Module 7 Markets and Taxation

Chapter 1

Introduction (Setting the Context)

37

I remember a time (maybe about 6 years ago) I had the opportunity to meet one of those hard to find Chartered Accountants who knew both taxation and markets quite well. It was at a friend’s party that I got introduced to him. He asked me what I do for a living, to which I promptly replied that I trade for a living. We immediately struck a chord and had a great conversation going. Somewhere during that engaging conversation he asked me a few questions –

  • How would I declare my Profits and/or Losses from my market activity?
  • Do I bifurcate between speculative business income and non-speculative business income?
  • Also, he asked me about the books of accounts that I’m supposed to maintain.

Thanks to my ignorance I had no answers to give him.

I was an eager learner, as I spent all my time learning about the markets and trading strategies but spent very little time learning about taxation and its relevance to market participants.

Probably the reason why I consciously ignored learning about taxation was because I always feared the heavy usage of jargon, random references to sections, subsections, circulars, and whatnot. To my defense – I once did honestly try to learn about taxation. I paid a visit to my broker’s office and met my dealer and questioned him on taxation. This is what he had to say – “Arre, why are you so worried? Long-term capital tax is 0% and short-term capital gains tax is 10%, that’s it, it is a simple matter.”

I for sure knew it was not just that, I insisted to meet someone more knowledgeable to understand the topic in greater detail. To my luck I got to meet the Regional Head of the stock broking company, enthusiastically I picked his brains about taxation for market participants; unfortunately even he reiterated the same thing that my dealer had told me. It seemed even worse as the regional manager had a sense of pride while he gave me that sloppy answer.

Frustrated, I visited a CA and he essentially said the same thing that my dealer said, but he used fancy jargon and complicated the whole matter to no end. At that point in time nobody had blogged about it online, no good articles were written on the topic and thus my quest to learn taxation related to markets got squashed like a bug.

In retrospect, had I known more about this topic, had I got more information – I would have clearly benefited in multiple ways.

I’m certain there are many traders and investors in a similar situation as I was few years ago. In fact this is true considering that our blog on taxation (which was put up a few years ago) has received over 2000 questions! This number is besides the numerous emails received and queries asked on Trading Q&A.

Keeping this in perspective, we are happy to introduce our new module on Zerodha Varsity aptly titled “Markets & Taxation”. The module deals with literally everything that you need to know about taxation related to markets – be it short term capital gains, or treating your intraday trades as speculative business income, or about Section 44AD & 44ADA – we have it all on Zerodha Varsity – in one place, concise, and simplified.

Now here is the best part – the whole module is authored by Nithin himself, which means that we get to learn about taxation from a trader/investor’s perspective and not really from the CA’s perspective. This makes a huge difference in terms of topic narrative. With a seasoned trader discussing taxation, we get to learn about the essential topics without digressing into the taxation wilderness.

M7-Ch1-Intro-Cartoon

Lastly, if I look back in time, I could not imagine brokers giving out such valuable information to clients. In fact, stock brokers were always known to hoard information and pass it only to select clients. I’m sure you would agree with me on this, especially if you have been trading the Indian markets for a while now. Stock Brokers in India have always been snobby, expensive, and full of unwanted attitude.

However the stock broking industry is slowly waking up to the fact that the customer, irrespective of his size deserves the best. This change in attitude is leading to a revolution of sorts in the industry – and I do believe Zerodha is the epicenter of this revolution – changing the way the Indian broking industry functions. Be it providing you high quality tools to trade, better trader education, or ready to use tax friendly reports – Zerodha has it all for you.

So please do go ahead and explore this unique module on Markets & Taxation. I can assure you that the content presented here will make you more confident about matters related to taxation, and with that new-found confidence you will never have to fear the taxman!

Stay connected, stay profitable.

