Income tax on traders is the guide prepared to cover the issue of income tax on trading in shares, bonds, options. In addition, we cover here speculative and non speculative business losses, carry forward of losses, effect of trading on profit and loss and balance sheet as per income tax law, how to determine turnover limit etc.
Income tax on traders
Definition of Traders:
Trader as per dictionary is defined as a person who buys-sells shares, currency or commodity for himself or on behalf of somebody. Now-a-days they are additionally defined as persons’ who promises to buy or sell shares, currency or commodity.
Heads of Capital gain
Earning or losses from trading of shares, bonds, options etc. can be categorized into following major four heads:
- Long Term capital gain or loss
- Short term capital gain or loss
- Speculative gain or loss
- Non-Speculative gain or loss
- Long Term Capital Gain or Loss:
As per section10(38) of Income Tax Act 1961, if you hold a stock for more than 1 year (12 months), then in such cases any profit or loss incurred by sale of shares is considered as long-term capital gain
- Short Term Capital Gain or Loss:
As per section10(38) of Income Tax Act 1961, if you hold a stock for less than 1 year (12 months), then in such cases any profit or loss incurred by sale of shares is considered as short-term capital gain
- Speculative Gain or losses:
Intraday is another way of saying within the day. So any buying and selling of shares done within in a day is said to be speculative gain or losses. As per Income Tax Act 1961, section 43(5) states that “any profits or losses from day trading are considered to be either Speculative Profits or Speculative Losses.”
- Non- Speculative gains or losses:
Derivative trading is defined as agreement between two parties to buy or sell a fixed amount of shares at fixed price on a given date. Derivative trading normally includes futures and options trading on the various stock, commodity and currency exchanges in India.
The trading in derivatives as long as is carried out in a recognized exchange, it is not considered as a speculative transaction. And thus any profit or loss incurred in such scenarios is considered to Non-Speculative gain or loss.
Note: A person trading derivatives (Non-Speculative trading) and / or in Intra-day (Speculative) trading is considered as a person who is an active trader or a person whose basic occupation or business is trading. In such a case any profit or loss from speculative or non-speculative trading is considered as “Profits and Losses of business or profession.”
Calculation of Capital Gain
- Short Term Capital Gain or Loss:
The short capital gain or loss is calculated as below:
| PARTICULARS | AMOUNT |
| Full value of consideration (i.e., Sales consideration of asset) | A |
| Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, advertisement expenses, etc.) |
B |
| Net sale consideration | C=A-B |
| Less: Cost of acquisition | D |
| Less: Cost of improvement (If any) | E |
| Net short term capital gain | F=C-D-E |
- Long Term Capital Gain or Loss:
The long capital gain or loss is calculated as below:
| PARTICULARS | AMOUNT |
| Full value of consideration (i.e., Sales consideration of asset) | A |
| Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, advertisement expenses, etc.) |
B |
| Net sale consideration | C=A-B |
| Less: Indexed cost of acquisition (*) | D |
| Less: Indexed cost of improvement if any (*) | E |
| Net Long term capital gain | F=C-D-E |
| * Indexed Cost: Cost Inflation Index is a measure of inflation that is used for computing long-term capital gains on sale of capital assets | |
- Speculative & Non Speculative Gain or losses:
There is no special calculation involved here and the calculation is very much similar to short term capital gain.
The Gain or loss (under speculative or non-speculative trading)
Sale consideration – Cost of acquisition
Taxability as per income tax act:
Capital gains are charged at special rates. Please find the details as below:
- Long Term Capital Gain:
All Long term capital gains are taxed at 20%.
Note: In instances where sale transaction of shares is done through recognized stock market and for which Securities Transaction Tax (STT) is paid, such long term capital gain earned are exempt from tax.
- Short Term Capital Gain:
All short term capital gains are taxed at 15%.
