INCOME TAX GUIDELINES BASED ON GUIDANCE NOTES

A. AUDIT REQUIREMENTS:

Where, audit is required if

Turnover for financial year is > ₹1 crore

If turnover < ₹1 crore and profitability is less than 8% of turnover (Section 44 AB)

Intraday trading is considered as a speculative Business. Since it is a business, you have to use ITR4.
Futures and options — ITR 4, Trading as a business. Hence, guidelines for filling ITR4 are:

a. Fill Mutual funds data in the capital gains head.
b. Fill Positive turnover of intraday trading in Sales and
c. Fill Negative turnover in Purchases.

B. DOCUMENT REQUIREMENTS:

The documents that would be required would be

a. Account Statements( equity, f&o, Commodity)
b. Contract notes and
c. DP statements(in case of delivery based trades).

C. TURNOVER REQUIREMENTS:

The turnover is being calculated here just to determine if you need a tax audit or not. We are
following guidance note on Tax audit under section 44AB (Section 5.12, Page 23).

Excerpt from Guidance Note on Tax Audit Under Section 44AB of IT Act, 1961 (Revised 2013
edition)

5.12 The turnover or gross receipts in respect of transactions in shares, securities and derivatives
may be determined in the following manner.

(a) Speculative transaction: 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. Thus, in a speculative
transaction, the contract for sale or purchase which is entered into is not completed by giving or
receiving delivery so as to result in the sale as per value of contract note. The contract is settled
otherwise and squared up by paying out the difference which may be positive or negative. As such,
in such transaction the difference amount is 'turnover'. In the case of an assessee undertaking
speculative transactions there can be both positive and negative differences arising by settlement of
various such contracts during the year. Each transaction resulting into whether a positive or negative
difference is an independent transaction. Further, amount paid on account of negative difference
paid is not related to the amount received on account of positive difference. In such transactions
though the contract notes are issued for full value of the purchased or sold asset the entries in the
INCOME TAX GUIDELINES BASED ON GUIDANCE NOTES

books of account are made only for the differences. Accordingly, the aggregate of both positive and
negative differences is to be considered as the turnover of such transactions for determining the
liability to audit vide section 44AB.

(b) Derivatives, futures and options: Such transactions are completed without the delivery of shares
or securities. These are also squared up by payment of differences. The contract notes are issued for
the full value of the asset purchased or sold but entries in the books of account are made only for
the differences. The transactions may be squared up any time on or before the striking date. The
buyer of the option pays the premia. The turnover in such types of transactions is to be determined
as follows: (i) The total of favourable and unfavourable differences shall be taken as turnover. (ii)
Premium received on sale of options is also to be included in turnover. (iii) In respect of any
reverse trades entered, the difference thereon, should also form part of the turnover.

(c) Delivery based transactions: Where the transaction for the purchase or sale of any commodity
including stocks and shares is delivery based whether intended or by default, the total value of the
sales is to be considered as turnover.

D. TURNOVER GUIDELINES FOLLOWED:

Broad guidelines followed based on the subject guidance note:

o If a trade doesn’t result in delivery, and since the stocks never came to the demat
account, it is speculative and shall be considered under Business income transaction.

o A person who is doing BTST trading is not really an investor, he has to consider himself
a trader. As a trader, the profits from BTST becomes business income. There is no
different rules for intraday f&O or overnight f&O. (page 64 for speculative trade (which
BTST is) only differences in Buying and Selling will be taken into account.)

o For Intraday equity — absolute sum of settlement profits and losses per scrip
o For Delivery equity — sell side value of the stock
o For F&O (Equity, Currency, Commodity) — absolute sum of settlement profits & losses
for F&O) per scrip and the sell side value of option contract. (All MTM profits and losses
are absolutely added to arrive at turnover. Example: Total Futures losses is -36000 and
Total futures profit is +24000. Then Total turnover = 36000+24000= 60000)
INCOME TAX GUIDELINES BASED ON GUIDANCE NOTES

E. TAXES & EXPENSES GUIDELINES FOLLOWED:

All taxes & brokerage costs are part of the costs and can be deducted from Profit or can be added to
losses.

a. STT is part of your cost, so yes it is an expense but cannot be a tax deductible. So what
this means is if you bought 100 stocks at Rs 100 and all your costs (including brokerage,
STT etc) adds upto Rs 15, then your actual buying price becomes 100.15. If you sell this
stock at 101, the actual cost becomes 100.85 (after your costs). Hence your net profit is
Rs 70 and not Rs 100.
b. STT and other costs becomes part of the cost

F. PROFIT & LOSS GUIDELINES

a. If you carry equity for more than a year and make a loss it becomes a long term loss,
this can be net off against any long term capital gain like gain in gold, real estate or
any other capital asset.
b. All f&o losses become like your business loss and can be net off against any short
term gains( equity trading where you buy/sell within a year).
c. You cannot carry forward a profit even if you keep the cash in your trading account.
If you make profits you have to pay the taxes the same year, but if you make losses
you can carry forward.