– Karthik Rangappa

37 comments

  1. karan says:

    karthik that is nithin’s caricature right , with a tattoo on the hand …. good one mate (hahaha) :):):)

    • Nithin Kamath says:

      😉

    • Karthik Rangappa says:

      Yup, that’s him teaching us all about taxation 🙂

      • sujay1803 says:

        can you made a sample ITR 4 return form video for those who has taken trading and investing as business ????? i have found but not found anything about our profession

        • Nithin Kamath says:

          Go to the last chapter of this module Sujay, there is an excel download of a sample ITR4. A video will be tough to make.

          • Ashok says:

            Hi Nithin, just watched your session on taxation – https://www.youtube.com/watch?v=1p6tY3lelIY
            It was brilliant. Although I had read the modules and was already aware of it, it was like very good revision and it would be extremely helpful for people who are beginners. So is any other module. Keep up the good work.

            As you said at the end, it would be great if you can arrange for a session on filling ITR-4 form. Thanks.

  2. sujay1803 says:

    dear zerodha please translate this chapter in regional languages also (assamese ,bengali.hindi and south indian) very helpful documents

    • Karthik Rangappa says:

      Thanks for the suggestion Sujay. We will certainly look into it.

    • i would like to inform that neither i made money nor i have filed returns since almost four years, now i would like to stream line so what all documents i can get from your office to update the records, if u can suggest good auditor please let me know

  3. Vivek says:

    2014-15 FY TAX ITR 4S
    FIRST TIME
    I’ve Income from
    Salary,
    FD,
    MF/SIP,
    F&O trading activity,

    To file and save tax for future.
    Need help

    Hi Zerodha, I’m salaried, I do have income from Fixed Deposits, and I do have Income from Equity MF through SIP, and I Do have Trading activity in F&O,

    Question 1 -Do I need to file ITR separately for salary and FD, SIP, F&O returns?

    Question 2- I do understated that last date for filing ITR for salary is on Aug31,
    What will be the last date for FD, SIP, F&O activity to file ITR

    Question 3- In my PAN I find few trading activities captured in income tax India website, What action do I need to take to resolve it?

    Question 4- Do I really need to consult CA? Any nearby suggested contacts near to Whitefield?

    Question 5- I’m doing trading from few years, and few years went through some negative values, coming days trading activities going to change to positive, and I may need to pay a tax,
    I want to cover up my previous year negative years from around 5 years, Is there a way to file it now? And show as carry forwarded for future

    Your response will be more valued on this

    • Nithin Kamath says:

      Firstly, do read through the entire module. All your answers are already answered. Anyways
      1. No. Just one, ITR4
      2. One ITR4 and one last date which is Aug 31
      3. Resolve it?
      4. Not really
      5. If you file returns after due date, you cannot carry forward the loss. So you can take that benefit only for FY14/15 for which returns have to be file by Aug 31st.

  4. saurabhshares says:

    Sir, Could you please tell me if I am classified as trader then I have to pay tax for long term (held for more than 1 year) capital gains on stock trading?

  5. abhishek says:

    suppose i am a trader(buy and sell stocks in few weeks) lets say i bought 10 stocks worth Rs 10,000 then 15 stocks worth Rs 9000 then 5 stocks worth Rs 1000. and after sell all of them(worth Rs 20,000) i make a profit of say Rs 2000. (total now Rs 2,2000) and now again if i buy stocks worth 2,2000. and don’t liquidate the money… do i have to pay tax on the earned profit i.e Rs 2000 as the money is still invested in stocks??

    • Nithin Kamath says:

      You can file your returns either ways

      1. Show your profit booked and don’t consider the profit/loss on your investment that you hold at end of year.
      2. Add your profit to the marked to market value of your holdings on 31th march and pay taxes on the net profit/loss. Suggest you to go through this: http://zerodha.com/varsity/module/markets-and-taxation/

      • Taurus says:

        Hi Nithin
        I have read all the modules, however was unable to get details on point 2 mentioned above. Can you please elaborate.
        I think it can address the issue that I am facing as explained below

        I purchased 1000 qty of Stock A at 100 Rs and after 3 months sold 1000 qty at 150 Rs. Hence STCG of 50,000/-. However within few days (within same FY) I purchased 1000 qty of the same Stock A at 150 Rs. However since then the stock has been facing LC and I am unable to exit with the current price of stock being 80 Rs. So can I use the point 2 mentioned above to save on STCG.

