Trading Taxation: How Are Trading Profits Taxed in India

Hello, and welcome to the trading and taxation world. If you have ever struggled to understand the tax implications of trading financial instruments, you’re in the right place – we got you! In this chapter, we'll go deep into the crucial areas of taxation in trading, which will make them understandable and useful for you in your own trading adventure.

For example, you could envision yourself as a small business owner selling delicious street food. Likewise, as you would account for your income and expenditure to correctly pay your taxes, so too do traders must understand the workings around taxes in their field. You can earn money by trading different financial products, like stock, currency, or commodity, but being knowledgeable about the tax effect will help you in the decision-making process.

So, without further ado, let’s embark on understanding trading taxation, starting with the difference between capital assets and trading assets! 

Understanding Capital Assets and Trading Assets

Picture this: you have a friend who has a habit of, and a passion for, collecting rare antique coins. He always keeps them safe and secure, locked away in a safety box, in the hopes that slowly their value will increase over time. Opposite your friend is your sister, who runs a small shop where she buys and sells products daily. In these two scenarios, your friend’s coins are like capital assets, and your sister’s products, which she buys to sell for her shop, are like trading assets. 

In the realm of trading, the differentiation between capital and trading assets matters a lot as tax regulations depend on it.

Capital Assets

Capital assets are the property that you acquire for the long term, hoping that their value increases over time. They do not work to make a quick profit but are held accountable for their contribution to revenue or the appreciation of assets over time. Some examples of capital assets include: 

• Stocks held for more than a year
• Bonds
• Mutual funds
• Property (real estate)

If the sale of your capital asset leads to capital gains, the profit made on the transaction is called capital gain and is taxable under capital tax law. Capital gains taxes differ based on the length of ownership before selling the asset.

Trading Assets

However, trading assets are different because they are bought and sold with the objective of generating profit in the per-view period. Such assets are in a shorter run, typically 12 months and below. Some examples of trading assets include: 

• Stocks held for a short term (less than a year)
• Currencies (in forex trading)
• Commodities (like gold, silver, or oil)
• Futures and options contracts

Profit that comes through the sale of trading assets is considered business income, which is then taxed based on your slab of income tax.

Different Taxes and Charges in Trading and Income Tax Rules

Having clear distinctions between capital assets and trading ones in your mind, it is time to explore the types of taxes and charges you may face in your trades. Moving on, we will delve deeper into how the tax rules govern these trading avenues.

Intraday Trading

Intra-day trading refers to buying and selling stocks within a period of one trading day. The money realised from intraday trading falls under the business income category and is taxed under your tax brackets. For instance, your standard deduction or taxable income may be ₹The number of earnings you gain is ₹8 lakhs per year, and if you get in 20% brackets, your trading gains in intraday will be taxed at 20%.

Forex Trading

Forex trading typically involves a deal whereby you will buy or sell a foreign currency. The category in which the income from forex trading falls is business income and is consequently taxed according to the tax slab to which every individual falls. According to the law, if your turnover is more than ₹10 lakhs per year, you are supposed to get an accountant to audit your figures every year.

Futures and Options (F&O) Trading

F&O trading comprises offsetting long and short positions of derivative contracts. The revenue gained from F&O trade is categorised as business income and thus is taxed according to tax brackets. The same is true. But you can revive this loss in your F&O trading against other business income for the next 8 years.

Currency Trading

Fiat money exchange is called currency derivatives trading and is reflected in purchasing and selling currency futures or options contracts. The profits are paid out as business income, on which your income tax will be deducted accordingly.

Commodity Trading

Commodity trading involves buying and selling commodities like gold, silver, oil, or agricultural products. The profits earned from commodity trading are treated as business income and are taxed according to your income tax slab. If your total turnover from commodity trading exceeds ₹10 lakhs in a financial year, you'll need to get a tax audit done by a chartered accountant.

Other Charges

Apart from income tax, there are other charges applicable to trading:

• Securities Transaction Tax (STT): STT is a type of tax levied on the transfer of security from one owner to the next, where security here includes share and equity-oriented mutual funds. 
• Commodity Transaction Tax (CTT): CTT is the tax buyers have to pay on the sales of commodity futures contracts. The actual CTT rate is quite low; 0.01% of each transaction value only.
• Brokerage and other charges: Brokers can charge a certain fee in addition to those fees, which may include GST on brokerage, transaction charges, or stamp duty, among others.

What is the Role of Turnover in Trading Tax?

Let's imagine, for instance, that you and your pal decide just to sell some handmade crafts over the internet. When your business grows, you may produce the total sales, the concept called turnover in which you attempt to understand whether your business is doing well or not. As a result, turnover is an important element that determines your responsibility for responding to taxes in trading.

Turnover is a total amount all trades during one financial year, with both winning and losing trades are included in the calculation. 

