Nothing Special   »   [go: up one dir, main page]
Scribd Logo
Upload

Welcome to Scribd!

  • 4 views

    Reporting F&O and Stock Trading in ITR

    Uploaded by

    sagar deep

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Reporting F&O and Stock Trading in ITR

    Uploaded by

    sagar deep
    4 views6 pages

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    4 views6 pages

    Reporting F&O and Stock Trading in ITR

    Uploaded by

    sagar deep

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 6

    Explore e-paper My Account

    HomeBudget- New
    NewsMarketsPremiumMoneyMutual IndustryCompaniesTechnologyWeb In OpinionVideos
    2024 Fund Stories Charts
    Get more from your Mint subscription Upgrade now

    MONEY

    F&O, intraday and delivery trading:


    How these are reported in ITR
    Shipra Singh 6 min read 19 Jul 2024, 05:00 AM IST
    Taxpayers can claim certain expenses incurred towards carrying out F&O trades, which can be
    reduced from the turnover. (iStockphoto)

    SUMMARY

    All types of trading income are to be reported in income tax returns, even
    when the taxpayer has made only losses. We give you a rundown of how the
    different types work

    There is empirical data that shows a sudden boom in equity trading among
    retail investors. These include derivatives (futures and options, or F&O),
    intra-day trading and frequent buying and selling of stocks. However, this
    means increased tax compliance for such investors.

    All types of trading income are to be reported in income tax returns (ITR),
    even when the taxpayer has made only losses. The fact that F&O and
    intra-day trades are not reported in the annual income statement (AIS)
    adds to the misconception that these are reported only when the trader
    has made profit. However, since such trades involve several high-value
    transactions, they have to be shown in the ITR.

    In this article, Mint gives you a rundown of how the different types of
    trading incomes are reported in tax returns.

    Futures and options


    Trading in stocks derivatives counts as business income for income tax
    filing. It is to be reported in ITR-3, or ITR-4 when you opt for a
    presumptive income scheme.

    Apart from filing the more complex ITR-3 or ITR-4, you may also need to
    maintain books of accounts or get tax audit done under different
    conditions.
    View Full Image

    ...

    The books of accounts—or, in simple words, the profit and loss (P&L)
    statement—is to be made when the F&O turnover exceeds ₹25 lakh or
    income exceeds ₹2.5 lakh. Both these criteria are to be checked for the
    last three financial years. So, if your F&O turnover was below ₹25 lakh in
    FY24 but exceeded this threshold in FY23, you still need to submit
    accounting records in the current assessment year. The taxpayer doesn’t
    need a chartered accountant (CA) for creating books of accounts and can
    just use the P&L statement given by the broker.

    Also Read | Retail investors and the draw of options


    trading, and why regulators are worried

    Turnover is the net sum of both profit and losses made on various trades
    throughout the year. This method of computation has been adopted after
    the Institute of Chartered Accountants of India (Icai) released a guidance
    note in 2022 that excluded the sale amount of options from the turnover
    calculation. This has come as a relief to most derivatives traders as
    including the sale amount of options easily inflated the turnover to the
    threshold above which tax audit is required.

    Though the income tax department has not released a circular reinforcing
    the same, Prakash Hegde, a CA and principal consultant of direct taxation
    at Acer Tax & Corporate Services LLP, Hegde advises that taxpayers only
    consider the profit and losses, and not the sale amount.

    “Income tax laws don’t define turnover. It is the Icai’s guidelines on tax
    audit that do, so these should be followed to decide whether audit is
    required or not. But since this doesn’t come from a law and rather a
    guidance note, it is not binding on the tax authority and there have been
    some cases where the tax authorities have disputed the new method," he
    said.

    A tax audit has to be done by a CA, and is mandatory under two


    conditions: when the turnover exceeds ₹10 crore or when the taxpayer
    opts out of presumptive income scheme.

