Kamath says:

      1. Only equity delivery you have an option to show as either STCG or business. Equity intraday is speculative business, F&O is business compulsorily.
      2. You can’t change the stance with similar activity. But if your activity reduces, you should be able to.
      3. You will have to decide.
      4. If you are showing them as capital gains, yep, doesn’t get disturbed.

  45. Ranjeet says:

    Zerodha has clearly wiped out my doubts. Thanks a lot.
    Now, a big confusion is that as I have already filed my return for FY2015-16 and also claimed refund of excess of tax while filing ITR2. Since, I am a trader with salaried income these speculative and non-speculative subject made me to think whether I should refile my tax return under ITR4.
    Pls Guide me whether I should refile ITR4 (Note: Ihave already filed ITR2).

  46. Sibin says:

    Hi Nithin,
    
I am working in a software company and have a salary 6 LPA as CTC and paid tax of Rs 13000 for FY-2015-16. I have opened Demat & trading account in Sept 2015. My primary aim is to invest for long term. But I have done some short term investments.

    As per EQ tax P&L breakdown – FY-15/16 of Q backend, for me there is:-

    Short-Term Turnover = Rs 11,544
    Short Term Profit = Rs 379

    No of total Short term trades = 8

    Total Charges = 97.85
    DP Charges = Rs -114.8
    
My queries are:-
    1. Do I need to pay any tax for this?
    2. Is an auditing required in my case?
    3. Which ITR form I have to use for e-filing?
    4. My company has filed ITR-1 already for me but not e-verified yet. If in case ITR-1 is not the right one, then can I re-file it?

    Please help me. Thanks in advance.

    • Nithin Kamath says:

      1. On the net profit (after reducing all charges), you will have to pay 15%.
      2. No
      3. ITR2, you will have to show this as short term capital gains.
      4. Yes you can refile.

      • Sibin says:

        Thanks a lot for your valuable help.

        Nithin, out of the 8 Short term trades mentioned above, one stock I have purchased in CNC and sold the next day. Will it make any difference in taxation you have mentioned(tax %, ITR ,audit requirement)? I am a newbie in market so little confused. Please help.

  47. All I learned from here that to be very successful in life, one must wake up early in the morning as Nithin does.

  48. Sri says:

    I have filed the returns in time with salary income but didn’t give F&O losses for last 3 years (FY2012-13, FY2013-14, FY2014-15), can I revise / rectify the returns now for those last 3 years and carry forward the losses to offset?

    • Nithin Kamath says:

      Sri, you can revise for FY 14/15, and since you have filed on time, so yeah you can declare the loss in the revised return and carry forward.

      • Sri says:

        Hi Nithin, When you say FY 14/15, you mean 2 financial years FY 2013-14 and FY 2014-15 or only for FY 2014-15? Please confirm

        • Nithin Kamath says:

          only FY 14/15

          • Sri says:

            Ok Thanks Nitin,
            1. earlier you had mentioned 2 years, so I was asking, as per this I can do for only one year FY 2014-15 and FY 2015-16 is till open till end of Sep, so only these 2 years I can do?
            2. During FY15, I had earned bank interest, now that I will show F&O losses in revision, as per details provided above I can club interest earned in to F&O losses (business income), will I be eligible to get the refund on tax paid on interest income?

          • Nithin Kamath says:

            1. You can only revise for FY 14/15 and FY 15/16.
            2. Yes you can revise and request for a refund.

  49. Sri says:

    You are a great help Nithin but I have more questions 🙂
    FY 2012-13, FY 2013-14 I have filed ontime with Salary income but didn’t include F&O losses as mentioned earlier, if I rectify / revise for these years, I know I can’t carry forward the losses as you mentioned earlier but can I club bank interest earned during each year with F&O losses (as a business income) and claim for tax refund? Or even refund is not possible coz they are more than 2 years old?

    • Nithin Kamath says:

      Sri, for those years you cannot revise/rectify. There is a deadline upto which you are allowed to rectify/revise.

      Cheers,

  50. Sarath Chandra says:

    Hi Nithin,
    Is a partnership firm/private limited company deriving income from stock market, also allowed to choose to be a trader, investor or both? Or should these entities necessarily declare their income as business income?

  51. Amit says:

    Dear Sir,

    I look forward for your valuable advice. My query is little long.

    In FY 2014-15, I had loss about 5 lakhs from indtraday share trading (No delivery of equity share in demat A/C). Other than that my total income (Salary + Bank Interest) is below Rs. 1 lakh. I consulted a CA and he put this under Short Term Capital Loss in ITR4 form to be carry forward.
    However now I came to know that this must be under speculative loss.
    Was my ITR filling incorrect ? Does speculative loss require book keeping and auditing?

