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Taxability in case of Shares & Derivatives Trading

If a person is engaged in shares dealing then it can result either in Business Income/Loss (chargeable under section 28 as Profits & Gains of Business or Profession) or Capital Gain/Loss (chargeable under section 45 as Capital Gain).

Classification of Income

It depends on facts and circumstances of each case as no standard guideline is available which helps in determining the nature of income for taxability purpose. However, as a very broad guideline, as held in many cases, ordinary purchase and sales of shares with the motive of earning profit would result in business income but where the objective of investment is to earn income by way of divided etc then the profit arise on sales of shares will yield in capital gains. Some of the other factors which will kept in mind while determining the classification of such income:-

  • Frequency of such dealing
  • Holding period of the shares
  • Substantial activity during the financial year
  • Nature opted during the previous financial years

When the income is treated as Business Income

Trading in share and derivatives can be of two types

  • Delivery based trading
  • Non delivery based trading (intraday trading)

Delivery based trading

In delivery based trading there is actual delivery of shares. In other words the shares will get transferred from Demat account of seller to the Demat account of buyers. The buyer of the shares have to pay full consideration to the seller for getting delivery of shares.

Non delivery based trading (intraday trading)

Intraday trading mean a system of trading where the trader will square-off their trade/position on the same day. In other words trader have to buy and sell or sell and buy the shares on the same day before the market get closed. In this case share are not actually transferred to the Demat account of buyer as the net position is Nil at the end of the day. Also the buyer of the shares do not need to pay full consideration for the trading instead he will pay or get the difference margin arising on the account of such buy/sell transaction.

Nature of Business Income

  • Speculative
  • Non-speculative

Speculative Business Income

As per section 43(5) of the Income Tax Act, speculative transaction mean 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 actual delivery or transfer of the commodity or scripts subject to certain exemption. So, intraday trading of shares is considered as speculation income.

Non-speculative Business Income

Delivery based trading of shares is non-speculative business income as is settlement is done by actual delivery of shares in Demat account.

Income from trading in F&O (both intraday or overnight) on all the recognised exchanges (such as NSE, BSE, MCX etc) is also considered as non-speculative business income. As per Section 43(5)(d), a eligible transaction in respect of trading in derivatives referred to in clause (ac) of Section 2 of the Securities Contracts (Regulation) Act, 1956 carried out in a recoginsed stock exchange; shall not be deemed to be a speculative transaction.

Computation of Turnover for Business

a) Delivery based trading
Turnover will be the total value of sales amount of such shares.

b) Non delivery based trading
In case of intraday trading of shares or F&O, turnover will be aggregate of all the positive and negative difference after squaring off.

In other words:-

  • Intraday trading of shares – The aggregate of both positive and negative differences is to be considered as the turnover.
  • Delivery based trading of shares – Sale value or purchase value whichever is high is considered as turnover.
  • Futures – The aggregate of both positive and negative differences is to be considered as the turnover.
  • Options – Premium received on sale of options is also to be included in turnover.
Trades Purchase Sales Difference (Profit or loss)
Trade 1 2,00,000 2,50,000 50,000
Trade 2 1,75,000 1,50,000 25,000
Total of differences considered as turnover 75,000

Requirement of Tax Audit

If the total sales, turnover or gross receipts exceeds Rs 1 Crore in the relevant financial year then tax audit is required under section 44AB of Income Tax Act. Person can also opt for presumptive scheme upto a turnover of Rs 2 Crore. In such case he has to report 8% of the turnover as business income without any requirement for tax audit.

Carry forward & Set off of losses

a) Non-speculative or General business loss

As per Section 71, Loss of business can be set off from any other head of income including income from speculative business but excluding income under the head “Salaries” of that year. If such loss is not set off against the available income in the same year, such losses are eligible to be carried forward for a period of 8 subsequent assessment year as per Section 72. The carry forward loss can be set off only from income chargeable to tax under the head “Profit and gains of business or profession” even from speculation income of next year.

b) Speculative loss

As per Section 73, speculative loss cannot be set off against any other head of income other than speculative income if any in that year. Such losses are eligible to be carried forward for a period of only 4 subsequent assessment year and can be adjusted only against speculative income of the next years.

When the income is treated as Capital Gain

Income from capital gain can be classified as :-

  • Short Term Capital Gain
  • Long Term Capital Gain

Short Term Capital Gain

If the shares held for a period of less than 12 months and sold on a recognised stock exchange and liable to security transaction tax (STT) then such income will be chargeable to tax @ 15% (plus surcharge and cess as applicable). In case of unlisted shares the period of holding shall be less than 24 month and will be taxed according to applicable slab tax rate.

Long Term Capital Gain

If the shares held for a period of more than 12 months and sold on a recognised stock exchange and liable to security transaction tax (STT) then such income will be exempt from income tax under section 10(38). In case of unlisted share the period of holding shall be more than 24 months and will be taxed @ 20% (plus surcharge and cess as applicable) if the user opted for indexation benefit or @ 10% (plus surcharge and cess as applicable) without availing benefit for indexation.

Note:- Income/loss from trading in derivatives such as Futures, Options etc will generally have nature of Profit and Gain from Business or Profession.

About Rohit Pithisaria

Rohit Pithisaria is a Practicing Chartered Accountant from Jaipur and been in practice for more than 7 years. He is actively writing from very beginning of his professional career and is author of various tax articles and blogs.

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