1. Tax Audit: In case your total turnover sum from both intraday trading (including F&O, currency, and Commodity) exceeds ₹5000, you will be considered a professional trader and are charged GST. If a business earns over 10 lacs in a financial year, then they are required by law to get a tax audit conducted by a chartered accountant. 
2. Presumptive Taxation: If, however, your sales proceeding from trading is less than ₹ 2 lakh, then you may choose to pay the presumptive tax as per section 44AD of the Income Tax Act. Here, your taxable income is presumed to be 8% of your total partition of sales, and you do not even have to maintain detailed books of accounts. Nevertheless, there is no room for decreased deductions when it comes to taxes, assuming that you made a profit through your trading practice.
3. Advance Tax: If your estimated tax liability for a financial year exceeds ₹10,000, you are required to pay advance tax in four installments throughout the year. The due dates for advance tax payments are 15th June, 15th September, 15th December, and 15th March. The amount of advance tax you need to pay is based on your estimated taxable income, which includes your trading profits. Failing to pay advance tax or paying less than the required amount can result in interest charges.
4. Goods and Services Tax (GST): If your total turnover from trading exceeds ₹20 lakhs in a financial year (₹10 lakhs for some states), you may be required to register for GST and pay GST on your brokerage and other charges. However, this depends on the specific nature of your trading activities and the services you avail from your broker.

Below is a tabular representation of all the taxes for a quick overview:

Investment Type	Tax Implication	Tax Type	Additional Notes
Capital Assets	Long-term holding (>1 year)	Capital Gains Tax	Rate depends on holding period
Trading Assets	Short-term holding (<1 year)	Business Income Tax	Taxed according to individual tax slabs
Intraday Trading	Same-day buy/sell	Business Income Tax
Forex Trading	Currency exchange	Business Income Tax	If turnover > ₹10 lakhs, requires annual audit
Futures & Options	Derivatives trading	Business Income Tax	Losses can be carried forward to offset future gains
Commodity Trading	Buying/selling commodities	Business Income Tax	Requires tax audit if turnover > ₹10 lakhs
Securities Transaction Tax (STT)	On share transfers	STT	Applicable at time of security transfer
Commodity Transaction Tax (CTT)	On commodity futures sales	CTT	Charged at a low rate per transaction
Brokerage & Other Charges	Various trading transactions	Varies (may include GST)	Depends on broker and specific transactions
GST	Applicable if turnover > ₹20 lakhs	GST	Required registration and payment
Advance Tax	If estimated tax > ₹10,000	Advance Tax	Paid in four installments throughout the year

 

In the next section, we'll discuss in more detail when a tax audit is required and why it is important for traders.

Is a Tax Audit Required? 

From a trader’s perspective, it is quite critical to be able to understand if there is a tax audit that is necessary, why and the reasons for the same. A tax audit is a verification of the accuracy of your income by a chartered accountant comparing your statement of different sources of earnings and fees with the amount of tax you paid.

When is a tax audit required?

You are expected to get your tax audit completed if the total turnover from trading (including intraday trading, F&O, currency, and commodity trading) exceeds ₹10L. This regulation is applicable even if your net profit is less than the given rupee.

Why is a tax audit important?

A tax audit is absolutely important for a number of reasons, including compliance, accuracy, and credibility. In short, a proper tax audit ensures that you can avoid penalties and legal issues while also staying error-free in your books and, therefore, being better placed when applying for loans or courtship of investors for your business and such. 

How is the Taxation Calculated?

Here’s how you can calculate your tax liability: 

• Calculate your net profit or loss from trading by subtracting all eligible expenses (such as brokerage fees, transaction charges, and other allowable deductions) from your trading income.
• Add your trading profit or loss to your income from other sources, such as salary, rental income, or interest income, to determine your total taxable income.
• Deduct any eligible tax deductions and exemptions, such as investments in tax-saving schemes or charitable donations, from your total taxable income.
• The remaining amount is your net taxable income, which is subject to tax as per the applicable income tax slab rates.

Advance Tax in Trading

Advance tax is the tax paid in advance on your estimated total income for a financial year. If your estimated tax liability for a financial year exceeds ₹10,000, you are required to pay advance tax in four instalments:

• 15% of the total tax liability by 15th June
• 45% of the total tax liability by 15th September
• 75% of the total tax liability by 15th December
• 100% of the total tax liability by 15th March

To estimate your income tax liability for the present year, calculate the total income, including trading in the stocks and other sources, and find the tax liability on the basis of tax brackets (10% – 30%). However, not paying advance tax or not paying the amount due can cause interest while paying later.

Role of Carry Forward Loss in Taxation 

The carryforward of losses allows you to deduct those losses against the prospects of any profits subsequently made. If you experience a loss while trading, the loss may be carried in your account, with which it will be possible to offset eight years past trading profits when any such arises. This enables the respective taxation in the times and situations when one creates profits.

However, there are certain conditions to be met for carrying forward losses:

• Loss should be suffered only from a taxable head of income under the title “Profits and Gains of Business or Profession.”
• The carryforward only exists if the return of income for the year is received by the due date.

In this chapter, we reviewed the essential components of taxation in trading. Acquaintance with the essential issues allows you to put all this into practice correctly and lawfully. Always be sure to keep accurate records, talk to your tax professional again, and always be on top of new tax regulations to be confident in navigating the world of taxation in trading.