    I have received IT notice for Limited Scrutiny for security transactions. How should I deal with it?

    In the FY 2015-16, I had profit of Rs. 900 from indtraday share trading. Other than that my total income is around Rs. 5 Lakhs. I filled the ITR4 for this year as well but I have not shown this Rs. 900 profit as I am not sure where to add this income and also I have not transferred this profit from my DEMAT account to my bank account. Is this comes under tax liability even if you have not transferred your profit from your DEMAT to bank A/C?

    Does my this year intraday trading require book keeping and auditing?

    Thanks for your help, Sir.

    • Nithin Kamath says:

      ITR 4 is correct, but yes it should have been speculative loss. Audit/book keeping requirement is if your turnover is more than 1 crore or profit less than 8% of turnover (check the chapter on turnover). If your turnover was below 1crore, no audit was required in your case in 2014/15.
      Ideally you should have showed this profit in your ITR4 for 2015/16. It doesn’t matter if you have withdrawn it to your bank or not. You can revise your return even now. Audit requirement is again based on your turnover.

  52. Suryakant says:

    Dear Sir,
    Thank you so much for excellent and crisp article, I have one question, I am salaried employee and primary income is salary.
    I invest for short term and long term delivery based stocks.
    (1) I bought 100 ITC may 2016 , and 100 FIEM shares in June 2016 and they are in my demat account .
    (2) On 29th Sept ( Surgical strike by India) I sell 100 ITC and 100 FIEM shares , and after that ( on same day ) market goes down and I bou those shares back again same day.

    This is treated as day trading on 29th Sept ? or I shall calculate profit as Profit = Purchase price ( as in May/Jine ) – Sale Price on 29th Sept.
    and new holding starting on 29th Sept. And these being LTCG / STCG.

    Kindly clarify.
    Thanks for your time , apreciate it.

    • Nithin Kamath says:

      If you sold shares in a fear of price eroding and you bought this back and that too as a one off incident, you can consider this as capital gains itself. If you show this as an intraday trade, you will be required to use ITR4.

  53. Ram says:

    Hi,

    My friend got loss of 4 lakhs… Is it mandatory to show that loss. He thought it was not required to file ITR. He got scrutiny notice.
    What he has to do now ? He traded intra day and so the buy and sell value was in crores but since he got loss he never thought that he had to show that loss in ITR. Please explain in detail about this situation so that many will understand…

    • Nithin Kamath says:

      Ram, go through the entire module, has explanation.Now that you have received notice, you will have to explain to the income tax officer that you didn’t declare because there was no tax to pay and you had a loss.

  54. Chirag says:

    Hi Sir,

    I am salary employ and do trading in commodity segment. In FY15-16 salary income was 5 lakh but loss in Trading 2.5 lakh
    Now my query is given below

    1. should i need to show loss in ITR even do not want carry or take benefit from future income from same head.
    2. what will happen if not show loss in ITR and IT AO can take any action regarding this. I have read mutiple post but anywhere not mention what happen if not shown loss in ITR.
    3. if it is must to show in ITR, can i fill ITR 4 and declare profit more than 8% to avoid audit treatment

    Please guide me on quey.

  55. Karthik Rangappa says:

    Sorry, no stock tips here 🙂

  56. Neeraj says:

    Hi,
    I am having taxable income ( salary + trading) less than Rs 2,50,000, I did intraday as well as delivery trading and did not file any ITR. Do i need to? and I intend to classify myself as investor not trader but I have already did many interaday trading from Jan 2016 to Sep 2016 (without any ITR). Do I need to as my income is less than Rs 2,50,000.

    Thanks and Regards
    Neeraj Patel.

  57. Bhavana says:

    Thanks a lot for this elaborate article. I have been for this since some time and most of my doubts have already been clarified here.

    I have a question on claiming expenses such as (Telephone, Laptop, electricity etc.,). As I am a housewife and all the bills are in my husbands name (because he owns the house) Is it possible to claim those expenses? Or is it mandatory to have in my name to be able to claim it?

    • Nithin Kamath says:

      I am guessing your husband is not already claiming those expenses, if he isn’t you definitely can. As long as you are using them for the business of your trading.

      Cheers,

      • Bhavana says:

        Thanks for taking time to respond. Yes, He isnt claiming those expenses. All the bills are directed to him as he owns the place.

        Correcting typo above: I have been looking* for this since some time and most of my doubts have already been clarified here.

        Very nice article indeed.

  58. Swami says:

    First time I have read an article which is so clear and compact about Taxation in Trading. Thank you so much. Just one question. If you are an active trader, trading in equity and futures, both intraday and delivery and your total income is below the taxable income, do you still have to file income tax return.