G. OTHER REFERENCES:

As per below CBDT Circular
http://www.incometaxindia.gov.in/communications/circular/910110000000000316.htm
“CBDT also wishes to emphasise that it is possible for a tax payer to have two portfolios, i.e., an
investment portfolio comprising of securities which are to be treated as capital assets and a trading
portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee
has two portfolios, the assessee may have income under both heads i.e., capital gains as well as
business income.”
http://taxguru.in/income-tax/shares-investor-or-trader.html
http://articles.economictimes.indiatimes.com/2011-01-25/news/28427085_1_stt-long-term-
gains-business-income
INCOME TAX GUIDELINES BASED ON GUIDANCE NOTES

http://www.business-standard.com/article/pf/is-your-return-from-stocks-capital-gains-or-
business-income-113081800685_1.html

EXCERPTS FROM SOMEOTHER SOURCE:

TRADING IN STOCK MARKET- KNOW ITS TAX TREATMENT TOO

Income tax has recently started issuing notices to the non-filers as well as mis-filers of income tax return
who trade on recognized stock exchanges. Assesses are also not clear on accounting as well as tax
treatment of transactions done on the exchanges.

This article may help you to do proper tax treatment whenever we have transactions related to stock,
currency or commodity exchanges..

But before going into the taxation part, first it is important to understand what type of share trading activity
one is indulged in:

Investing,
Trading – It can be further classified into:
Intraday trading: – Trading in spot market (Cash Market) & Squaring off the position in that day only
Delivery based trading: – Trading in spot market (Cash Market) & squaring them at a later date.
Trading in Derivatives: – Trading in Futures & Options (Calls & Puts).

Income tax department clarifies that these transactions are to be separately assessed under different heads:

Treatment of INTRADAY TRADING: – Intraday Trading is regarded as a speculative transaction whether
it is done on a recognized stock exchange or not. Income Derived from intraday trading is regarded as
speculative business transaction. Loss from intraday trading can only be settled from other speculative
income only.

Treatment of DELIVERY BASED TRADING: – Delivery trades have to be assessed on the quantum &
purpose of trades. If the purpose of the trades was to invest in the securities then it will be assessed under
the head capital gains. If trades are done frequently in cash segment then it has to be assessed as business
profit/loss.

The treatment & taxability aspect on various cases has been described as follows:-

IF THE PURPOSE IS TO INVEST IN SHARES:
INCOME TAX GUIDELINES BASED ON GUIDANCE NOTES

If one do not frequently buy and sell shares than all the gains from share trading is to be assessed as capital
gains and the dividend received shall be assessed as Income from other sources [currently exempt under
section 10(34)].

WHERE SALE TRANSACTIONS ARE DONE ON RECOGNISED STOCK EXCHANGE & STT
THEREON IS PAID
Tax on Short Term Capital Gain: –
The equity shares which are sold in less than one year of purchase, the profit/loss on that particular security
is treated as short term capital gain/loss. Income Tax on these gains has to be assessed flat @ 15%.
Remember that the sale of security would have been done on recognized stock exchange & STT thereon
should be paid.
Tax on long term capital gains: –
The equity shares which are sold after 1 year from the date of purchase, the profit/loss on that particular
security is treated as long term capital gains. Income tax on sale of long term equity shares is exempt. It
means no tax would be payable on sale of equity shares where sale transactions are done on recognized
stock exchange & STT thereon should be paid.
NOTE: – While calculating Capital Gains on shares we have to exclude STT from the cost of acquisition
& while claiming expenses in sale or purchase of shares.

WHERE SALE TRANSACTIONS ARE DONE OTHER THAN ON RECOGNISED STOCK
EXCHANGE & STT THEREON IS NOT PAID
Tax on Short Term Capital Gain: –
The equity shares which sold on over the counter basis and are sold before one year from date of purchase
then slab rates are applicable to assesses.
Tax on long term capital gains:-
The equity shares which are sold on over the counter basis and are sold after one year from date of
purchase then flat 20% is applicable to assesses after considering the price index.

