Comment on Classifying Your Market Activity

renuka hardasani commented on 17 Mar 2017, 08:44 PM

prepared in short the effective points from your chapter

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.
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

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