FAQ on tax on income from share market

Income from intra-day trading is considered as speculation income and taxed as such. While speculation losses can be set off only against speculation gains, non-speculation business losses may be set off against short/long-term capital gains.

KEY POINTS:

i. As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. Income from speculation gains is taxed at the normal rates.

ii. Speculation losses can be set off only against speculation gains and not against any other head of income or non-speculation business income.

iii. Short-term capital loss can be set off only against income from short/long-term capital gains.

iv. Non-speculation business loss can be set off against the Long Term or Short Term Capital Gains made during the said year

1. How profit  on F&O taxed ?

If you are playing the F&O market, you are considered a trader. So profits from trading in the F&O market will be considered business income.

This will be added to your income under other heads and the total will be subject to axation at the applicable income tax slab rate.

As usual, expenses incurred on trading can be deducted.

The loss can be carried forward and set off over the next eight years.

2. Can losses in F&O be set off against profits from short-term trading gains or vice versa?

According to the provisions of Section 43(5) of the Income Tax Act, 1961, the gains or losses from an eligible transaction in ‘Options’ and ‘Futures’ will not be treated as a speculation gain or loss, and it will be taxed as Income from Business/Profession.

In case of the business loss not being a speculative loss, it can be set off against income from other sources or other heads. It cannot, however, be set off against income under the head ‘Salaries’. The balance, if any, can be carried forward and set off against business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.

Thus, losses incurred in the F&O business can be set off against short-term trading gains.

3. Can profits from intraday trading be set off against losses in F&O or vice versa?

Income from intraday trading in shares is treated as speculative business income as the transaction is settled without delivery. Accordingly, it is charged under the head ‘Profit and gain of business or profession'. As per Section 43(5) of the Income Tax Act, 1961, speculative transaction means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips.

However, trading in derivatives, referred to in Section 2(ac) of the Securities Contracts (Regulation) Act, 1956, carried out on a recognised stock exchange is not deemed to be a speculative transaction. Recognised stock exchanges are NSE, BSE, the MCX Stock Exchange and the United Stock Exchange of India. The transaction will be treated as non-speculative business income.

It may be noted that though loss from a non-speculative business, i.e. F&O loss can be set off against income from speculation business i.e. Profit from Intra Day trading, but loss from a speculative business cannot be set off against income from non-speculation business

4. Is the profit from STCG and F&O added to my salary / business income to calculate the tax slab?

Short Term Capital Gains (STCG) on capital assets other than Securities Transaction Tax (STT) is paid as well as profit from F&O are taxed at normal rates. Hence, the same will be added to your salary income, and the tax would be determined after taking into account the slabs as applicable to non-specified individuals. However, if STT is paid on STGC on the sale of shares, a tax rate of 15 per cent is payable on such STGC as per the Income Tax Act.

5. What charges can I book as expenses to calculate my tax liability?

While you can get only deduction in respect of profession tax paid/deducted by the employer in respect of your income from Salaries, the deductions under the other heads of income are allowable as follows:

Short Term Capital Gains – The cost of acquisition/cost of improvement incurred on the capital asset.

Income from Business – Generally speaking, any expenditure is allowed as deduction under this head of income provided that:

i. The expense is in the nature of revenue expenditure (capital nature only if specifically allowed by the provisions of the Act).

ii. The expense is not a personal expense of the assessee. 

iii. The expense is laid out or expended wholly or exclusively for the purpose of the business.

iv. The expense relates to the income earned.

v. The expense is incurred in the previous year.

vi. The expense is not for a purpose which is an offence or which is prohibited by law.

Thus, expenses such as postage, conveyance and telephone etc. incurred by you for carrying on the business can be claimed as deduction. Further, you may also claim depreciation on assets used for the business or profession.

STT is allowable as a deduction, as it is a direct expense.

Long Term Capital Gains (LTCG) in respect of securities for which STT is paid are exempt, and hence not taxable

6. Are intra-day transactions in the share market considered while calculating short-term gains/losses?

Intra-day trading is the trading of shares within the same day. Generally, delivery is not taken in case of intra-day trading, and thus, these are said to be speculative transactions. As per Section 43(5) of the Income Tax Act, 1961, the said transactions shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. However, if based the on facts and circumstances of your case, you can prove that though delivery was not actually taken it was within your normal business transaction, it could be treated as non-speculation business income or a short-term capital gain.