  59. Avadhoot says:

    Can I show investment in stocks under 80 c?

  60. Yogesh Bharti says:

    Sir
    In key takeaway point 4
    You write non speculative where as it should be speculative income

  61. Sudipta says:

    Hi Nithin,
    This is a great article. Thanks for all your help to clarify the rules & the process. I have few basic questions here.
    1. I understand that we need to declare ourselves as Investor or Trader or both. In my case it will be both since I have long term investments as well as F&O. But my question is, where do we declare it ? Is it somewhere in my ITR file, or is it somewhere in my profile created under incometax govt site, or is it to be done by my broker ? Please clarify.
    2. I am trading through 2 brokers – one is obviously Zerodha, another is ICICIDirect. It is a different topic why I am maintaining 2 different accounts, but here my question is – what is the consequences of a mismatch of my “activity type” in these 2 accounts ? To explain it better: I am doing mostly investment activities in ICICI. And in Zerodha I am doing mostly F&O and few short term trades. So I am an Investor in ICICIDirect and I am a trader in Zerodha. So how do I declare myself (once I know an answer to Qs 1) ? I guess I have to select the option “Both” but is it really available as an option ? Or do I declare myself as Investor in ICICIDirect and as Trader in Zerodha – which will inherently give me a status of “Both” ? Please throw some light how I should classify myself. Of course I want to take the zero tax benefit on my LTCG, so cannot show that as business income. I have always shown that as LTCG in previous years (but I did not do F&O trading earlier).
    3. How do we make a swicth.. I mean what is the process ? I know that we should not make a change. But in case I find out that my “declaration” at present is not correct somewhere, I have to change it at least once to rectify it. Is it allowed and what is the process ?

    Thanks a lot in advance.

    • Nithin Kamath says:

      1. There is nothing like declaring. You use an ITR 4 and show all F&O under business income and equity investments under capital gains.
      2. Ah, doesn’t matter how many accounts you have. You just just file ITR4 like I mentioned above. Combine all capital gains and show as one on ITR4.
      3. There is no status as such to switch, just start using an ITR4 from this year. That’s it.

  62. nishigandha says:

    Hi Nithin,
    As you said earlier non – speculative business gains(profits) can be offset with any other business income or rental income or interest on deposits
    Speculative business gains (profits) can be offset with only other speculative gains. My question is there any such source of income( apart from intraday trading) available that will generate speculative gains(profits) or to offset speculative business gains, i need to generate intraday trading profit and then only I can offset.
    Regards,
    Nishigandha

  63. Rakesh says:

    Have filed returns but not included trades in the last 4 returns filed. would it be possible to file belated returns for all these earlier years? if yes, what is the penalty for late filing.

    • Nithin Kamath says:

      You can revise a return within one year of filing provided it’s filed within due dates. So you can revise only for FY 2015-16. Penalty would essentially mean paying the tax that might have gotten evaded with interest rate. If there is a loss, nothing.

  64. Sai Sreedhar says:

    Hi Nithin

    Can we offset the losses in F&O partially in the current year, and carry forward part losses to the next year when we believe we can make correct use it based on the slabs.

    • Nithin Kamath says:

      Yes, you can.

      • Sai Sreedhar says:

        Thanks for clarifying Nithin! Do we have to pay the adjusted amount of tax before 31st March of the current year, or do we get time to do our calculations and pay the adjusted tax along with the last date of filing returns (31st July)?

        • Nithin Kamath says:

          You get time till 31st July

          • Sai Sreedhar says:

            Hi Nithin,
            If I have 10Lakhs profit and 9Lakhs as the loss, can I record 7.5L as Profit for the current financial year [after adjusting 2.5L from losses to current financial year] and set off remaining 6.5L loss to next financial year?
            My CA says as per Section – 72, Income-tax Act, 1961-2016, we can only set off the net loss (supposing we have more loss than profit for a year) to the next financial year!

          • Nithin Kamath says:

            Yes your CA is correct.

  65. Shankar says:

    I have borrowed money from family and friends upto Rs20 lakhs, I have used that money to Trade in the Nifty Options(Intraday), now for about 6 months I have Traded in a discipline way and made about 30%(Rs 6,00,000) returns, I had agreed to share Half of the Profits that I make with the people from who I borrowed the money.

