Taxation for Traders / Investors

[carnot11]

Hello,

I am trying to gather information on Taxation matters and will be posting them here for the benefit of all.

Below is what my friend had forwarded to me in Mar 2014.

Enjoy,
CArnot
__________________________________________________ ______

Indian Income Tax Act 1961, Section 44AB reads as under:
"Audit of accounts of certain persons carrying on business or
profession” -- 44AB -- Every person, --
(a) carrying on business shall, if his total sales, turnover or gross
receipts, as the case may be, in business exceed or exceeds
one crore rupees* in any previous year; or
(b) carrying on profession shall, if his gross receipts in profession
exceed twenty-five lakh rupees* in any previous year; or
(c) carrying on the business shall, if the profits and gains from the
business are deemed to be the profits and gains of such
person under section 44AE or section 44BB or section 44BBB,
as the case may be, and he has claimed his income to be
lower than the profits or gains so deemed to be the profits and
gains of his business, as the case may be, in any previous
year; or
(d) carrying on the business shall, if the profits and gains from the
business are deemed to be the profits and gains of such
person under section 44AD and he has claimed such income to
be lower than the profits and gains so deemed to be the profits
and gains of his business and his income exceeds the
maximum amount which is not chargeable to income-tax in any
previous year get his accounts of such previous year audited by an
accountant before the specified date and furnish by that date the report of such
audit in the prescribed form duly signed and verified by such
accountant and setting forth such particulars as may be prescribed.

Note - For all practical purposes read "Accountant" as registered chartered accountant

The following have been listed out as professions
(i) Accountancy
(ii) Architectural
(iii) Authorised Representative
(iv) Company Secretary
(v) Engineering
(vi) Film Artists/Actors, Cameraman, Director, Singer, Story-writer, editor,
singer, lyricist, dress designer etc.
(vii) Interior Decoration
(viii) Legal
(ix) Medical
(x) Technical Consultancy
(xi) Information Technology

The following activities have been held to be business :
(i) Advertising agent
(ii) Clearing, forwarding and shipping agents
(iii) Couriers
(iv) Insurance agent
(v) Nursing home
(vi) Stock and share broking and dealing in shares and securities
(vii) Travel agent.

Explanation ---

Share brokers, on purchasing securities on behalf of their customers,
do not get them transferred in their names but deliver them to the customers
who get them transferred in their names. The same is true in case of sales
also. The share broker holds the delivery merely on behalf of his customer.
The property in goods does not get transferred to the share brokers. Only
brokerage which is being accounted for in the books of account of share
brokers should be taken into account for considering the limits for the
purpose of section 44AB. However, in case of transactions entered into by
share broker on his personal account, the sale value should also be taken
into account for considering the limit for the purpose of section 44AB. The
case of a sub-broker is not different from that of a share broker.


The turnover or gross receipts in respect of transactions in shares,
securities and derivatives may be determined in the following manner.

(a) Speculative transaction:

A speculative transaction means a transaction in which a contract for the purchase
or sale of any commodity, including stocks and shares, is periodically or ultimately
settled otherwise than by the actual delivery or transfer of the
commodity or scrips. Thus, in a speculative transaction, the contract
for sale or purchase which is entered into is not completed by giving or
receiving delivery so as to result in the sale as per value of contract
note. The contract is settled otherwise and squared up by paying out
the difference which may be positive or negative. As such, in such
transaction the difference amount is 'turnover'. In the case of an
assessee undertaking speculative transactions there can be both
positive and negative differences arising by settlement of various such
contracts during the year. Each transaction resulting into whether a
positive or negative difference is an independent transaction. Further,
amount paid on account of negative difference paid is not related to
the amount received on account of positive difference. In such
transactions though the contract notes are issued for full value of the
purchased or sold asset the entries in the books of account are made
only for the differences. Accordingly, the aggregate of both positive
and negative differences is to be considered as the turnover of such
transactions for determining the liability to audit vide section 44AB.

(b) Derivatives, futures and options:

Such transactions are completed
without the delivery of shares or securities. These are also squared up
by payment of differences. The contract notes are issued for the full
value of the asset purchased or sold but entries in the books of
account are made only for the differences. The transactions may be
squared up any time on or before the striking date. The buyer of the
option pays the premia. The turnover in such types of transactions is
to be determined as follows:
(i) The total of favourable and unfavourable differences shall be
taken as turnover.
(ii) Premium received on sale of options is also to be included in
turnover.
(iii) In respect of any reverse trades entered, the difference thereon,
should also form part of the turnover.