As regards taxation, the income from speculation gains is taxed at the normal rates. Your tax liability would thus depend upon your net taxable income. If the income is treated as non-speculation business income/short-term capital gain (Securities Transaction Tax not paid), the taxation is at normal rates. However, if the same is treated as a short-term capital gain and the STT is paid, the tax is chargeable at specified rate, viz. 15 per cent plus education cess/higher education cess as applicable.

It may be noted that in case of speculation loss, the same can be set off only against speculation gain and thus cannot be set off against any other head of income or non-speculation business income.

Short-term capital loss can be set off only against income from capital gains, whether long term or short term.Non-speculation business loss cannot be set off against salary income

It may also be noted that trading in derivatives (futures and options) is treated as non-speculation business even though delivery is not effected in such transactions.

7. What are the common mistakes investors/ traders make in their tax return?

The big mistake that traders do is they don’t declare the loss at the time of filing their returns. By doing so, the loss cannot be carried forward and set off against income from future years and it becomes a dead loss.

Apart from not declaring losses, erroneous calculation of the turnover is another common mistake that traders make. Turnover is not the contract value, but the sum of the settlement profit and settlement loss for intraday trades in equity. That is, if you make a profit of say ₹5,000 in one transaction and a loss of ₹5,000 in another transaction, then your turnover will be ₹10,000 (₹5,000 profit +₹5,000 loss).

A third error,  is in choosing the wrong ITR form for filing a tax return. “If you have only long-term capital gains or losses, you need to use ITR 2. For traders, ITR 4 is to be used, but getting your books audited is mandatory if you use this form to file your returns.”

Auditing is also mandatory if your turnover is either greater than ₹1 crore, or if your turnover is less than ₹1 crore but your profit is less than 8 per cent of your turnover.

8. How profit on shares taxed if the same was held for investment purpose and not for trading purpose?

Any gain or loss made after holding the stock for more than 12 months is considered a long-term capital gain or loss. For an investor, long-term capital gains are completely exempt from tax.

But for a trader, the gains will be considered as business income and taxed at the normal slab rates of 10, 20 or 30 per cent. However, since this is business income, the expenses incurred on trading, such as internet connection charges and so on, can be excluded from the gains.

Gains made within 12 months of the sale of a stock are short-term capital gains, which are taxed at 15 per cent for investors. For traders, short-term gains are taxed the same way as long-term gains. In case of a loss, traders can set off/carry forward both short-term and long-term capital losses. In the case of investors, only the short-term capital loss can be carried forward and set off, with no provision for setting off or carrying forward a long-term capital loss. There is an eight year time limit for setting off a capital loss.

If you make a quick buck through day trading, the profit or loss from such intraday trades is treated as speculative activity. So if you make a profit, it will be added to your income and taxed as per your tax slab. A speculative loss can be taken forward for setting off, but only within the next four years and against speculative income

9. What will happen to unabsorbed speculation loss?

If there is unabsorbed speculation business loss, then such loss can be carried forward to be set off against the subsequent year's income from speculation business. Such loss cannot be carried forward for more than four assessment years (AY) immediately succeeding the AY for which the loss was first computed. Further, loss from trading in derivatives carried out on a recognised stock exchange should not be treated as speculation loss. Unabsorbed non-speculative business loss can be carried forward for eight years to be set off against business income of subsequent years.

ALL ABOUT GST

The Goods and Service Tax (GST) is a tax likely to be implemented in India, from 1st April 2016. GST is proposed to be a comprehensive indirect tax to be levied on manufacture, sale and consumption of goods as well as services at the national level. It will substitute all indirect taxes levied on goods and services by the Central and State Governments in India as of now. It is aimed at being comprehensive for most goods and services.

