What are the tax liability for trading in equities or F&O

A person working in an organisation will have a salary. In such a case paying tax by calculating as per rules is easy. But when the same person is having other income also then it is a little difficult and we may have to consult the IT consultant. Some people may have a trading business and the gains from this as gains in Future and options (F&O).

The gains from this business are considered as business gains but not as capital gains. The income tax will be charged as per the applicable tax rates. For F & O tax calculation, there are two methods to be followed.

Method 1: Normal system of computation. The income will be calculated by taking the turnover and subtracting the purchases, other expenses and depreciation if any.

Let us say a person purchased Rs. 5,00, 000/- worth shares in a year and sold shares worth of Rs.6,00,000/- On the face of it we feel he gained Rs.1,00,000/- and that is his income. But during this purchasing and selling, he might have incurred some expenses like subscription, phone calls, consultation etc. Let us assume that he incurred Rs.20.000/- expenses. Then his income will be Rs.80,000/- only.

If we use this system we should maintain all the records of expenses and bills for the expenses and all the account books including balance sheet, P& L account are to be maintained perfectly. When our turnover is less it will be very difficult to meet all these obligations.

So for such cases, there is the second option.

Method 2: In this method option we need not maintain any records. The tax will be to be paid on an assumed basis. This method is known as presumptive tax.
This method can be used by the business people whose turnover is less than 2 crores. we can declare our income as a percentage of the turnover. The minimum percentage to be declared is 6% of the turnover. Earlier this minimum percentage was 8% but from the last three years, it was reduced to 6%. In F & O transactions all the payments are received through the bank. SO calculating the turn over is very easy and on that, we have to pay the percentage as we declare and it should not be less than 6%. If we feel that our income will be less than 6% we have to go for method 1.

The total turn over is to be calculated based on profitable transactions and nonprofitable transactions also. For example, you purchased shares worth of Rs.50.000 and sold at Rs. 60,000/-. The gain is Rs.10,000/-. Another share you have purchased at 5000/- and sold at Rs.4000/-. The loss is Rs, 1000/-. So the total turnover will be calculated as Rs. 10,000/ + Rs.1000/- = Rs.11,000/-.

If there is a loss in these transactions, that loss can be reduced from the income you have from other sources during that year. If we are not able to do this in the same year. We can carry forward for the next year and it can be continued up to eight years and can be set off against your business income only.

Many people trade in equities and also in F & O (futures and options) instruments. There are different types of transaction and depending upon that the tax is applicable.

Let us consider day trading operations. Day trading is considered as a short time gain and is taxed at a special rate of 15%. The net gain in the day trading will be taken for calculation of the short term tax.

Another is share trading other than day trading. That has two types of trading. One is where the period of holding is less than 1year then it is termed as short term capital gain. This income is added to the income of the tax payer and he has to pay the tax as per the bracket of his tax. If the period of holding is 1 year or more than the Govt has now enacted a tax as LTCG (long term capital gain) which will be levied at 10 % without the indexation benefit. This will only be applicable when the gain in a financial year exceeds Rs 1 lakh.

Those people who are doing F & O trading as a business entity are taxed based on the turnover of their deals. The turnover is defined any shortfall in the contract or gain in the contract which is also known as absolute profit. If it is a business entity than the F & O transactions are audit able also especially when there is a loss or the turnover increases the value of Rs 2 crore.

One thing to be noted is that the loss and gain are to be adjusted within the same category and in case loss is there than it has to be carried forward for next years and can not be adjusted with other heads this year only. This is an important provision and to be understood clearly. For example a long term loss can be carried forward for 8 years which means that next year if there is a gain it will get nullify to that extent.

Calculation of tax would not be a clumsy process provided one is working in a single organisation. In that situation, the of rate is calculated as per your capacity of earning. However, a complex situation may arise due to source of multiple earnings including the multiple trading business where the gains have to be calculated separately for which we need to take suggestions from some Financial - consultant.
For the computation of tax in relation to shares we have to take stock of amount invested and the gains there on on its selling. The profit in this case would the selling price of the share minus the investment. However, this would indicate a rough idea of the gain but in case we have some expenditure such as calls and consultation of the advisors etc, we will have subtract this components from the corpus of gains
Now the earnings from the shares have to be clubbed with that of organisation so as to calculate the income - tax for all such earnings. In such process, there should be systematic inclusion of the relevant bills, updating of Balance - sheets and maintaining P&L records.
However, in case of loss in the share because of market erosion, the same loss has to be calculated and from the entire earnings the loss has to subtracted to get the value of actual earnings. Hence. taxation under such cases would be based on your real earnings.