    1.) Now Should I pay taxes from my account for all the 6lakhs or should I pay it only for 3lakhs which is 50% of the profit generated.
    2.) If I pay Taxes for all the 6 lakhs, which is around Rs 45000, and transfer half of the remaining amount to my lenders (either online or by cheque) will they be exempt from the Taxation for this income, If yes, what forms should I use to show this legally.
    3.) If I pay Taxes for only 3 Lakhs, and transfer the remaining amount to them, what forms should they use to show this as income from trading F&O, (because it will not be traded in any of their accounts)

    Thanks in Advance

    • Nithin Kamath says:

      1. When you are giving back 3lks, show it as interest you have paid for the loan taken. You will need to pay tax only on the remaining 3lks.
      2. They will be exempt from taxes only if they show this as return of their original capital. If they show it as profits/interest earning, they will need to pay taxes. Best to do as in point 1.
      3. They can’t show this as trading F&O income, they can show it as interest income.

      Btw, borrowing/pooling money to trade markets is a grey area in terms of compliance.

  66. renuka hardasani says:

    prepared in short the effective points from your chapter
    TAXATION SHARE MARKET

    Circular No.6/2016 Government of India Ministry of Finance Department of Revenue Central Board of Direct
    Taxes North Block, New Delhi, the 29t h of February, 2016
    Sub: Issue of taxability of surplus on sale of shares and securities – Capital Gains or Business Income – Instructions in order to reduce litigation – reg.-
    So before filing income tax returns,
    you will have to first classify yourself
    as an investor, trader, or both.
    When trading or investing you need to classify your income
    1- Long term capital gain (LTCG)
    *
    Assume you buy stocks or Mutual Funds today for Rs.50,000/-
    and sell the same after 365 days at Rs.55,000/-,
    then the profit or gain of Rs.5,000/- is considered
    as Long term capital gain
    tax on LTCG is at 0%.
    Do note – the purchase and sale of shares
    has to be conducted via a recognized exchange.

    If the investment and the consequent sale were done
    via an off-market transaction,

    Non listed stocks –
    Tax on LTCG is 20%
    (for example purchase and sale of shares belonging to
    startup companies by Venture Capitalists)
    Listed stocks – Tax on LTCG 10%

    Short term capital gain (STCG)
    **
    Assume you buy today,
    listed stocks or equity oriented mutual funds
    for Rs.50,000/-
    and sell the same within the period of 12 months,
    say at Rs.55,000/-,
    then the profit or gain of Rs.5,000/-
    is taxed as a Short term capital gain(STCG) .
    Generally speaking, gain or profit earned
    by investing into stocks or equity mutual funds
    holding for more than 1 day (also called delivery based)
    and selling them within 12 months from date of purchase can be categorized under STCG.
    Currently tax on STCG in India is
    flat 15% on the profit
    3- Speculative business income
    As per section 43(5) of the Income Tax Act, 1961,
    profits earned by trading
    equity or stocks for intraday or non-delivery
    is categorized under speculative business income.
    THERE IS NO FIX RATE TAX AND SO
    TAX HAS TO BE PAID, AS TAX SLAB
    For example, for the financial year
    my profit from trading intraday stocks was Rs. 100,000/-,
    and my salary for the year was Rs.400,000/-.
    So my total income for the year is Rs 5,00,000,
    and I have to pay taxes on this as per my tax slab

    3- Non-speculative business income
    Income from trading futures & options on recognized exchanges
    (equity, commodity, & currency)
    is categorized under non-speculative business income
    as per section 43(5) of the Income Tax Act, 1961.
    It has no fixed tax rate, you are required to add
    the non- speculative business income to
    all your other income, and pay taxes
    according to the slab applicable to you.

    Pros and cons of declaring trading as a business income
    Here is a list of advantages of declaring
    trading as a business income:
    1-Low tax –
    If the total income (trading + any other) is less than Rs.250,000/-,
    then there is no tax implication
    and if less than Rs.500,000/- effectively
    one has to pay less than 10% of income as tax.

    2- Claim expense –
    One can claim benefit of all expenses incurred
    for the business of trading
    (while for capital gains only charges on your contract note
    ****************************
    other than STT can be claimed).
    ****************************
    For example, brokerage charges, STT, other statutory taxes
    while trading, internet, phone, newspapers, depreciation of computers
    and electronics, research reports, books, advisory, etc.

    3- Offset the loss with gains –
    If one incurs any non-speculative F&O trading loss,
    this can be set-off against any income other than salary.
    For example, if I incur Rs 5,00,000 loss in trading F&O
    and my other income (like rent & interest, excluding salary) is Rs 10,00,000 ,
    I will have to now pay tax only on Rs 5,00,000.
    4- Carry forward the F&O loss –
    If there is net loss any year
    (non-speculative F&O + any income other than salary),
    and if income tax returns are filed before due date,
    loss can be carried forward for
    the next 8 years.
    During the next 8 years, this loss can be set-off
    against any other business gain
    (non-speculative business income).
    For example, if you had net loss of Rs 5,00,000
    this year trading F&O which was declared on time,
    you can carry forward this loss next year
    and assuming you made a profit of Rs 20,00,000 next year,
    you can set-off the previous year’s Rs 5,00,000 loss
    and pay taxes only on Rs 15,00,000.

