For a salaried person who trades in stocks, filing an income tax return can be a tricky job. Traders today have so many compelling options that are varying on the instrument, the frequency of trade and the volume in order to manage their capital more wisely and then achieving of trading objectives. Traders can either fill the ITR-2 form, that is meant for the salaried person with no professional business income or ITR-4 which is for income which is derived either from business or from the profession.
However, deciding the right form and to fill it in the right manner has always been a difficult task. So understanding the process of taxation treatment business for the trading activities in India is very important in order to achieve the goals accordingly.
Trader or Investor?
Income from investment activity or trading can also be classified into four different categories:
- Long-term capital gains
- Short-term capital gains
- Speculative business income
- Non-Speculative business income
This classification, however, depends on how often an investor buys and sells the stocks and on the income which is earned by him. Thus in order to understand the rules and the applicability of capital gains tax on the transactions that are based on various classifications, you are required to pay attention to the Income Tax Return and you should thus take the advice of an auditor before filing the return.
Capital Gains Tax:
Any profit or loss made which is earned or is incurred respectively after holding the stock for more than one year (365 days) is considered as a long-term capital gain or loss.
As per section 10(38), long-term capital gains are completely tax-free provided that such investments are done by a recognized stock exchange for which the security transaction tax (STT) is paid.
Gains that are made within one year of the sale of a stock are however considered as short-term capital gains. These are taxed at 15% for investors. For the traders, both the gains are considered as business income and are taxed at the normal slab rates of 10, 20 or 30 per cent. The expenses that are incurred on trading, such as the internet connection charges or so, can, however, be excluded from the gains.
Traders can also set off and carry forward both their short-term or the long-term capital losses, which are incurred within eight years of the time period, in a case of any loss. However, for the investors, only the short-term capital loss can be set off or they can be carried forward, with the fact that they have no provision for carrying forward or for setting off their long-term capital loss.
Tax on Futures and Options:
If you are dealing with the F&O market, then it is considered as a trader. Therefore, any gains from trading in the Future & the Options market will thus be considered as a business income. This will be accommodated to your income under other heads and the total will thus be subjected to taxation under the applicable income tax slab rate. The expenses that are incurred on trading can also be deducted simultaneously and the loss can be set off/carried forward over the next 8 years.
Mistakes to avoid:
The blunder that traders usually do is that they
- Don’t declare their loss at the time of income tax return filing. By doing so, the loss thus cannot be set off or it cannot be carried forward against any income from future years, hence, they become a dead loss.
Another pitfall is that an
2. Erroneous calculation of the turnover is required to be avoided by the traders.
A third error is in choosing the
3. Wrong ITR form for filing a return. If the person has only long-term capital profits or the losses, then he is required to fill ITR 2 form. For the traders, form ITR 4 is required for filing the income tax return.