It was March 2020, almost 2 years after the first Covid Lockdown. Many youngsters entered the Stock Market first time during this period. Nearly 8,39,81,228 Active accounts are managed by CDSL and NSDL. People started trading intraday, BTST, STBT, Option selling, futures. For them, they are either trading or investing. But from a taxation perspective, it is more complicated specifically in respect of the trading part. Since Numerous traders either know little or are not aware of tax implications or whether they have crossed the turnover limit? Whether Books of Account need to maintain or not? Whether it will count as Business Income or Short term trading? Let’s make it simple from a taxation perspective also. let started
Tax on intraday Trading – Speculative trading
A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
25.3 As per Explanation 2, where speculative transactions constitute a business, such speculation business is deemed to be a distinct and separate business from any other business (Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961).
In simple, any Intra-day trading, BTST (Buy Today Sell Tomorrow) in which Share doesn’t credit in Demat account, will be considered speculative trading.
| 1. | Profit of speculative business taxable? | Yes |
| 2. | Is Tax Audit Applicable? | Annexure 1 |
| 3. | Is it a Distinct Business? | Yes |
| 4. | Any expenses that can be claimed? | Brokerage, STT, related expenses. |
| 5. | Can we set off Speculative loss against other businesses in the current year? | No |
| 6. | Can we carry forward the Speculative loss? | Yes, Speculative loss can be carried forward for 4 more Assessment years. |
| 7. | Taxable Rate | Slab Rate |
Annexure 1:
How to calculate the ‘Turnover’ for the purpose of Intraday, STBT, and BTST?
| Symbol | Entry Date | Exit Date | Quan-tity | Buy Value | Sell Value | Profit | Taxable Profit | Tur-nover |
| DIVISLAB | 2020-07-20 | 2020-07-20 | 35 | 80815 | 79555 | -1260 | -1260 | 1260 |
| DIVISLAB | 2020-07-20 | 2020-07-20 | 35 | 80325 | 79555 | -770 | -770 | 770 |
| AUROPHARMA | 2020-06-03 | 2020-06-03 | 50 | 37900 | 37240 | -660 | -660 | 660 |
| BERGEPAINT | 2020-05-19 | 2020-05-19 | 50 | 22277.5 | 21840 | -437.5 | -437.5 | 437.5 |
| HINDUNILVR | 2020-05-22 | 2020-05-22 | 20 | 39680 | 39278 | -402 | -402 | 402 |
| M&M | 2020-07-17 | 2020-07-17 | 50 | 28730 | 28335 | -395 | -395 | 395 |
| PIDILITIND | 2020-05-06 | 2020-05-06 | 25 | 34837.5 | 34447.5 | -390 | -390 | 390 |
| GLEN MARK | 2020-05-22 | 2020-05-22 | 50 | 18100 | 17710 | -390 | -390 | 390 |
| INFY | 2020-07-24 | 2020-07-24 | 50 | 45695 | 46050 | 355 | 355 | 355 |
| GODREJCP | 2020-05-22 | 2020-05-22 | 30 | 17074.5 | 17000 | 2235 | 2235 | 346.5 |
| 2114.5 | 5406 |
Both positive and negative differences i.e gross gain or loss is to be considered as the turnover of such transactions for determining the turnover for the purpose of Tax Audit. If all the transactions happened through Electronic way the Limit of Tax Audit for the A.Y. 2022-2023 i.e F.Y. 2021-2022 is 10 Crores otherwise 1 Crore.
Q. How to find net profit from the speculative business?
A. Gross Profit less broker commission, telephone expenses, STT, or other incidental charges related to the intraday trading.
Q. What About the T2T trade?
A. Stock which is in nature of T+2 needs to take Mandatory Delivery. So, therefore even on the 3rd day, we sell the shares, right after the share is credited in Demat Account, the same will be treated as a Non-speculative transaction. Therefore, not included in this calculation.