    5- Carry forward your intraday equity loss –
    Any speculative or intraday equity trading loss
    can be set-off only against any other speculative gain
    (note: you cannot set-off intraday equity trading loss
    which is considered speculative
    with F&O trading which is considered non-speculative). S
    peculative losses can be carried forward
    for 4 years if the returns are filed on time.
    So assume an equity intraday trader makes a loss of Rs.100,000/-
    this year, he cannot off set this against any other business income.
    However, he can carry it forward to the next year (upto 4 years).
    Assume the next year he makes a profit of Rs.50,000/-
    by trading equity intraday, then in that case
    he can use the previous year’s Rs.100,000/- loss
    to offset the complete gains of this year (Rs.50,000).
    The balance loss of Rs.50,000/-
    can still be carried forward to the next 3 years.
    So do note, partial offset of losses is possible.

    Now, here is a set of drawbacks for declaring your business income –
    Potentially high taxes –
    1- If you fall under the 30% tax slab,
    you will effectively pay 30% of all your trading profits as taxes

    2- ITR Forms – Declaring business income would mean
    having to use an ITR4 or 4S, which would mean
    needing help of a CA to file your IT returns.
    This can be an added effort and cost especially
    for those salaried people who might have been using
    the very easy ITR 1 or ITR 2

    3- Audit – Having to maintain the book of accounts
    which will need to be audited
    if your turnover goes above Rs 2 crore
    (was Rs 1 crore until FY 15/16)
    for a year or if your profit is less than 8% of your turnover

  67. AYUSH GANGWAR says:

    Dear,
    Please clarify the taxable income in the scenario given as below :
    1. I earned Rs 3,00,000 as income through professional service.
    2. I also earned STCG of Rs 5,00,000 .
    3. I made loss of Rs 15000 in intraday trading.
    Now in this case should I proceed as given below :
    Total income = 300000+500000-15000 = 785000.
    Suppose I have deposited 150000 in PPF to save tax.
    Net taxable income will be =785000-150000= 635000.
    Now tax is exempted for Rs 2,50000.
    Net Taxable income = 635000-250000=385000
    Tax @ 10% for 250000 = 25000 and tax @ 20% for 185000 = 37000. Total tax payable = 25000+37000= 62000
    OR tax calculation should be :
    Total income from professional services and intraday trading = 300000-15000 = 285000.
    PPF Investment = 150000. Net Income after PPF investment = 285000-150000= 135000 ( Less than threshold of taxable income limit of Rs 250000). Nil Income tax but
    For STCG of Rs 500000 = Net tax payable @ 15% = 75000.
    Please clarify ??

    • Nithin Kamath says:

      Intraday trading is speculative business, so that has to be carried forward, can’t set it off against your professional income or STCG. You can carry forward this intraday loss to next year.
      How the rest will work is, you reduce 1.5lks (PPF) from your total income 8lks (3+5). You are left with 6.5.
      In this 6.5, the first 2.5 there is no tax. You are left with 4.

      This 4lks will be charged a flat 15% = Rs 60,000

      So Rs 60000 and Rs 15000 of carry forward intraday loss to next year.

  68. Naresh says:

    Dear Nitin , You have mentioned that you can indicate part of your portfolio for trading purpose and part of your portfolio as long term holding while declaring yourself as a trader. Just to understand you correctly, are you implying that some stocks which I intend to hold for long term against some which I intend to trade short term ? Can you please confirm. Additionally, does the same logic apply if you trade some bonds through Zerodha and do I have the freedom of treating some of them as short term and some for long term ? Thanks

  69. Sibin says:

    Hi Nithin,

    I have salary of above 7 lacs and I do invest and hold stocks for long term and occasionally do some short term trades also.

    As per Zerodha tax P&L breakdown – FY-16/17 from Q backend, for me there is:-

    Intra-day / Speculative profit = -50.85
    Intra-day / Speculative turnover = 50.85
    Short-term profit = -1978.55
    Short-term turnover = 27304.20
    Long-term profit = -370.50
    Long-term turnover = 903.50

    No of trades done (Sold during FY 16-17) are:-

    Intra day trades = 2
    Short term trades = 9
    Long term trades = 1

    My queries are:-
    1. Do I need to pay any tax for this?
    2. Which ITR form I have to use for e-filing?
    3. Is an auditing required in my case? If yes, can I show profit of 8% of turnover and pay 15% tax on that to avoid tax audit?
    4. Is it required to show my stock purchases that are not sold yet in the tax filing time?

