A BUSINESS GUIDE OF TAXATION FOR TRADERS

Transcription

1 A BUSINESS GUIDE OF TAXATION FOR TRADERS

2 CONTENTS Types of Stock Market activity... 1 Futures & Options...1 Intra-day Stock Trading...1 Short Term Equity Trading...2 Long Term Equity Investing...2 Mutual Funds...2 Am I a Trader or an Investor?... 3 Trading is reported a Business... 4 F&O...4 Short term Equity Trading...5 How to calculate Business Income?... 6 An example of how to calculate business income... 7 How to report in case of multiple business income streams?...10 I have a business loss...11 Do I need to maintain accounting records?...12 Accounting records to be kept...12 What is an audit? And is it compulsory?...13 Which ITR should I file?...14

3 What is Presumptive income from Business? Does it apply to me?...15 Commonly asked questions...16 Am I liable to pay advance tax?...16 I am a NRI with F&O, are there any different provisions for me?...16 I have a business and F&O both, how will the turnover be calculated in that case?...17 Is section 44AD applicable to me?...17 How to carry forward losses to future years?...17

4 Types of Stock Market activity Your investments or activity in the stock market can take several forms. As a first step, it is important to classify your activity into various buckets. Let s understand them: Options: Options and Futures are alike. However, when you do an options contract, you can choose to not make the transaction. Here you have a choice (but not a compulsion) to buy/sell the underlying asset. Futures & Options Futures: A Futures contract means an agreement to buy/sell on a future date. This contract expires on a pre-set date. On expiry, futures are executed by delivery of the underlying asset or via payment. Options and Futures are alike. However, when you do an options contract, you can choose to not make the transaction. Here you have a choice (but not a compulsion) to buy/sell the underlying asset. Intra-day Stock Trading Intraday is simply another way of saying within the day. Traders buy & sell or sell & buy a stock on the same trading day. These transactions are settled without actual delivery of the stock. Intraday price movements are used by short-term traders to make many trades in a single trading session. Types of Stock Market activity 1

5 Short Term Equity Trading If you purchase and sell listed equity shares within 12 months via delivery, your are into short term equity trading. Here your intention is to hold for the short term (less than 12 months) and profit from short term price rise instead of staying invested for the longer term. Listed equity shares are transacted by paying STT for the same. In the following sections, we ll understand this activity in further detail. Long Term Equity Investing Listed equity shares which are sold after 1 year from the date of purchase are called long term investments. Mutual Funds A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. Mutual funds may be equity based or debt based and have several other types. Types of Stock Market activity 2

6 Am I a Trader or an Investor? Before we understand taxes in detail, it is important to decide whether you are a trader or an investor. Tax filing is different for traders and investors. Here are some parameters which can help identify if you are a trader or an investor. Parameter Trader Investor Frequency of transactions Several transactions Few, irregular transactions Volume of transactions High volume Small trades Your Intent Intention to profit for frequent price fluctuations Staying invested for the longer term These are general guidelines to follow to segregate your activity as trading or investing. This classification is important as trading is reported as a business and investments are usually reported as capital assets. In the next section let s understand this bifurcation in detail. Am I a Trader or an Investor 3

7 Trading is reported a Business F&O Income from F&O deals is almost always treated as business income. This treatment is irrespective of the frequency or volume of your transactions. That may come as a surprise if you are salaried and have never done a business. Taxpayers who have business income have to file ITR-4. What is ITR-4? See here. Let s understand in more detail. As per Indian tax laws, incomes are reported under five heads, salary, house property, capital gains, business & profession and other sources(any residual income which cannot be classified in other heads). F&O trade must be reported under the head Business in your return. Reporting F&O trade as a business means: You can claim expenses from your business income As a result you may earn a profit or incur a loss Losses must be reported and losses have tax benefits Your total income (from all five heads) continues to be taxed at slab rates Businesses may be speculative or non-speculative. The income tax act says that F&O trade is considered as a non-speculative business. This is important since losses from speculative & non-speculative businesses are treated differently. Intra-day stock trades, however, are treated as a speculative business. Remember that cost indexation and capital gains exemptions are only allowed on sale of capital Trading is reported a Business 4

8 assets such as equity shares, mutual funds, land, house etc. Since F&O trades are considered a business, tax rules of capital gains rules do not apply. Short term Equity Trading Short term equity trading may be considered a business when you have large volumes and high frequency of transactions. This is a subjective matter and you ll have to use your judgement to understand your nature of transactions. If you do not have significant volumes, you can report your activity under capital gains. As per capital gains tax rules, shares which are sold within one year from the date of purchase, result in short term capital gains(or loss). You need to pay tax at 15% of on these gains. Long term gains are exempt from tax and there is no tax treatment of long term capital losses from equity shares. Trading is reported a Business 5

