ITR Filing & Tax Audit for Income from F&O Trading

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Thus, dealings in shares could either be in the course of business - chargeable as Business Income, OR for the purpose of investment - chargeable as Capital Gains. However, as a very broad guideline, as held in many cases, it can be said that - ordinarily, the purchase and sale of shares with the motive of earning a profit, would result in transaction being in the nature of trade, but where the object of investment in shares of a company is to derive income by way of dividend etc.

This article deals with the situation where trading in shares have been considered as business income. Explaining Speculation and Non Speculation Business: Trading in shares can be of two types namely.

A Delivery based trading. B Non delivery based also called intraday trading. The buyer of the share will have to pay the full value of share and the share will become his asset with that either he can trade in his business or hold for investment. Intraday trading by the name itself one can get a view that it refers to the trading system where the traders have to square-off their trade on the same day.

Squaring off the trade means that the traders have to do the buy and sell or sell and buy transaction on the same day before the market close. In other words in this trading, shares are not actually transferred to the DEMAT account of the buyer instead they have to square off their position before the market close on same day by selling the same number of shares. Income from intra-day trading is considered as speculation income and taxed as such. As per Section 43 5 of the Income Tax Act,intra-day trading shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses.

Income from speculation gains is taxed at the normal rates. Intra-day trading is the trading of shares within the same day. Generally, delivery is not taken in case of intra-day trading, and thus, these are said to be speculative transactions.

As per Section 43 5 of the Income Tax Act,the said transactions shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. For a person earning income from any head of income, intra-day trading in shares is always treated as speculative business. Section 43 5 of the Income Tax Act,deals with speculative transaction.

It states that a transaction of purchase or sale of a commodity including stocks and shares settled otherwise than by actual delivery or transfer of the commodity or scrip is a speculative transaction. In intra-day trading in shares, there is no actual delivery as the shares enter and exit from the trading account on the same date and it does not enter the DEMAT account at all.

From the reading of the above it is clear that trading in derivatives including commodity derivatives on a recognized stock exchange will not be considered as a speculative transaction and hence not treated as speculative business. Therefore since these are not considered as speculative business, therefore income from such transactions will be considered as normal business income and loss from such transactions will be considered as normal business loss.

How is turnover computed.? As such, in such transaction the difference amount is 'turnover'. Each transaction resulting into whether a positive or negative difference is an independent transaction. In such transactions though the contract notes are issued for full value of forex trading demo account south africa purchased or sold asset the entries in the books of account are made only for the differences.

Turnover must be firstly calculated, in the manner explained below: The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.

Premium received on sale of options is to be included in turnover. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.

Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated. 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.

When is audit required? Audit is also required as per section 44AD in cases where turnover is less than Rs. If you are trading in the stock market frequently mostly non-delivery tradereturns from it can be classified as follows: Tax treatment is similar to your Business income tax.

It is taxed as per the tax slab you fall in while losses can be offset only against speculative gains. Tax on share trading in such cases is similar to your business income tax. Treatment of Adjustment for loss. As per Section 72 of the Income Tax Act, if there is any such loss which is not set off against the above said incomes, such losses are eligible to be carried forward and set off against the other incomes excluding income from salary for a period of 8 subsequent assessment years in the manner as specified in the above order of set off.

As per the Section 73 of the Income Tax Act, loss in respect of speculative business cannot be set off against any other heads of income i. If there is any such loss which is not set off, such losses are eligible to be carried forward and set off only against speculative incomes for a period of only 4 subsequent assessment years.

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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:.

Income tax department clarifies that these transactions are to be separately assessed under different heads: Income Derived from intraday trading is regarded as speculative business transaction. Loss from intraday trading can only be settled from other speculative income only. If the purpose of the trades was to invest in the securities then it will be assessed under the head capital gains.

Guidelines for business income are as follows:. 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. 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. As turnover in derivative can easily cross Rs. So Mechanism of calculating turnover is different as in calculation of normal business. 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: 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 ].

Tax on long term capital gains: Income tax on sale of long term equity shares is exempt. Guidelines for business income are as follows: If the total turnover of trading of shares exceeds Rs. If the total turnover of trading does not exceeds Rs. Turnover in case of cash market transactions is the total monetary value of shares sold during the financial year. 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. In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. So whether there is profit or loss it has to be treated as turnover. Suppose there is a loss of ITC futures is Rs. Turnover in case of Options is aggregate sum of premium received from sale of options. Turnover will be Rs.

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. In case of turnover less than Rs. Quick Connect info professionalowls.