(c) Delivery based transactions:

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.

Further, an issue may arise whether such transactions of purchase
or sale of stocks and shares undertaken by the assessee are in the course of
business or as investment. The answer to this issue will depend on the facts
and circumstances of each case taking into consideration the nature of the
transaction, frequency and volume of transactions etc.

In case such transactions are for the purposes of investment and
income/loss arising therefrom is to be computed under the head 'Capital
Gains', then the value of such transaction is not to be included in sales or
turnover for deciding the applicability of audit under section 44AB. However,
in case such transactions are in the course of business, then the total of
such sales are to be included in the sale, turnover or gross receipts as the
case may be, of the assessee for determining the applicability of audit under
section 44AB.

Distinction between shares held as stock-in-trade and shares held as
investment - tests for such a distinction
1. The Income-tax Act, 1961 makes a distinction between a “capital
asset” and a “trading asset”.
2. Capital asset is defined in Section 2(14) of the Act. Long-term capital
assets and gains are dealt with under Section 2(29A) and Section 2(29B).
Short-term capital assets and gains are dealt with under Section 2(42A) and
Section 2(42B).
3. Trading asset is dealt with under Section 28 of the Act.
4. The Central Board of Direct Taxes (CBDT) brought to the notice of the assessing
officers that there is a distinction between shares held as investment (capital
asset) and shares held as stock-in-trade (trading asset). In the light of a
number of judicial decisions pronounced after the issue of the above
instructions, it is proposed to update the above instructions for the
information of assessees as well as for guidance of the assessing officers.
5. In one of the case the Supreme Court observed that:
“Whether a particular holding of shares is by way of investment or
forms part of the stock-in-trade is a matter which is within the
knowledge of the assessee who holds the shares and it should, in
normal circumstances, be in a position to produce evidence from its
records as to whether it has maintained any distinction between those
shares which are its stock-in-trade and those which are held by way of
investment.”
6. In another case the Supreme Court observed :
“The High Court, in our opinion, made a mistake in observing whether
transactions of sale and purchase of shares were trading transactions
or whether these were in the nature of investment was a question of
law. This was a mixed question of law and fact.”
7. The principles laid down by the Supreme Court in the above two cases
afford adequate guidance to the assessing officers.
8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to
the decisions of the Supreme Court in several cases, has culled out the
following principles:
“(i) Where a company purchases and sells shares, it must be shown that
they were held as stock-in-trade and that existence of the power to
purchase and sell shares in the memorandum of association is not
decisive of the nature of transaction;
(ii) the substantial nature of transactions, the manner of maintaining
books of accounts, the magnitude of purchases and sales and the
ratio between purchases and sales and the holding would furnish a
good guide to determine the nature of transactions;
(iii) ordinarily the purchase and sale of shares with the motive of earning a
profit, would result in the transaction being in the nature of
trade/adventure in the nature of trade; but where the object of the
investment in shares of a company is to derive income by way of
dividend etc. then the profits accruing by change in such investment
(by sale of shares) will yield capital gain and not revenue receipt”.
9. Further CBDT emphasises that it is possible for a tax payer to have two
portfolios, i.e., an investment portfolio comprising of securities which are
to be treated as capital assets and a trading portfolio comprising of stock-in-trade
which are to be treated as trading assets. Where an assessee has two portfolios,
the assessee may have income under both heads i.e.,capital gains as well as business income.
10. Assessing officers are advised from CBDT that the above principles should guide
them in determining whether, in a given case, the shares are held by the
assessee as investment (and therefore giving rise to capital gains) or as
stock-in-trade (and therefore giving rise to business profits). The assessing
officers are further advised that no single principle would be decisive and the
total effect of all the principles should be considered to determine whether, in
a given case, the shares are held by the assessee as investment or stock-intrade.

 

[madhavareddy1203]

Nice one.

Keep adding more

 

[carnot11]

Hello,

Another mail from my friend regarding taxation matters. Hope it helps.