9 How to calculate Business Income? The first hurdle is to prepare your business s profit & loss details. To calculate gross income from F&O trades, take your transaction statement for the whole year. Now look at your receipts, these may be a positive or a negative value. Sum these up for the whole year. From your total income you are eligible to deduct expenses which are directly related to earning this income. Here are the type of expenses you can deduct: Rent or maintenance expenses of premises used for the business Mobile or telephone expenses Internet charges DEMAT account charges Broker s commission Any subscription used to assist in your business, such as journals, newspapers, books etc. Depreciation on laptop used for trading. Any other expense which is directly related to your work Business income is calculated for the financial year for which you are filing your return. You ll also have to prepare a balance sheet which is reported in ITR-4. It is basically a statement of your assets and liabilities. How to calculate Business Income 6

10 An example of how to calculate business income Vikas works with XYZ ltd and has earned a salary of Rs 15 lakhs in FY Vikas 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. Vikas 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 organised by the brokerage firm and paid them Rs 7,000 for it. Vikas 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. Vikas 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 An example of how to calculate business income F&O and had a dinner worth Rs 2,000. When Vikas looked up his trading statement he found that he has incurred a loss from F&O aggregating Rs 3 lakhs. Vikas is unsure if he should report his trading activity from F&O or he can ignore since there is a loss. Besides, salary Vikas has Rs 80,000 interest income and Rs 3.5lakhs rental income. Vikas sends an to ClearTax alongwith his trading statement for the year. Here is an extract of his trading statement - Here (see sheet 1). Note that this is an extract of his statement, his total turnover is Rs 1.2crores (sum of column ) and his F&O loss is Rs 3lakhs (sum of column ). 7

11 Let s see what Vikas 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. Vikas can claim expenses of F&O from his income (loss), which are directly related to F&O trading. Losses have tax benefits. Since Vikas s turnover is more than Rs 1crore, he must get an audit done. He also has to maintain books of accounts for his business. Let s help Vikas draw up details of his expenses. Expenses of F&O Business Brokerage enrollment charges 5,000 Brokerage charges paid 98,000 Workshop fees 7,000 Telephone expenses 18,000 Internet 14,400 Income (loss) from F&O Loss from F&O 3,00,000 Less: expenses of F&O 1,44,400 Total F&O loss 4,44,400 Total taxable income of Vikas Salary Income 15,00,000 Rental income 3,50,000 Interest income 80,000 Non-speculative loss -4,44,000 Total taxable income Rs 15,00,000 Loss to be carried forward - Rs 14,000 Meals & Entertainment 2,000 Total 1,44,400 An example of how to calculate business income 8

12 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. An example of how to calculate business income 9

13 How to report in case of multiple business income streams? A lot of people get confused when they have more than one type of dealings in the stock market. They do intra-day stock transactions along with F&O trades. And some may hold stocks as long term investments and have investments in mutual funds. In such a situation, you should calculate your business income from all of these separately. F&O trade income will have separate expenses. And intra-day stock trading will have expenses allocated to it separately. Don t worry if you have consolidated expenses, for example you use the same premises to trade in both, or use a single phone, bifurcate these expenses on a reasonable basis. You can allocate them using a ratio basis your time spent. If you are invested in some stocks for the longer run you can treat them as capital assets. These will not get reported as business if you have held them for good and don t trade them often. There is an element of judgement involved here and the main criteria is your intent. Which is best supported by you, so choose carefully. In case you have some stocks where you trade often and some which you hold for good; you can separate them out between business & capital assets. Remember to choose on a fair basis and apply your choice consistently. You ll report gains from capital assets under the head capital gains, which has different tax rules. Mutual funds too may be treated as investments and taxed separately. How to report in case of multiple business income streams 10

14 I have a business loss You ll end up paying higher tax if you do not report your losses. Since losses have tax benefits and reduce your total taxable income. Losses from F&O can be set off from income from other heads (except salary income). Say if your loss from F&O business is Rs 1 lakhs, salary income is Rs 5lakhs, income from rent is Rs 2lakhs, interest income is Rs 50,000. Your total taxable income shall be Rs 6.5 lakhs. In the example above Vikas has set off his losses from income from other heads and reduced his total taxable income. If losses are not fully set off in the same year, you can carry them forward for 8 years. However, in the following 8 years, it can only be set off from non-speculative business income. I have a business loss 11

