How to: Income Tax for F&O/Intraday Traders
Tax filing feels burdensome for individuals with single income source and if you have additional sources like trading derivates they’re equally as complex and require more work. To start off, a lot of traders are concerned about the liability of an Audit — which is a crucial part of the tax filing process for traders. This post will outline all the possible scenarios and tax applicability for you as a derivative trader, so you can have it cleared once and for all.
Here are a few scenarios you might fit in —
Non-speculative income
Non-speculative trading income including F&O is to be reported as business income in your Income Tax Return. You’re also eligible to deduct any expenses resulting from your business, like rent, mobile/broadband bill, brokerage fees, demat account charges, depreciation of laptop, etc. Business income will be taxable at slab rates. Do note that losses can only be set off against income from other sources which excludes salary income.
If your annual turnover exceeds Rs. 1 crore, you will need to mandatorily have your accounts audited by a practicing CA. Similarly, in case your turnover is less than 1 crore but your income/profits are less than 8% or you’re are facing a net loss, you’ll be required to have financial statements prepared before filing your tax returns.
Trading vs. Investing in equities—
If you have a fairly large volume of delivery based transactions, even in equities, it is to be treated as trading and reported as business income. Losses can be set off against other income sources except for salary.
Having a lower volume of equity delivery transactions throughout the year can be treated as investing activity and income will be treated as capital gains.
Speculative income
Speculative income from sources like Intraday trading is to be reported as business income similar to non-speculative income, but unlike non-speculative, losses from speculative income can only be set off against other speculative income, eg. losses in intraday/day trading cannot be set off against other income sources like Bank interest, Rental income, etc. You can set off the losses of the current year with income from speculative sources till 4 subsequent years(as opposed to 8 years in non-speculative).
Key takeaways
- Ascertain your income source — Is it Speculative or non-speculative?
- Income group — Do you have incomes below or above the set limits with respect to profit percentage of the turnover and total turnover?
- Depending on your situation, file your income tax return with or without an Audit as applicable. Don’t know which ITR form to file? Use Quicko’s Know Your ITR tool to find out which ITR you need to file.
Understanding the process is necessary, doing it yourself is not. Tax filing for incomes like Trading is better handled by experts, so it’s recommended to have your taxes done by someone who is more nuanced and trustworthy.
And this is a good segway to our shameless plug- Quicko has a team of in-house tax CAs dedicated to helping traders like you prepare your tax return in the most effortless way possible. So if you’re looking for help, you know what to do :)