Futures and Options
| No. | Is Tax Audit Applicable? | Annexure 2 |
| 1. | Is it a Distinct Business? | Yes |
| 2. | Any expenses that can be claimed? | All related Expenses. |
| 3. | Can we set off Option & future Business loss against other businesses in the current year? | Yes |
| 4. | Can we carry forward the loss? | Yes, For the next 8 A.Y. |
| 5. | Can we set off Option & future Business loss against other businesses in the Next Assessment year? | Yes, even if you discontinue the trading of futures and options. |
| 6. | Taxable Rate | Slab Rate |
Annexure 2
The turnover in Future and Options transactions is to be determined as follows:
(i) The total of favourable and unfavourable differences shall be taken as turnover. (Futures buying and selling difference i.e gain or loss)
(ii) Premium received on sale of options is also to be included in turnover. (Option Selling)
(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover. (when we cover the option net gain or loss from that transaction is also added)
To Simplify Further, Just add Profit figure, Loss Figure, and Sell Value in options trading and absolute Profit or loss figure in Future trading. The below image shows a different situation
| Particular | Lot | Buy | Sell | Profit | Turnover | |
| Sold Nifty 17500 CE | 20 Lot (50) | 25 | 200 | 1,75,000 | 3,75,000 | (Profit + Sell value) |
| Buy 17350 CE | 20 Lot(50) | 100 | 67 | -33,000 | 1,00,000 | (Loss incurred + Sell Value) |
| Buy BNF 37500 CE | 30 Lot (25) | 366 | 798 | 3,24,000 | 9,22,500 | (Profit + Sell value) |
| Sold Nifty 17500 PE | 20 Lot (50) | 600 | 400 | -2,00,000 | 6,00,000 | (Loss incurred + Sell Value) |
| buy Nifty BNF | 20 Lot (25) | 37000 | 37250 | 1,25,000 | 1,25,000 | Profit Only |
| Sold Nifty Future | 20 Lot (50) | 17777 | 17500 | -2,77,000 | 2,77,000 | Loss Only |
| 1,14,000 | 23,99,500 |
Q. What Related Expenses you can claim as Business Expenses in relation to Options and Futures?
A. Here is a list of expenses which you can claim: All the expenses mentioned in Contract Notes, Salary to the person hired for trading business, Software expenses, Telephone expenses, consultant expenses, Mobile expenses, Internet Cost, Capital goods depreciation used in future and option trading business, etc.
Short term Capital Gain:
| No. | What is Short term with Respect to shares? | Period less than 12 months |
| 1. | Expenses that can be claimed? | Annexure 3 |
| 2. | Is STT is allowed | No |
| 3. | Tax Rate | Flat 15% |
| 4. | What will be the tax rate if buying and selling stock is a business for quick return? | Slab Rate |
| 5. | Can it adjust against Long term Loss? | No |
| 6. | Can we set off STCL against LTCG in the current year? | Yes |
| 7. | Can we set off with other Businesses? | Yes |
| 8. | can we carry forward? | Yes, upto 8 A.Y. |
| 9. | Can we set off losses against future LTCG or STCG | Yes |
Short Term Gain or Business Income?
The most disputed topic between Assessee and Income-tax Department is whether the transaction counts as short-term capital gain or Business Income.
Why it is so important to distinguish between Short term gain and Business Income in Cash Stock? The main difference is the tax rate and the number of expenses claimed against the profit from the sale of shares.
Annexure 3:-
| No. | Business Income Expenses | Short Term Expenses |
| 1 | Cost of Acquisition | Cost of Acquisition |
| 2 | Brokerage | Brokerage |
| 3 | Telephone | Not Allowed |
| 4 | Salary to employee | Not Allowed |
| 5 | Software | Not Allowed |
The CRUX of Circular is:CBDT in Distinction between shares held as stock-in-trade and shares held as an investment – tests for such a distinction CIRCULAR NO. 4/2007, DATED 15-6-2007 had mention case laws, Advance ruling, general advice to Tax officers.
- No. of the transaction take place?
- Whether held to earned Dividend?
- Is the separate Demat account maintained?
- Intend to held for Quick Profit booking or 4-5 Months?
So, Short term gain or business Income depends upon the way the trader shows the transaction in ITR.
TAX AUDIT Applicable to Whom?
Q. Major Question arises what if a person trade in All i.e Option, Future, Speculative trading, Other Business-like Trading in Steel, Cotton Shop, Clothes Shop, etc whether the limit will be individual or aggregate for tax audit purpose?
A: In cases where the Person carries on more than one business activity, the results of all business activities should be clubbed together. The aggregate sales, turnover, and/or gross receipts of all businesses carried on by Person would be taken into consideration in determining whether the prescribed limit (excluding salary, capital gains, and others).
Example 1: It is Assume that all transactions had been done through Banking Channel. In the given example person is not required to carry tax audit of his business. For AY 2022-2023 Tax Audit Limit is 10 Crores.
| Business | Turnover |
| Speculative Business | 6,86,000 |
| Future And Option | 78,42,000 |
| Cash Trading Businesss | 36,00,000 |
| Home Décor Business | 1,20,00,000 |
| Total | 2,41,28,000 |
Example 2: What if Person carrying on businesses covered by sections 44AD (presumptive taxation scheme), 44AE (Profits and gains of business of plying, hiring or leasing goods carriages), 44BB (Shipping Business) along with Share trading?
| Business | Total Turnover | Tax Audit Turnover |
| Speculative Business | 6,86,000 | 6,86,000 |
| Future And Option | 8,90,00,000 | 8,90,00,000 |
| Cash Trading Businesss | 36,00,000 | 36,00,000 |
| Home Décor Business (Presumptive) | 1,20,00,000 | – |
| Total | 10,52,86,000 | 9,32,86,000 |
A: In the given case, assuming all the transactions are done through Banking Channel. Home Décor Business is under presumptive covered under 44AD of the Act but one has to take all the eligible business under 44AD of the Act, when he chooses a presumptive scheme. It includes Speculative business, F&O Business, Short term Trading Business. Therefore, the total turnover of the person including the Speculative Business exceeds 2 crores and even 10 Crore Limit. Tax Audit is applicable and tax Audit turnover will be 10,52,86,000/- .He cannot avail presumptive Scheme for Home Décor also.