  6. pratheesh says:

    Hi karthik,
    Thanks i have doubt,my friend is planning to start a derivative account in zerodha,the doubt is he is an NRI,he is planning to trade /investment in NIFTY FUTURES/OPTIONS segment,he is planning to start trading account using his old normal SB account,i just want to confirm whether any legal issues for doing trade with his sb account and taxation like normal income slab?if legally not possible for him can i collect fund from him as loan and do trade in my account in zerodha?can u please guide

    • Nithin Kamath says:

      I’d advise it is best not to open a trading account with a normal SB account mapped if he is a NRI. Yeah, you could take a loan, no issues with that.

  7. pratheesh says:

    Nithin , thanks a lot for ur prompt reply,one more doubt plz clear it,I have lots of NRI friends,most of them interested in doing trade/investment in Indian market particularly derivatives m asking for them they know investment through PIS/Pms account,but have the doubt is same day square off possible for them in equity segment?can they trade in derivatives?what will be taxation slab for them?,if not possible in derivatives trading as per ur suggestions i can receive fund fund as loan from them and trade in my resident Indian account,is there any upper limit for receiving fund from them in my SB account as loan and use it for derivatives trading ?

  8. Shekh Anubhab says:

    I am a client of Zerodha.I only do Equity Intraday trading.This is the first time where I need to file ITR in my life or not I don’t know that why it would require your help.
    I started doing trading from 7Jan,2016 and I dont have any other source of income other than Equity Intraday Trading.In Tax P&L statement calculations done by Zerodha it is showing INTRADAY GROSS PROFIT₹-14,526.05, INTRADAY TURNOVER₹24,760.75 and TOTAL CHARGES₹5,829.67. Now my actual question 1>Is all the calculations have already made by Zerodha? 2>Do i need to file ITR as my income is within the free tax bracket of 2.5Lakhs?

    • Nithin Kamath says:

      1. Yeah all P&L is already made by us. You can add other amounts that you have spent like internet etc to this. This loss can be carried forward to next year.
      2. It is best to file ITR.

  9. John misquita says:

    There should be an FAQ link on the first page/main page, the Knowledge base is difficult to find

    • Karthik Rangappa says:

      We have linked all the chapter titles here – http://zerodha.com/varsity/module/markets-and-taxation/

      • anoope says:

        Hello Karthik,

        I’m a salaried person with no other income. I filed ITR-1 for the last year. It was easy as all I’ve to do was copy the digits from Form 16 to incometaxindiaefiling.gov.in website.
        But this year, i had few FDs and RDs for around 50K. Also I am planning to be an investor in stocks.
        I’ve two questions.
        1. Do I have to pay tax on the gains from FD and RD? If yes, how do i file them? Which ITR form has to submitted for AY2016/17?
        2. When I do invest (more than 1 year) in stocks, its tax free right? Then do I have file ITR for the same?

        • Nithin Kamath says:

          1. yes you have to pay tax on the gains (if your annual income is more than Rs 2.5lks). You can use ITR 1 or ITR 2 (2 if you are investing into stocks as well).
          2. If you invest in stocks and book profits, yes whatever held for more than 1 year is tax free.Yeah good practice to file your ITR declaring all income.

  10. anoope says:

    Hello Karthik,

    I’m a salaried person with no other income. I filed ITR-1 for the last year. It was easy as all I’ve to do was copy the digits from Form 16 to incometaxindiaefiling.gov.in website.
    But this year, i had few FDs and RDs for around 50K. Also I am planning to be an investor in stocks.
    I’ve two questions.
    1. Do I have to pay tax on the gains from FD and RD? If yes, how do i file them? Which ITR form has to submitted for AY2016/17?
    2. When I do invest (more than 1 year) in stocks, its tax free right? Then do I have file ITR for the same?