- Speculative and Non-Speculative Gain:
As Speculative trading and Non-Speculative trading gains are considered as gains under “Profits and Losses of business or profession”, the special rates don’t apply. Both are taxed as below:
- For individual : At slab rate
- For business: At 30% of profit earned
Inter- Head adjustment of losses in the same financial year
Set off of losses means adjustment of losses against income earned for the financial year. The Income Tax Act has prescribed rules to set-off losses against income from different source under one head of income and also to adjust loss from one head against other heads of income. The details off losses adjusted against losses incurred on sale and purchase of equity is given below:
- Long term capital loss
Long Term Capital Loss can only be set off against Long term capital gain and cannot be set off against any other income head.
- Short term capital loss
Short Term Capital Loss can only be set off against income earned from long term capital asset or short term capital asset and not against any other income head.
- Speculative loss
Speculative Loss incurred due to sale-purchase of equity can only be set off against income earned from speculative gains.
- Non-speculative loss
Non-speculative Loss incurred due to sale-purchase of equity can be set off against any income head except “Income from Salary”
Carry forward of losses
Any unadjusted losses for one financial year can be carried forward to the subsequent financial year and the same can be adjusted against income of other sources.
The losses of one year can be carried forward only if proper income tax return is filed within the prescribed due dates with complete details of losses and income for the year.
- Long term capital loss
If there are unadjusted capital gain losses then the same can be carrying forwarded up to subsequent eight assessment years immediately succeeding the assessment year for which the loss was first computed. Any carried forward long term capital loss cab is set off only against income earned from Long term capital asset.
- Short term capital loss
If there are unadjusted capital gain losses then the same can be carrying forwarded up to subsequent eight assessment years immediately succeeding the assessment year for which the loss was first computed. Any carried forward short term capital loss can only be set off against income earned from “Capital gains” irrespective whether such gain is earned from a short term capital asset or long term capital asset.
- Speculative loss
Any unadjusted speculative business losses can be carry forwarded for a period not more than four assessment years immediately succeeding the assessment year for which the loss was first computed only if income tax returns are filed within the prescribed due dates.
Any such loss incurred on speculative business carried on by the assesse can be carried forward and set off against only profits and gains of another speculation business.
- Non-speculative loss
The losses loss arising in a business or profession can be adjusted in a financial year with any other income earned from other heads of income except income from salary. Whereas the carry forward of losses.
But in case of carry forward of business losses the below restriction applies:
- Any business loss cannot be carried forward unless income tax return is filed within prescribed due date as per section 139.
- Business loss can only be carried forwarded for a period not more than eight assessment years.
- Carry forwarded business loss can only be set off against Business Income
Summary chart
| LOSS INCURRED | SET OFF OF LOSS FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE UNDER THE SAME | SET OFF OF LOSS FROM ONE HEAD AGAINST INCOME FROM ANOTHER | CARRY FORWARD AND SET OFF OF LOSS (No. of years) |
| HEAD OF INCOME | |||
| Loss from Non-Speculative | Yes | Yes | Yes for 8 years |
| (But carried forwarded loss cannot be adjusted against income of other heads) | |||
| Loss from Speculative business | Yes | No | Yes for 4 years |
| Short Term Capital Loss | Yes | No | Yes for 8 years |
| Long Term Capital Loss | Yes | No | Yes for 8 years |
| (but only against Long Term capital Gain) |
Balance sheet and Profit &Loss statements for Traders:
When you are engaged in trading of shares as a business, you are required to prepare and maintain balance sheet and P&L and income statement for the financial year.
Individual are to keep all record under their accounts and the same need to be published in case asked by authorities.
Turnover and Tax audit
An audit is mandatory in case the trading business income exceeds Rs.2crore for the given financial year. Audit is mandatory as per section 44AD under instances where turnover is less than Rs.2crore but profits are lesser than 8% of the turnover and total income is above minimum exemption limit.
Note: Advance tax based on the profitability should be paid. The due dates of individual or business must be properly followed.
Nature of transaction is important factor to determine income tax on traders. There is slight difference in speculative and non speculative transaction. So it is advisable to get help of expert to determine the taxability. ( Author credit – CA Rohini Kumari).