Example 3: What if Total cash Receipts and Cash payments are done in other businesses exceed 5% of that business turnover? Will tax audit be Applicable even though the turnover is not crossed 10 Crore?
| Business | Cash | Banking | Total Turnover | Tax Audit Turnover |
| Speculative Business | – | 6,86,000 | 6,86,000 | 6,86,000 |
| Future And Option | 7,00,00,000 | 7,00,00,000 | 7,00,00,000 | |
| Share Cash Trading Businesss | 36,00,000 | 36,00,000 | 36,00,000 | |
| Home Décor Business | 780000 | 1,12,20,000 | 1,20,00,000 | 1,20,00,000 |
| Home Décor Business Total expenses 1 Crore | 600000 | – | – | – |
| Total | 8,62,86,000 | 8,62,86,000 |
A:- Even Though turnover does not exceed 10 Crore but due to Cash expenses and receipt exceeding 5 % total payment and total sales respectively in that business. The Tax audit limit will shift to a lower 1 Crore as per section 44AB of the Act. Therefore, in the above case Tax Audit will be applicable since the turnover is 8,62,86,000/-
Example 4: What if Aggregate turnover of businesses including Futures and options Business is less than 2 Crore, can we declare income under a presumptive income scheme as per section 44AD of the Act?
A:- Yes
Example 5: What if the loss in share trading business and aggregate turnover is less than 2 crores? Will tax Audit be applicable?
A:- If Turnover is less than Rs 2 crore and if your profit is less than 6% of turnover or incurred losses an audit is not required if your total tax liability for the year is zero. That means if your total income (Salary + Business income + capital gain) is less than Rs 250000/-, you have no tax liability, and hence audit is not required. Otherwise, it becomes mandatory to get the Tax audit done by a practicing chartered accountant.
Therefore, Section 44AB of the Income Tax Act, 1961 become mandatory if either Condition is fulfilled:
a. If in a presumptive scheme, declared profit is less than 6% and Net income is more than the basic exemption limit.
OR
b. Normal business income turnover (profit/loss) exceeds Rs. 10 crores in a financial year.
OR
c. Taxpayer has incurred Business loss and has a turnover of more than 2 crores but less than 10 crores but ‘total income’ is more than exemption limit.
Example 6:
Sasha works with Wipro ltd and has a salary of Rs 45 lakh in FY 2021-22. He also earned house rent amount to Rs. 4,50,000/-(Net) and Interest income of Rs. 3,60,000/-
He has to paid brokerage charges amounting to Rs 1,12,000/- Sasha has Internet expenses for the whole year of Rs 25,000 and 50% of his bill is towards his F&O trade. Software expenses amount to 1,50,000/-. He has incurred a loss from F&O aggregating Rs 9,75,000/- lakhs. His total turnover is Rs. 1,67,50,789/-Sasha wants to carry losses. whether Tax Audit is applicable?
A: Since the basic exemption limit exceed and Sasha wants to carry forward the losses incurred. Even Though the turnover doesn’t exceed 2 Crore or 10 Crores. It will become compulsory for Sasha to take a Tax Audit done by CA.
Alternative View (a):
Sasha can show 6% of Total turnover as profit under the presumptive scheme to avoid Audit.
Alternative View (b):
Sasha decides not to claim and carry forward the trading loss, so he can avoid the hassle of a tax audit.
| Income From Business | Amount |
| Loss From F&O | 9,75,000 |
| Brokerage | 1,12,000 |
| Software Depreciation | 37,500 |
| (150000*25%) | |
| Internet Expenses | 12,500 |
| (Only 50% allowed) | |
| Total | 11,37,000 |
____
| Particular | Amount |
| Income from salary | 45,00,000 |
| Income from house Property | 4,50,000 |
| Income from Business | -11,37,000 |
| Income From Other Sources | 3,60,000 |
| Total taxable Income | 45,00,000 |
| Loss Carry Forward | -3,27,000 |
This article is for information only and written as per the provision given under income tax law and finance act 2021.
Author Bio
Salary income – 700,000
Capital Gains and other income – 200,000
Intraday loss – (5000)
No F&O or other business income or turnover.
Can we select 44AA as not applicable and show the intraday loss in speculative activity for carryforward under “No accounts case” in ITR-3?