  11. Saurabh says:

    Could you please suggest me a accounting firm or CA who can take care of my auditing/filling. I am going to do in big volume but this 1cr limit always stop me. If I have a good CA then I can shed my those inhibitions. Please suggest me.

    • Karthik Rangappa says:

      You could touch base with Taxiq – http://taxiq.in/contact-us/

      • Saurabh says:

        thanks a lot for such a quick response.

        • Karthik Rangappa says:

          Welcome!

          • Saurabh says:

            Sorry this is little different topic. But since I can reach you directly so mentioning here. When I redeem my liquid fund (much before cut off 1:30 pm time), then zerodha is paying me amount towards END of T+1 day. Whereas for same scenario other brokers like fundsindia, hdfc securities pay me at START of T+1 day. This benefit me so that I can buy stock. But because of Zerodha unnecessary delay I miss one full day. In the world when SEBI and various AMCs are trying to instantaneous redemption for liquid funds, then why is Zerodha putting unnecessary and avoidable delay in crediting my account. hope you will look into this important matter. another suggestion is to provide me equivalent margin at start of day so that I can buy stock in delivery basis (CNC).

  12. SADEESH says:

    1)I AM MAKE TRADING TRANSACTION ABOVE 1 CRORE BUT all My profit include other is below 2. 5 lakhs may i need to pay tax?

    2)I MADE EQUITY TRADING WITH 2.7 LAKH PROFIT AND 2 LAKH LOSS IN SAME YEAR THAT IS 70 000( NET PROFIT) include other,may i need to pay tax?

  13. sachin negi says:

    I have started trading from this financial year i.e. 2016-17.
    I have bought some shares and received dividend against them.
    I have not sold any share till now as I want to hold them for more than one year.
    I wanted to ask about the ITR form I should be filling and where to show the dividend income.

  14. Vikram Pai says:

    The Long-term capital gains declaration comes only when we sell the stock/shares after a year / two right?. Do we need to declare the stocks if we are still holding it or its declared only after selling it.

  15. B Vamsi Krishna says:

    How is cost basis taken into consideration? We have LIFO and FIFO. For ex, if I buy 1000 stocks at 50/- and 500 stocks at 55/- I will have 1500 stocks at 83.33.. Now if I sell some 700 stocks at 60/- and keep rest as such then 2 scenarios I can assume.

    1) 300 stocks at 50 and 500 stocks at 55 will remain with me..

    In this case profit is 700 x (60 – 50) = 7,000

    2) 800 stocks at 50/- will remain with me..

    In this case profit is 200 x (60-50) + 500 x (60-55) = 2,000 + 2,500 = 4,500.. Which case will be assumed for taxation?

  16. Krishna Bansal says:

    I m a salaried person working in a private organization. I also have a demate account in zerodha. I do intraday , short-term traiding, f&o and made profit in equity and loss in f&o in FY 2016-17 . I want to know that which ITR I have to file for assessment year 17-18.

  17. anil bhasein says:

    dear sir ,
    no words to describe the zerodha platform , excellent is the word
    one request is there if the P/L STATEMENT OFR THE CURRENT YEAT CAN ALSO BE SHOWN IT BECOMES EASY FOR US TO CALCULATE OUR PROFITS AND LOSSES , AS THEY ARE BASED ON INTRADAY AND SHORT TERM
    TILL A FEW DAYS BACK BACK OFFICE WAS GIVING US THE 17/18 STATEMENT . HOWEVER IT IS STOPPED NOW
    KINDLY ADVICE

  18. tirumala says:

    Hi Team,
    I am holding zerodha since 2014.why P&L statement showing wrong details in q.zerodha.com.is there any issues in q.zerodha or any modification happen to get the P&L statement pls let me know we heve very short time to fill returns..I raise a complinnt on 19th july regarding this.still i didn’t get response..could you pls short out the issue..

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