    Please help me. Thanks in advance.

    • Nithin Kamath says:

      1. No profits, so no tax.
      2. ITR 2 (you have intraday, but since it is so little, you can maybe show this as short term itself. Best to speak to a CA).
      3. If you use ITR2, no audit. But if you show intraday as speculative business, yeah audit needed.
      4. Best to show it.

      • Sibin says:

        Thank You Nithin for valuable response. I will speak to CA about intraday trades.

        Just to understand better, audit requirement when profit is below 8% of turnover is only applicable to intraday and F&O trading and not applicable for short term and long term delivery based transactions? Am i right?

  70. Rajiv says:

    Hii Sir, I am planning to show STCG as Non-speculative business income. Trading is only source of income for me. Zerodha provides me with combined charges for both INTRA-Day and STCG in one excel sheet (TAX P&L Report). If I have to show STCG as a non-speculative business income then how can I separate the charges from the combined one. Please clarify. Thank you.

    • Nithin Kamath says:

      Rajiv, we are working on the new tax P&L which will show this. Until then you will have to manually separate out these charges.

  71. Madhav says:

    Hello
    Very informative article indeed.
    I would like to know that whether central government employees are allowed or not to do share trading.
    I am a central government employee and confused as I am not able to find reliable information. Kindly help me in this regard.

  72. Nagaraj S says:

    Hello Sir…

    My sister had shares worth around 4 lacs in her Demat a/c in BOI….She had bought them around 10 years back. She transferred those shares to my Zerodha Account and I Sold them for her 2 days back, all the 4 lacs worth shares…So now how much tax should I pay for that…Kindly educate on this…Thanks.

    • Nithin Kamath says:

      This can be shown as a gift to you and if your sister had paid STT when she bought the shares 10 years back, there is no tax in your hands as the gain is all long term capital gain.

  73. Sudipta says:

    Hi Nithin,
    I am a regular trader in Zerodha. I have LTCG, STCG and FnO trading activities. I need your help with respect to the following suggestion you made: “you can have stocks meant as investment for long term, and stocks meant for shorter term trades. Just because you indulge in a lot of shorter term trades, wouldn’t necessarily convert all your longer term holdings or investments into trades and therefore bring those long term gains under business income. But it is important to clearly demarcate your trading and investment portfolio while filing returns.”

    I understand this and I want to apply this for my taxation because I want to show my STCG as Business Income, without impacting the zero tax on my LTCG. But the CA who is working on my case (mine is Audit case, hence I had to take a CA) is of the opinion that I can either show the capital gains as LTCG-STCG, or I have to show both of them as business income. He said, the moment I show the STCG as business income, it will convert the LTCG also into business income. I have told him about your article, and he happens to know you as well. But he categorically mentioned that the concept which you explained is wrong. Now I am in a fix. I have already paid 50% of his fees as advance and I cannot come out without forfeiting my money. Moreover, it is very difficult to find a CA who even understands these terms. At least this CA understands it clearly although he has a different opinion.

    I have told him about the circular but in vain. Can you please help me how I should handle it ? I do I convince him ? Can you refer any CA who agrees to your concept, and may be I can have my CA speak to that CA. I will have to incur huge tax if my LTCG is shown as business income. On the other hand, I can save good amount of tax if STCG is shown as business income because then I will remain under Rs. 2.5 lakh slab, hence zero tax on short term trades.

    Thanks in advance,
    Sudipta.

    • Nithin Kamath says:

      Sudipta, hmm.. The loophole here is that we can show all stocks held for over 1 year as LTCG to get tax exemption and those lesser where you made a loss as business loss. This essentially is a way to cause a loss to exchequer. I know CA’s who avoid taking this route, but I also know a lot of our clients who do and haven’t had an issue. Deciding on declaring your business as trading or capital gains just to benefit the way you are saying, is not advisable. Best to declare as STCG itself.

      Btw, if your total income is below 2.5lks, STCG doesn’t apply. You wouldn’t need to pay the 15%.

  74. nishu says:

    Respected Sir,

    i am government servant, and i do trading since last 10 years, in intraday, deliverybase, marginplus intraday, option trading, when i calculate my purchase price & sell price i have to count all expense related to brokerage with STT or all expense related to brokerage without STT………. i mean when count profit or loss STT is count with brokerage or not? please guide me……..

    • Nithin Kamath says:

      You need to exclude STT if you are calculating for capital gains (delivery based). For business income, (intraday) you can include.

