Taxation for Traders - Detailed Tax Guide

Unlike capital gains, there is no fixed taxation rate when you have a business income. Speculative and non-speculative business income has to be added to all your other income (salary, other business income, bank interest, rental income, and others), and taxes paid according to the tax slab you fall in. 

Learn with an example

Ajay’s salary – Rs.10,00,000/-

Short term capital gains from delivery based equity – Rs.1,00,000/-

Profits from F&O trading – Rs.1,00,000/-

Intraday equity trading – Rs.1,00,000/-

Given these incomes for the year, what is Ajay’s tax liability?

In order to find out his tax liability, we need to calculate his total income by summing up salary, and all business income (speculative and non-speculative). The reason capital gains are not added is that capital gains have fixed taxation rates unlike a salary, or business income.

Total income (salary + business) = Rs.10,00,000 (salary income) + Rs. 1,00,000 (Profits from F&O trading) + Rs. 1,00,000 (Intraday equity trading)  = Rs 12,00,000/-

Ajay has to pay tax on Rs 24,00,000/- based on the tax slab –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 5% – Rs.12,500/-
• 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,
• 1,000,000 – 1,200,000: 30% – Rs.60,000/-

Hence his total tax : 25,000 + Rs.100,000 + Rs.60,000 = Rs.172,500/-

Now, He also has an additional income of Rs.100,000/- classified under short term capital gains from delivery based equity. The tax rate on this is flat 15%.

STCG: Rs 100,000/-, so at 15%, tax liability is Rs.15,000/-

Total tax = Rs.185,000 + Rs.15,000 = Rs.200,000/-

This example was to give you a basic orientation of how to treat your income and evaluate your tax liability. We will now proceed to find a list of important factors that have to be kept in mind when declaring trading as a business income for taxation.

It is best to show your capital gains as a business income if the frequency of trades is higher or if investing/trading is your primary source of income.

Speculative business income – Income from intraday equity trading is considered as speculative. It is considered as speculative as you would be trading without the intention of taking delivery of the contract.

Non-speculative business income – Income from trading F&O (both intraday and overnight) on all the exchanges are considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of the underlying contracts. 

Even though currently almost all equity, currency, & commodity contracts in India are cash-settled, but by definition, they give rise to giving/taking delivery (there are a few commodity futures contracts like gold and almost all agri-commodity contracts with the delivery option to it).Income from shorter-term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if the frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.

Speculative (Intraday equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.

If you incur speculative (intraday equity) loss of Rs.100,000/- for a year, and a non-speculative profit of Rs 100,000/-, then you cannot net-off each other and say zero profits. You would still have to pay taxes on Rs 100,000/- from non-speculative profit and carry forward the speculative loss.

Another example:

Income from Salary = Rs.500,000/-

Non Speculative profit = Rs.100,000/-

Speculative loss = Rs.100,000/-

You may calculate your tax liability as –

Total income = Income from Salary + Gains from Non Speculative Business income

= Rs.500,000 + Rs.100,000 = Rs.600,000/-

You’re required to pay the tax on Rs.600,000 as per the slab rates –

0 – Rs.250,000 : 0% – Nil

250,000 – Rs.500,000 : 5% – Rs.12,500/-

500,000 – Rs.600,000 : 20% – Rs.20,000/-,

Hence total tax = Rs.12,500 + Rs.20,000 = Rs.32,500/-

You can carry forward a speculative loss of Rs.100,000/-, which you can set-off against any future (up to 4 years) speculative gains. Also to reiterate, speculative business losses can be set-off only against other speculative gains either the same year or when carried forward. Speculative losses can’t be set-off against other business gains.

But if you had a speculative gain of Rs 100,000/- and non-speculative loss of Rs 100,000/- they can offset each other, and hence tax in the above example would be only on the salary of Rs 500,000/-.

Advance tax – business income

Paying advance tax is important when you have a business income. The advance tax has to be paid every year – 15% by 15th Jun, 45% by 15th Sep, 75% by 15th Dec, and 100% by 15th March. 

When you have a business income you have to pay most of your taxes before the year ends on March 31st. The issue with trading as a business is that you might have a great year until September, but you can’t extrapolate this to say that you will continue to earn at the same rate until the end of the financial year. It could be more or less.

Balance sheet and P&L statements

When you have declared trading as a business income, you are required to like any other business to create a balance sheet and P&L or income statement for the financial year. Both these financial statements might need an audit based on your turnover and profitability. We will discuss more on this in the next chapter.

Wrapping up

Now that you know about Markets and taxation: for traders, it’s only logical that we move on to the next big topic - The process and documents of filing taxes. To discover the answer, head to the next chapter. 

A quick recap

• Speculative business income if trading intraday equity.
• Non-speculative if trading F&O, or short term equity delivery actively.
• Speculative losses can’t be set-off against non-speculative gains.
• The advance tax has to be paid when trading as a business –15% by Jun 15th 45% by Sep 15th, 75% by Dec 15th, and 100% by Mar 15th.
• Can claim all expenses if income from trading shown as a business income.