There is a lack of awareness when it comes to trading tax. Trading in goods is one thing but when you are trading in shares or securities, it is a whole new world. NSE reported a whooping transaction volume of Rs. 64,825,834 crores in F&O deals in the FY 2015-16. This clearly indicates how F&O trading is ruling the securities market. In collaboration with Cleartax, Fyers now offers you a free trading account on its next generation trading platform Fyers One which has advanced charting tools, technical screeners and plenty of resources to help you trade in stocks and derivatives with ease. Further, you can experience the same goodness on your mobile device with the Fyers Markets app.
Now, many times the traders find themselves at crossroads when it comes to reporting their transactions to the tax department in form of Income Tax Returns and end up receiving the notice from the department. The income from trade in shares or securities is taxed under the head ‘profit from Business or Profession’ or ‘income from Capital Gains’ depending upon the case. We shall limit the discussion to trading in F&O in this article.
F&O i.e Futures & Options is the most popular form of derivatives. Derivatives are basically the instruments which don’t have a value of their own, they derive their value from the underlying assets which keeps on fluctuating. The income from such deals are taxed as business income irrespective of the volume or turnover and ITR 4 i.e detailed form for reporting business income is to be filed. Even if you are a salaried individual, you need to choose form ITR-4 if you have engaged in F&O trading at any time during the previous year (AY-2016-17).
Business is categorized by the tax department as speculative & non-speculative. Activities like gambling, horse race, intraday trading etc. are speculative activities and F&O trading is treated as non-speculative business and hence normal tax compliances apply as they apply to any other form of business.
Maintenance of Books of accounts:
All the transaction that are carried out, are required to be recorded which include buy/sell transactions, expenses like electricity bills, demat charges, phone bills etc. In case a trader is involved in multiple forms of trading in shares like intraday trading, F&O, making investments in MFs, holding shares for more than twelve months from the date of purchase, the business income from each of these must be shown separately since the tax treatment differs based on the type of dealing. The common expenses can be bifurcated on a reasonable basis like the proportion of overall time spent on the various types of trades.
How to calculate your trading turnover?
The turnover in case of F&O trading business is calculated in the manner below:
· For every trade contract notes are issued which show the full value of assets bought or sold. While for the recording purpose only the difference amount is used.
· The premium received on sale of contracts is also included in the turnover. For eg. A trader engaged into 2 transactions:
1. He bought one lot of Adani ports at 2.0 lac and sold it for 2.8 lac (profit = .8lac)
2. He bought one lot of Infosys at 3.5lac and sold it for 3.00 lacs.(loss=.50lac)
The turnover shall be computed as (.80 + .50)lacs i.e Rs. 1.30 lacs being the sum of the net differences plus the premium received on sale of contracts.
Tax Computation for Arun – F&O Trader
Let’s take the case of Arun – Arun works with XYZ ltd and has earned a salary of Rs 15 lakhs in FY 2015-16. Arun picked up F&O basics from his colleague was excited at the prospect of making some extra bucks. He decided to try his hands at F&O trading.
Arun opened a trading account with a brokerage firm by paying Rs 5,000 as enrollment charges. He has to pay 0.02% as brokerage charges for each F&O trade and paid a total of Rs 98,000 as brokerage charges during the year. He also attended a workshop for F&O beginners organized by the brokerage firm and paid them Rs 7,000 for it. Arun has telephone expenses for the whole year of Rs 36,000 and a review of his past bills indicates about 50% of his bill is towards his F&O trade. Arun spends a significant amount of time researching on the internet which help him improve his trading skills. His monthly internet bill is Rs 1,200. He met a consultant who specializes in F&O and had a dinner worth Rs 2,000. Arun sends an email to ClearTax along with his trading statement for the year. His total turnover is Rs. 1.2 crores and his F&O Loss is Rs. 3 Lakhs. Let’s see what Arun finds out –
• His F&O trades shall be treated as a business. He shall have to file ITR-4 instead ITR-1 that he filed normally
• Arun can claim expenses of F&O from his income (loss), which are directly related to F&O trading
• Losses have tax benefits
• Since Arun’s turnover is more than Rs 1 crore, he must get an audit done. He also has to maintain books of accounts for his business
Let’s help Arun draw up details of his expenses:
F&O trading is considered as a non-speculative business and therefore its losses are allowed to be set off from other incomes such as rental income, interest income (set off not allowed salary). Any loss which is unadjusted (Rs 14,000) here can be carried forward to 8 succeeding years. In these 8 years it can only be set off against non-speculative business income.
When is audit mandatory?
When the turnover from F&O trading exceeds Rs. 1crores or if your profit is less than 8% of the trading turnover (and your other income is above taxable limit), the accounts need to be audited by a practicing Chartered Accountant.
Treatment of losses from the F&O trading business and how it affects tax liability?
When there are losses, people conveniently omit on reporting them in their tax returns mostly out of ignorance. The fact is that reporting the losses can help you bring down the tax liability. Since F&O trading is counted as a non-speculative business, loss from F&O trading is allowed to be adjusted against income from any other source (except salary income). The thing to be noted is that Loss from a speculative business cannot be set off against any income other than income from a speculative business.
If the loss is not fully adjusted it can be set off against income under any other source like ‘Income from House Property’, ‘Income from Capital Gains’ etc except under the head “Salaries”. If the loss can still not be adjusted fully in the year in which it was incurred, the unadjusted loss can be carried forward for next eight years immediately succeeding the year in which it was incurred and be set off only against the head ‘profit and gains of business and profession’ for non-speculative business provided the income tax return has been furnished on or before the due date.
What can be the consequences on non-compliance?
· Penalty of amount upto Rs. 25,000 for not maintaining proper books of accounts.
· Penalty of 1.5 % of the turnover or maximum penalty of Rs. 1.5 lacs for not getting the accounts audited before the specified date.(Relevant date is 17th October 2016 for the FY 2015-16).
Author is a chartered accountant at ClearTax with over 10 years of experience in taxation and finance. ClearTax is India’s largest efiling service for individuals and businesses.