  75. Sukku says:

    Sir I’m a PSU bank employee and I did intraday trading for about one month and recently I came to know that central government employees can’t do speculative trading that is intraday…kindly guide me whether to stop it or carry on it..

  76. Ankur says:

    Can Intraday trading (Equity) profit be declared as Short Term Capital Gains or do I need to declare it as Speculative Business Income ?

  77. Divya says:

    Hi Sir,

    I invest in shares for both long term and do short term trading as well – short term trades are all delivery based. ie I buy shares and hold them for 2-3 months and then sell them.No intraday or F&O activity.Till 2015 I used to do only long term trades and it is only since last year that I have started doing short term trading. Hence I am bit confused on how to show the profit/loss in ITR.

    I am aware that I need to fill ITR2 based on my trading activity. For short term trades, I kept reinvesting the original amount+profit in the same stock.Eg in stock A,I invested 30000,after 3 months I sold it earning profit of 5000.Then I reinvested the same 35000 again in the same stock and earned 4000 profit.Then third time I reinvested the 39000 in same stock and made profit of 3000.I keep following same pattern for other stocks as well.

    My query is – while declaring STCG,we have to mention invested amount and profit.So do I mention it as follows:
    1. Investment – 30000 and profit – 12k or
    2. Investment – 30k+35k+39k and profit – 12k

    Please clarify

    • Nithin Kamath says:

      On the ITR you need to mention total buying value and total selling value. STCG automatically gets calculated. So total buying value : 30+35+39, calculate total selling value similarly.

      • divya says:

        Thankyou Sir for your response.

        1. So in my case, I would have to fill the details as below,correct:

        Full value of consideration 35+39+40 = 114000
        Cost of acquisition without indexation = 30+35+39 = 104000
        Profit = 10000

        2. In addition,(this is just for my info) – if I had made a loss of 3000,then this needs to be updated in CFL section – under assessment year 2016-2017?

        3. Apart from these 2,is there any other details I need to mention regarding STCG in ITR?

  78. Pallavi Nene says:

    Dear Nithin,

    i am a house wife. There is no income other than interest on saving account, FD and capital gains from trading. Last year, the trading was started in Delivery based, Intra day and F&O.

    If you consider total turnover in F&O, it is 5.96 lacs and a loss of 1.12 lacs, whereas in Intraday, the turnover is 0.81 lacs and a loss of 67K. The turnover in Short term is 13.24 lacs and profit of 0.75 lacs.

    Considering that I DO NOT have a business set up where I can show expenses on rent or telephone bill or staff etc, what ITR return form should I use to book the loss?

    If it is ITR3, I do not have balance sheet or profit/loss statement with me as I do not have business set up.

    it will be great if you can clarify the same

    Warm regards,
    Pallavi Nene

    • Nithin Kamath says:

      It is ITR3. You don’t need to be a business setup to have a balance sheet. It is quite simple for anyone to make a personal balance sheet.

  79. ABS says:

    Dear Sir, i am a private employee and a regular trader and trades in F&O mostly in zerodha (intraday as well as BTST), i have even done some Short term equity trading, how to proceed with tax filing..which ITR to consider am i required to fill ITR 4 ? or can i go ahead and file returns thru Clear tax website with addition of F&O in same STCG column please guide sir.
    one more thing wanted to ask volue of trading activity (turnover) would be considered how in case of F&O trades like margins used or whole lot value ?

    • Nithin Kamath says:

      ITR3. Go through all the chapters, I have explained in detail on how to calculate turnover and everything.

  80. Shah says:

    Hello sir!

    I am filling my returns for the first time this year, and I’ve been trading since 2014.
    Since my income was not taxable and turnover was less, I did not file the ITR return.

    Since trading is the only thing I do, I want to declare trading as Business (and also as investor if possible, for LTCG).

    My question is,
    1)If I treat the profit and losses from trading as business income, and suppose “If I hold some shares for more than 1 year, then can I declare it as LTCG, to take tax exemptions? ”
    Meaning, if I purchase say 100 Reliance shares to do delivery based trading, but if it’s value goes down and I continue holding it for more than 1 year, then can I claim it as long term capital gain later when I sell? Because I bought with intention to trade and it accidently turned into long term holding. Please guide me on this.

    2) Shall the Dividends earned on the shares I trade be except from tax completely? Or it will be taxable if I declare trading as business?

  81. Shah says:

    Thanks for reply sir.
    In reference to above question,
    When I declare trading as business, I do accounting as ; The shares purchase go into Purchase account and shares sold go into sales account. The profit is calculated as Sales-Purchase= Profit.