    “The ₹10 crore threshold is applicable when at least 95% payments are
    done through banking channels. Else, the threshold is ₹2 crore for
    individuals and ₹1 crore for companies and LLPs (limited liability
    partnerships)," said Hegde.

    When a taxpayer opts for presumptive income scheme, they have to


    continue it for a block of five years. Opting out in between makes it
    mandatory to get a tax audit done. “After opting out, taxpayer will also
    have to get their books audited for the next five financial years if the total
    income exceeds the basic exemption limit each year," said Sambhav Daga, a
    practising CA.
    Not auditing the accounting records when mandatory attracts a penalty of
    0.5% of the turnover, with maximum penalty capped at ₹1.5 lakh.

    It should be noted that taxpayers can claim certain expenses incurred


    towards carrying out F&O trades, which can be reduced from the turnover.
    These include trading expenses like securities transaction tax (STT), demat
    charges, brokerage and indirect expenses including subscription of
    courses, websites or publications taken to learn F&O, fees of trading
    software and depreciation of laptop and mobile phone used for trading.

    Losses from F&O are allowed to be set off against rent, other business
    income, interest and capital gains, but not salary. Leftover losses can also
    be carried forward to up to eight years. However, from second year
    onwards, income options for setting off the losses shrink, as per Karan
    Batra, founder of Charteredclub.com. “Carried-forward losses from F&O
    can only be set off against business income. All other avenues of capital
    gains, income from other sources and rent are not allowed," he said.

    Intra-day trading
    When stocks are bought and sold within the same day before the market
    closes, such transactions are called intra-day trades. For taxation
    purposes, intra-day income too is treated as business income, but these
    are categorized as speculative income, as opposed to F&O that are treated
    as non-speculative transactions.

    The downside is that losses from speculative business can only be set off
    against other speculative incomes, like gambling and horse races. Also,
    losses from intra-day trades can be carried forward to four years, whereas
    F&O losses are allowed to be carried forward to eight years.

    Batra said the department has categorically defined F&O as non-


    speculative income, whereas intra-day is speculative business. “It could be
    because derivatives trading is used for hedging," he said.

    Turnover calculation, thresholds for accounting and audit, and expenses to


    claim for intra-day trades are the same as F&O.

    Stocks trading

    For taxation purposes, delivery trading—stocks held for one or more days
    —can be categorized as either business or capital assets depending on the
    frequency of trades. While there is no concrete definition of the two in the
    tax laws, Batra said a simple method is to classify as per the frequency of
    trades.

    “When the taxpayer frequently trades shares and it’s their primary
    income, it should be reported as business income. However, a few trades in
    a year can be declared capital assets," he said. “I have a pensioner client
    who has over 10X profits on shares sold this year. Though the profits are
    huge, he has done less than ten trades in the last one year, so we are
    declaring the income as capital gains."

    Depending on whether the trading is classified as capital assets or


    business, the reporting varies drastically.

    First, for capital gains, the taxpayer can file ITR-2, whereas business
    income can only be filed in the more complex ITR-3. Second, for business
    income, the taxpayer has to maintain accounting records and get a tax
    audit done under the same conditions that apply to F&O.

    Third, for setting off losses, while a business loss can be set off against
    rent, capital gains, income from other sources and other business income,
    capital loss can only be set off against capital gains.

    Taxpayers should choose between declaring trading income as business


    and capital gains strictly on the basis of frequency of trades and not to
    benefit from lower tax rates applicable to the latter. Batra noted that
    trades declared as capital assets are more likely to be disputed by the tax
    authorities. “I strongly advise against declaring trading income as capital
    assets when it is an individual’s primary income or if they trade daily
    despite working a day job. If the tax department disputes, it will definitely
    go into litigation," he said.

    Catch all the Business News, Market News, Breaking News Events and Latest New… more

    TOPICS

    #ITR #income tax return #itr-filing

    MINT SPECIALS

    You might also like