Indrajith has been a regular player in the stock market since 2019. He took advantage of fluctuations in the market during the past FY and made handsome profits. He traded in both cash market segment and F&O segment. While he made good money in intraday trades in cash market, he lost in the F&O segment. Can he declare both these as “business” and set off the gain against loss?
BSE Sensex was on a roller-coaster ride during the last few months due to multiple headwinds like the Russia-Ukrane war and successive interest rate hikes to control the inflation. Like Indrajit, people who took risks during this uncertainty, made profits. What is the tax impact?
Before we get into the taxation part, let’s understand the key terms –
There are two types of markets through which you can trade in shares –
(a) equity market (cash market)
(b) derivative market (F&O market)
Cash market has Intraday trade and Regular trade. While Regular trade involves taking delivery of shares, intraday trade does not.
In Futures & Options Markets (F&O), a person enters into a contract to buy or sell a share of a company or index on a future date.
TAXATION
Gain or loss from regular trade in cash markets are generally declared as short term / long term capital gain / loss. Traders can declare regular trades as business income/loss instead of capital gains (subject to conditions).
Intraday trades in cash markets are defined as speculative business as per Sec 43(5) of the Income Tax Act 1961 and hence one does not have a choice in declaring this as a capital gain / loss.
While F&O trades do not involve delivery, they are classified as non-speculative business because they are intended to hedge the risk of the underlying stock.
Indrajith has a speculative business income (via intraday trades) and a non-speculative business loss (via F&O).
Non-speculative business loss can be set off against speculative business income while the reverse is not possible.
Share trading has become very user friendly due to the online trading facility, one must keep in mind to declare the gain or loss appropriately to avoid notice from the Tax department.
As a trader, one can declare the gain/loss from share trading as Business income/loss in ITR-3. While doing so, it is vital that one declares the income / loss appropriately and takes advantage of eligible expenses and deductions available under the Income Tax Law.
With respect to ITR-3, one must understand that, declaring income or loss from share trading is much different from declaring income or loss under any other regular business. For instance turnover computation for F&O is different from that of Intra day and short term equity trades. And incorrect declaration is bound leave the assesee at risk of scrutiny from Tax Department.
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With a 15 year experience in the Industry, Chocksi decided to commence his practice after the “Entrepreneurial Bug” bit him ! He is the Founder Partner of Chockalingam Unnamalai & Associates, Chartered Accountants.
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