    Now, if I buy say 100 X Reliance, I make entry of it in purchase account.
    But if I have not sold these, at the time of filing return, it will show under Purchase account on left side and Closing stock on right side of the P&L statement of my right?
    And later if I want to declare it as LTCG if it crosses holding period of 365 days, How will the accounting entry be changed from Purchase account to Investment?

    This is a very big question bothering me since 2 years. If you can clarify this, It will be a game changer and bit relief.

    • Nithin Kamath says:

      If you are declaring trading as a business, you can’t suddenly tomorrow decide to change it as capital gains. If it is investment you show separately under capital gain. If it is business income, you show the way you are. You can MTM all your equity trades based on March 31st closing price. you can start the next year with closing march 31st price. If capital gains, you show it under capital gain right from the start.

  82. Vijay says:

    Hi Nithin,
    I have a query, when you mention that a person can be trader as well as investor same time. Can I declare my equity delivery & MF profit (kept for a year) as LTCG while the other lesser duration holding as business profit? Also, can I show the cost for laptop and internet connection charges as cost? I actually posted a query but seems missing.

    • Nithin Kamath says:

      You need to be consistent at this. Just to show your laptop/internet charges as expense you can’t show your short term gains as business and reduce it. You can show these as expense if business income.

      • Vijay says:

        Nithin, my intent for considering self a trader in not just to manage cost. Instead, as I left my job for business purpose only and will be starting it. Currently my focus is for short term returns via equity and yes parallel to that I had some MF investment i did for tax saving purpose. I am asking abiut those, if I redeem those now, can I show them as LTCG along with my this year’s profit from trading. As I mentioned that business is what I am pursuing and no salary income, isn’t it better to define self as trader? Also, like you mentioned that for trader gains or profits are taxable as normal tax bracket, instead of fixed 15% on STCG.

        • Nithin Kamath says:

          Yes, mutual funds for sure you can show as capital gains. Yes if you are doing this full time, you can show it as business income. But don’t selectively show certain stocks as capital gains and others as business income.

  83. Saket Rana says:

    Hello Nithin,

    I’ve one question regarding intraday trading in equity.
    Net purchase value is Rs 261290.
    Net sales value is Rs 262836.
    Difference is Rs 1546.
    According to your article, Rs 1546 is turnover and 6% of Rs 1546, i.e. Rs 93 is profit from business.
    But logically isn’t the full amount, i.e. Rs 1546 should be treated as profit from business. Because that’s the money I’ve earned. How can we treat Rs 1546 as turnover that’s very low.

    Further if any person earns 90 lakhs….He/she would be very happy to offer only 6% as profit.

    What do you say?

    Thanks

    • Nithin Kamath says:

      You are talking about section 44AD. Which was made for small businesses who wanted to avoid an audit if turnover wasn’t much. Rs 1546 is the profits and taxes has to be paid by adding that to your income. Yes this is kind of a loophole for a trader to show 6% of turnover as profit and pay tax around it. But taking any such route to avoid paying taxes can be a pain tomorrow, chances of being asked to pay tax with penalty. This is meant for small businesses to avoid audit, as long as it doesn’t cause a loss to the government.

      • Saket Rana says:

        Since the turnover is less than 2 crores, everyone will definitely choose section 44AD. No penalty and tax can be levied as there is no breach of any law.
        And the question still remains unanswered…… What should be the turnover?

        Thanks

  84. Nikhil says:

    Hello Nitin,
    Can you help me regarding short term capital gain on selling shares . Suppose I bought shares of 1 lac and sold them after 6 months at a profit of 50,000. The amount i will in my account would be after-tax return or do i need to mention that profit at the end of financial year and will be taxed according to the slab?

    Thank you

  85. Arun says:

    Hello Nithin,
    I’m a cent gvt employee working n postal dept. Doing trading with zerodha since a month. I had done an intraday trading without my knowledge once on my very first day of trading. Later after squaring off only i came to know about it( its a loss anyways) . But after that i have been using CNC method( only purchased not yet sold one). Will it draw any disciplinary action?? Can u throw light on it plz and also suggest whether i can do delivery trading on short term and long term?? My dept files returns for the employees through a/cs section. Should i inform the a/cs section regarding this? Which form i should file to them? Or should file directly?? Kindly answer plz

    • Nithin Kamath says:

      1 trade and all shouldn’t be an issue. You will have to file your return using ITR2 to show your equity investments.

      • Arun says:

        Tnk u Nithin. As a central gvt employee can i invest in short term and gain income or is it banned for us? Or should invest only in long term alone??

        • Nithin Kamath says:

          Equity investing for both short and long term is allowed almost everywhere. As long as you don’t have access to some privy information of the stock.

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