15 Do I need to maintain accounting records? Businesses may be required to keep accounting records. Do note that these rules also apply to individuals as well. A lot of taxpayers write to us if they should keep accounting records since they are only transacting in a personal capacity. If you meet the below criteria, you must keep accounting records, even though you are not incorporated as a company. These apply irrespective of whether your business has a formal legal structure or not. Where the income is more than Rs 1,20,000 or total sales, turnover or gross receipts are more than 10,00,000 in all preceding 3 years, such profession or businesses must maintain books of accounts and other documents which help the Assessing Officer calculate their taxable income as per the Income Tax Act. No specific records are prescribed. In case of a newly set up profession or business the same rule applies when income is expected to Do I need to maintain accounting records be more than Rs 1,20,000 or sales/turnover/gross receipts are expected to be more than Rs 10,00,000. Accounting records to be kept The following records may be required for the entire financial year. You can keep as soft copies too, say in excel or word format. Entry wise detail of your bank statement Trading statement Bills and receipts of your expenses Profit and loss account - which can be prepared from the above list Balance Sheet If the tax payer fails to maintain accounting records, a penalty may be levied under section 271A. The maximum penalty that can be charged is Rs. 25,000. Maintaining these details is not cumbersome and it may help to sort and save these in separate folder in your computer on a regular basis. 12

16 What is an audit? And is it compulsory? Tax laws require that P&L and Balance Sheet of some businesses must be audited. The audit report has to be submitted along with your tax return. Audit means engaging a CA to check your accounts, say your stock statements, preparing & reviewing your P&L and Balance Sheet etc. If you have F&O loss, you must get your accounts audited. Audit is also mandatory if your turnover exceeds Rs 1crore. If account are not audited, a minimum penalty of 0.5% of turnover may be levied; however the maximum amount of levy is restricted to Rs 1.5lakhs. The due date of filing of tax returns for FY , where audit is mandatory is 30th September What is an audit? And is it compulsory 13

17 Which ITR should I file? As we have discussed before, those who do a business must file ITR-4. But taxpayers who are new to trading, F&O or intra-day stock trades, may have been filing ITR-1 or ITR-2 historically. Your ITR form can change for a financial year based on change in your income source. ClearTax s filing for Freelancers and Businesses, can help you prepare your return independently. Take a look here cleartax.in/business Which ITR should I file 14

18 What is Presumptive income from Business? Does it apply to me? When you are running a small business, you may not have enough resources to maintain proper accounting information and calculate your profit or loss. This makes it difficult to keep track of your income from such a business and find out how much tax you need to pay. With this in mind the Income Tax Department has laid out some simple provisions where your income is assumed based on the gross receipts of your business. This method is called the presumptive method, where tax is paid on an estimated basis. Under this scheme, your Net Income is estimated to be 8% of the gross receipts of your business. You don't have to maintain books of accounts of this business. You don't have to pay Advance Tax for such a business. You are not allowed to deduct any business expenses against the income. However, the nature of business done by traders is very different from a normal business and it is highly recommended that you do not file your returns the presumptive way. Our CAs can help explain in detail about your tax filing. Reach out to us here cleartax. in/business. What is Presumptive income from Business? Does it apply to me 15

19 Commonly asked questions Am I liable to pay advance tax? When your annual tax liability is Rs 10,000 or more, advance tax rules apply. Which means, instead of paying taxes in lump sum at year end, you must deposit tax in instalments. TDS usually takes care of your tax dues if you are salaried. But businesses have to estimate their annual income and tax to be paid on it. They must deposit tax as per schedule below. (Follow this guide to understand how to pay tax GUIDE on how to pay tax). Since tax dues are calculated on total income, if you have incurred a trading loss, you ll still have to calculate your total income and make sure taxes have been deposited properly as per this schedule. Applicable when your annual tax liability exceeds Rs 10,000. Commonly asked questions On or Before 15th June 15th September 15th December 15th March Amount to be paid Pay 15% of advance tax Pay 45% of advance tax Pay 75% of advance tax Pay 100% of advance tax I am a NRI with F&O, are there any different provisions for me? If you are a Non-Resident Indian, and want to trade in Indian derivatives, futures and options, you must comply with FEMA rules and SEBI guidelines. NRIs are barred from intra-day stock trading in cash segment. RBI monitors investment positions of NRIs in listed 16

20 companies based on information provided by banks. You ll need to seek professional help to make sure you are compliant. [Details of our NRI services are available here]. I have a business and F&O both, how will the turnover be calculated in that case? In case you are doing business (of any nature) and also have F&O transactions, you must calculate turnover from each of these separately. Turnover calculation has been explained through a detailed example in the handbook. Business income for these is also calculated separately. You are likely to have some common expenses. You can allocate them to the different businesses on a reasonable basis. How to carry forward losses to future years? If you have losses from previous year s filing, you ll have to add them to your current year s income tax return. This lets you set them off from current year income and carry forward any unadjusted balance. Adding losses is very easy on ClearTax, here s a guide that explains how to. Is section 44AD applicable to me? The nature of transaction in F&O and intra-day stock trading are very different from normal business transactions. Therefore, it is recommended that you do not opt for presumptive income and treat your business as any normal business. Commonly asked questions 17