IF THE PURPOSE IS TO TRADE IN SHARES:

If the purpose is to trade in shares then profit/ loss arising from such transactions will be treated as Income
from Business & Profession. Guidelines for business income are as follows:

While calculating gains/loss from trading in shares all expenses such as telephone expenses, internet
expenses or any other expenses incurred in running trading business can be claimed as expenses and are
deductible from gross Profit/loss from trading business.
If the total turnover of trading of shares exceeds Rs. 1 Crore then audit is compulsory under section 44AB
of income tax Act otherwise a penalty of Rs 150000.00 Or 0.5% of the turnover will be levied by CBDT.
If the total turnover of trading does not exceeds Rs.1 Crore then Provisions of Section 44AD is levied in
which 8% of the turnover is treated as profit whether there is loss in trading so it is now clear that even If
INCOME TAX GUIDELINES BASED ON GUIDANCE NOTES

the turnover is less than Rs.1 Crore audit is compulsory.
NOTE: Turnover in case of cash market transactions is the total monetary value of shares sold
during the financial year.

!! Is set off available in case there is a loss from sale of shares!!

As the nature of loss is Business income hence it is available for setoff first from any other business
income (intra head setoff).If after that unabsorbed loss is there it can be set off through other heads except
income from salaries. If After that too any loss remains unabsorbed then the loss can be carried forward for
next 8 years if the return is filed before due date.

TREATMENT OF DERIVATIVES:

Trading in derivatives has to be treated as Income from Business & Profession hence ITR 4 will be
applicable.
WHERE TRANSACTIONS ARE DONE ON RECOGNISED STOCK EXCHANGE & STT THEREON
IS PAID:
The income arising from Futures and Options are treated as normal business income as section 43(5) of the
income tax specifically explains that trading in futures & options is not a speculative transaction if it is
done through recognized stock exchange..So it is now clear that if trading is done through recognized stock
exchange then it is treated as normal business income. In that case too ITR 4 will be filed.
Applicability of tax audit will be as follows in case of F&O trading.
In case of profit from F&O trading:
In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such
trading exceeds Rs. 1 crore. Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit
from such transactions is less than 8% of the turnover from such transactions
In case of loss from F&O trading
In case of Loss from derivative trading, since profit (Loss in this case) is less than 8% of the turnover,
therefore Tax Audit will be applicable u/s 44AB read with section 44AD.

!! Is set off available in case there is a loss from derivative trading!!

The answer to the setoff is NO as section 43(5) which exempts derivative trading from speculative
business but is not covered by section 73 which allows setoff. So not even intra head setoff as allowed.
Only loss can be carried forward which can be settled only against derivative income in subsequent 8
years.

CALCULATION OF TURNOVER IN CASE OF DERIVATIVE TRADING:
INCOME TAX GUIDELINES BASED ON GUIDANCE NOTES

As turnover in derivative can easily cross Rs.1 Crore as volumes in the business is high because
transactions in derivatives are cash settled. So Mechanism of calculating turnover is different as in
calculation of normal business.

Turnover in case of Futures Trading is aggregate sum of mark to mark profit/Loss. So whether there
is profit or loss it has to be treated as turnover.

Suppose there is a loss of ITC futures is Rs.20000.00 and profit on NTPC futures is Rs.50000.00 then
profit will be 30000.00 but turnover in that case will be 70000.00 (50000.00+20000.00).

Turnover in case of Options is aggregate sum of premium received from sale of options.

:Suppose ITC 300 Call Option was purchased at Rs. 3*1000 shares lot and has been sold at Rs. 6*1000
shares lot. Turnover will be Rs.6000.00 and profit will be Rs3000.00 per lot.

SO IN A NUTSHELL TO SUMMARISE THE ARTICLE:-

Intraday trading is a speculative business and has to treated as same in income tax whether it is done
through recognized stock exchange or not.
Delivery of shares can be treated both ways either in capital gains or business income as the case maybe
and relevant provisions and tax will be applicable depending upon its nature.
Derivative trading is to be treated as business income if it is done through recognized stock exchange &
tax audit is mandatory in case of high turnover or in case there is a loss from derivative trading. In case of
turnover less than Rs.1 Crore, 8% of the turnover will be taken profit for calculating profit if tax audit is
not conducted.

So Dear investors and traders, Be careful while assessing your profits/loss from stock market as income tax
department is now vigilant about the tax treatment of transactions done on stock exchanges. So make
necessary arrangements to file your income tax return before time & get tax audit done because failure to
comply may lead to unnecessary harassment from income tax department.

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