Introduction of Goods and Services Tax (GST) will indeed be an important perfection and the next logical step towards a widespread indirect tax reforms in India. Initially, it was conceptualized that there would be a national level goods and services tax, however, with the release of First Discussion Paper by the Empowered Committee of the State Finance Ministers on 10.11.2009, it has been made clear that there would be a “Dual GST” in India, i.e. taxation power lies with both by the Centre and the State to levy the taxes on the Goods and Services. Almost 150 countries have introduced GST in some form since now. While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs, replacement and processing services. GST rates of some countries are given below :-

Country	Rate of GST
Australia	10%
France	19.6%
Canada	5%
Germany	19%
Japan	5%
Singapore	7%
Sweden	25%
New Zealand	15%

In India, government proposed the GST rate at 27% which is well above the global average of 16.4% for similar taxes.

But, Our Finance Minister, Mr. Arun Jaitley told lawmakers that the proposed rate is too high and needed to be much more diluted. But some states are asking for an even higher rates for GST.

Exemptions and exceptions have also been worked into the GST bill. This tax does not apply to alcohol and petroleum products. These will be taxed separately at first. And manufacturing states will be allowed to levy an additional tax of 1% on supply of goods.

World over in almost 150 countries there is GST or VAT, which means tax on goods and services. Under the GST scheme, no distinction is made between goods and services for levying of tax. In other words, goods and services attract the same rate of tax. GST is a multi-tier tax where ultimate burden of tax fall on the consumer of goods/services. It is called as value added tax because at every stage, tax is being paid on the value addition. Under the GST scheme, a person who was liable to pay tax on his output, whether for provision of service or sale of goods, is entitled to get input tax credit (ITC) on the tax paid on its inputs.

OBJECTIVES OF GST:- One of the main objective of Goods & Service Tax(GST) would be to eliminate the cascading effects of taxes on production and distribution cost of goods and services. The exclusion of cascading effects i.e. tax on tax will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country. It is felt that GST would serve a superior reason to achieve the objective of streamlining indirect tax regime in India which can remove cascading effects in supply chain till the level of final consumers.

BENEFITS OF GST:-

• GST will end cascading effects:- This will be the major contribution of GST for the business and commerce. At present, there are different state level and centre level indirect tax levies that are compulsory one after another on the supply chain till the time of its final consumption.

• Growth of Revenue in States and Union:- It is expected that the introduction of GST will increase the tax base but lowers down the tax rates and also removes the multiple point taxation. This will lead to higher amount of revenue to both the states and the union.

• Reduces transaction costs and unnecessary wastages:- If government works in an efficient mode, it may be also possible that a single registration and a single compliance will suffice for both SGST and CGST provided government produces effective IT infrastructure and integration of states level with the union.

• Eliminates the multiplicity of taxation:- One of the great advantages that a taxpayer can expect from GST is elimination of multiplicity of taxation. The reduction in the number of taxation applicable in a chain of transaction will help to reduce the paper work and clean up the current mess that is brought by existing indirect taxation laws.

• One Point Single Tax:- Another feature that GST will hold is it will be ‘one point single taxation’. This also gives a lot of comforts and confidence to business community that they would focus on business rather than worrying about their taxation that may crop at later stages. This will help the business community to decide their supply chain, pricing modalities and in the long run helps the consumers being goods competitive as price will no longer be the function of tax components but function of sheer business intelligence and innovation.

• Reduces average tax burdens:- Under GST mechanism, the cost of tax that consumers have to bear will be certain and it is expected that GST would reduce the average tax burdens on the consumers.

• Reduces the corruption:- It is one of the major problems that India is overwhelmed with. We cannot expect anything substantial unless there exists a political will to root it out. This will be a step towards corruption free Indian Revenue Services.

• Present CST will be removed and need not to be paid. At present there is no input tax credit available for CST.

• There are many indirect taxes in state and central level currently, which will be included by GST. i.e. you need to pay a single GST instead of all of them.

• Uniformity of tax rates across the states

• Ensure better compliance due to aggregate tax rate reduces.

• By reducing the tax burden the competitiveness of Indian products in international market is expected to increase and there by development of the nation.

• Prices of goods are expected to reduce in the long run as the benefits of less tax burden would be passed on to the consumer.

