Tax planning and filing is a mandatory requirement for traders nevertheless of profit or loss. Reporting income from intra-day trading or Futures & Options (F&O) in the tax returns can help you in many ways. Rules for reporting trading income are quite straight-forward and seldom change.
Long Term Investor
You can classify yourself as an long term investor if you hold equity investments for more than 1 year and can show income as long term capital gain (LTCG).
Short Term Investor
If your holding period is more than 1 day and less than 1 year, you can consider yourself a short term investor can show income as short term capital gains (STCG)
Profits/gains from both intra-day trading as well as F&O must be treated as ‘Business Income’ and have to be reported under ‘profits and gains from business or profession (PGBP)’. Income from trading, regarded as business income, is further sub-divided into two types. Speculative and non-speculative. While the profits/losses from intra-day trading is deemed to be derived from speculative business, profits/losses from F&O is treated as derived from non-speculative business.
Speculative business income – Income from intraday equity trading is considered as speculative. It is considered as speculative as you would be trading without the intention of taking delivery of the contract.
Non-speculative business income – Income from trading F&O (both intraday and overnight) on all the exchanges are considered as non-speculative business income. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of the underlying contracts.
Both speculative and non-speculative profits under PGBP will be part of the total taxable income (salary + rental + business + other sources). Tax payable would be the amount calculated on the aggregate taxable income based on the applicable income tax slab rate.
Reporting business income allows you to deduct associated expenses. Thus, costs such as broker’s commission, STT, demat charges, telephone charges and internet costs, incurred on trading, can be claimed as expenses before reporting trading income.
Following are some of the expenses that can be shown as a cost when trading
All charges when trading (STT, Brokerage, Exchange charges, and all other taxes). STT cannot be shown as a cost when declaring income as capital gains, but it can be in case of business income.
1. Internet/phone bills if used for trading (portion proportionate to your usage on the bill)
2. Depreciation of computer/other electronics (used for trading)
3. Rental expense (if the place used for trading if a room used – a portion of your rent)
4. Salary paid to anyone helping you trade
5. Advisory fees, cost of books, newspapers, subscriptions, and more
If there’s a loss tax treatment for speculative and non-speculative income differs if one of them is a loss.
If the non-speculative income derived from F&O is a loss, the amount equivalent to the loss incurred can be set-off against income from other heads except salary such as rental and interest incomes. The unutilised loss, if any, can be carried forward for the next eight years and can be set-off against non-speculative income only.
For example, your salary income is Rs 10 lakh per annum and you have a rental annual income of Rs 2 lakh. You also entered into an F&O contract during the year and incurred a loss of Rs 1 lakh. In this case, the total income would be Rs 11 lakh. (10 lakh + 2 lakh – 1 lakh).
In the same example, if the loss incurred is Rs 3 lakh, then only Rs 2 lakh can be set-off against rental income (not against salary). Hence, the taxable income would be Rs 10 lakh ( 10 lakh + 2 lakh – 2 lakh loss on F&O). The balance of F&O loss of Rs 1 lakh- can be carried forward upto 8 years.
On the other hand, a loss from intra-day trading, which is considered to be speculative income, can be used to set-off only the speculative income and not others. The balance unutilised, if any, can be carried forward to next 4 years to set-off speculative incomes.
While non-speculative loss can be used to set-off speculative gain, speculative loss cannot be used to set-off non-speculative gain.
For instance, if there’s an F&O loss of Rs 5 lakh and an intra-day trading profit of also of Rs 5 lakh, both profit and loss can offset each other and the taxable income from trading becomes zero. But this is not possible is not possible if the case was vice-versa — i.e intra-day trading loss and a profit under F&O.
Advance tax for business income
Paying advance tax is important when you have a business income. The advance tax has to be paid every year – 15% by 15th Jun, 45% by 15th Sep, 75% by 15th Dec, and 100% by 15th March. Advance tax payments can be paid online by clicking on Challan No./ITNS 280 on https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp
Also, here is an interesting link that helps you calculate your advance tax – http://www.incometaxindia.gov.in/Pages/tools/advance-tax-calculator.aspx.
if the advance tax is not paid, penalty of 12% annualized for the time period it was not paid has to be paid. The best way to pay advance tax is by paying tax for that particular time period, so Sept 15th pay for what was earned until then, and by March 15th close to the year-end, you can make all balance payments as you would have a fair idea on how you will close the year.