Other features of the GST model

(I) The GST shall have two components: one levied by the Centre (referred to as Central GST or CGST), and the other levied by the States (referred to as State GST or SGST). Rates for Central GST and State GST would be approved appropriately, reflecting revenue considerations and acceptability.

(II) The CGST and the SGST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services.

(III) The CGST and SGST are to be paid to the accounts of the Centre and the States respectively.

(IV) Since the CGST and SGST are to be treated individually, taxes paid against the CGST shall be allowed to be taken as input tax credit (ITC) for the CGST only and could be utilized only against the payment of CGST.

(V) Cross utilization of ITC between the CGST and the SGST would not be permitted except in the case of inter-State supply of goods and services.

(VI)  Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc.

(VII) To the extent feasible to the government, uniform procedure for collection of both CGST and SGST would be prescribed in the respective legislation for CGST and SGST.

(VIII) The States are also of the view that Composition/Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover.

(IX) The taxpayer would need to submit periodical returns, in common format as far as possible, to both the CGST authority and to the concerned SGST authorities.

Indirect taxes that will be included under GST :- The following indirect taxes from state and central level is expected to be integrated with GST

• State taxes

• VAT/Sales Tax

• Entertainment Tax (unless it is levied by local bodies)

• Luxury Tax

• Taxes on lottery, betting and gambling.

• State cess and surcharges in so far as they relate to supply of goods and services.

• Entry tax not on in lieu of octroi.

• Central Taxes

• Central Excise Duty.

• Additional Excise Duty.

• The Excise Duty levied under the medical and Toiletries Preparation Act

• Service Tax.

• Additional Customs Duty, commonly known as countervailing Duty (CVD)

• Special Additional duty of customs(SAD)

• Surcharges

• Cesses.

The above taxes dissolve under GST; instead all of these, only CGST & SGST exists.

Impact of Goods and Service Tax:-

• Food Industry: The application of GST to food items will have a significant impact on those who are living under subsistence level. But at the same time, a complete exemption for food items would drastically shrink the tax base. Food includes grains and cereals, meat, fish and poultry, milk and dairy products, fruits and vegetables, candy and confectionary, snacks, prepared meals for home consumption, restaurant meals and beverages. Even if the food is within the scope of GST, such sales would largely remain exempt due to small business registration threshold. Given the exemption of food from CENVAT and 4% VAT on food item, the GST under a single rate would lead to a doubling of tax burden on food.

• Housing and Construction Industry: In India, construction and Housing sector need to be included in the GST tax base because construction sector is a significant contributor to the national economy.

• FMCG Sector: Despite of the economic slowdown, India's Fast Moving Consumer Goods (FMCG) has grown consistently during the past three, four years. Implementation of proposed GST and opening of Foreign Direct Investment (F.D.I.) are expected to fuel the growth and raise industry's size.

• Rail Sector: There have been suggestions for including the rail sector under the GST umbrella to bring about significant tax gains and widen the tax net so as to keep overall GST rate low. This will have the added benefit of ensuring that all inter–state transportation of goods can be tracked through the proposed Information technology (IT) network.

• Financial Services: In most of the countries GST is not charged on the financial services. Example, In New Zealand most of the services covered except financial services as GST. Under the service tax, India has followed the approach of bringing virtually all financial services within the ambit of tax where consideration for them is in the form of an explicit fee. GST also include financial services on the above grounds only.

• Information Technology enabled services: To be in sync with the best International practices, domestic supply of software should also attract G.S.T. on the basis of mode of transaction. Hence if the software is transferred through electronic form, it should be considered as Intellectual Property and regarded as a service. And if the software is transmitted on media or any other tangible property, then it should be treated as goods and subject to G.S.T. Implementation of GST will also help in uniform, simplified and single point Taxation and thereby reduced prices.

• Impact on Small Enterprises: There will be three categories of Small Enterprises in the GST regime.

(a) Those below threshold need not register for the GST 

(b) Those between the threshold and composition turnovers will have the option to pay a turnover based tax or opt to join the GST regime,

(c) Those above threshold limit will need to be within framework of GST.

Possible downward changes in the threshold in some States consequent to the introduction of GST may result in obligation being created for some dealers. In this case considerable assistance is desired. In respect of Central GST, the position is slightly more complex