Enjoy,
CArnot
____________________________________________________________________

Maintenance of books of account under Income Tax
________________________________________________

Who is required compulsorily to maintain the books of accounts and for how many years one has to keep his books of accounts.*

Maintenance of books of accounts by Professionals:
--------------------------------------------------

Section 44AA of Income Tax Act and rule 6F of Income Tax rules deal with the provisions regarding maintenance of books of
accounts under Income tax Act. As per section 44AA(1) read with rule 6F the persons carrying on any of the profession as
mentioned below are required to maintain books of accounts and other documents as may enable the assessing officer to
compute his total income, if yearly gross receipts of the profession exceeded* Rs 150000.

1)Legal
2)Medical
3)architectural
4)engineering
5)accountancy
6)technical consultancy
7)interior decoration
8)authorized representative
9)film artist
10)any other profession as is notified by the board

When no books of accounts are required to be maintained by professionals covered u/s 44AA(1):
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Proviso to Rule 6F (1) provides that if the gross receipts of a profession do not exceed Rs 150000 in any one of the three
years immediately preceding the previous year or where the profession has been newly setup in the previous year, his total
gross receipts in the profession for that year are not likely to exceed the said amount, then such professional need not to
maintain any books of accounts as mentioned in sub rule 2 of rule 6F.

It means that if the gross receipts of a profession exceed Rs 150000 in all the three years preceding the previous year only
then the books of accounts will be required to be maintained, if the gross receipt exceed the prescribed limit in the two
preceding years but not in the third preceding year then there will be no need to maintain books of accounts as contemplated
in sub rule 2 of rule 6F.

Maintenance of Books of accounts by other Persons covered u/s 44AA (2):
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In relation to any other persons engaged in any other profession or carrying on any business other than section 44AA (1), the
requirement of compulsory maintenance of books of accounts applies if- either the income from business or profession exceeds
Rs 120000 or the turnover or gross receipts exceed Rs 10 Lakhs in any one of the three years immediately preceding the
previous year.

Example :

IF your profession is not covered in profession referred in sec 44AA(1) hence sec 44AA(2) applicable on u, in FY 07-08 ur
income from business profession was 140000 (exceeding 120000) so u r liable to keep & maintain books and other documents for
FY 08-09 as per sec 44AA.

When no books of accounts are required to maintained by other persons covered u/s 44AA (2):
-------------------------------------------------------------------------------------------

If the Income or the gross receipts or gross turnover of a person carrying on business or profession other than profession as
mentioned u/s 44AA (1) do not exceed in any one of the three years preceding the previous year then no books of accounts will
be required to be maintained u/s 44AA (2).

Presumptive Income scheme:
--------------------------

The* persons who are filling their return of income under the presumptive income scheme like under section 44AD or 44AE or
44AF etc are not require to compulsorily maintain books of account u/s 44AA. However where the profits and gains from the
business are deemed to be profits and gains u/s 44AD or 44AE or 44AF or 44BB or 44BBB as the case may be, and the assessee
has claimed his income to be lower than the profits or gains so deemed, then the books of accounts will be required to be
maintained u/s 44AA.

Maintenance of books of accounts in case of new 44AD section:
-------------------------------------------------------------

A new clause IV has been added to sub section 2 of section 44AA w.e.f. 01-04-2011 which provides that where the profits and
gains from a business are deemed to be profits and gains of the assessee under new section 44AD which is also applicable w.e.f
01-04-2011 and the assessee has claimed such income to be lower than the profits and gains so deemed i.e. below 8% and the
income of the assessee exceeds the maximum amount which is not chargeable to income tax during previous year then in such case
such person shall keep and maintain such books of accounts and other documents as may enable the assessing officer to compute
his total income.

Thus it means that if a person declares his income below the 8% of his total turnover or gross receipts as required u/s 44AD
which is applicable w.e.f 01-04-2011 and his income is above the exempted limit then he will have to compulsorily maintain his
books of accounts. But if his total income is below the exempted limit and profits are also declared below 8% of gross turnover
or gross receipts then he will need not to maintain compulsory books of accounts.

What books of accounts are required to be maintained by persons covered u/s 44AA(1):
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As per Rule 6F(2) the following books of accounts and documents are required to be maintained: 1) cash book, 2)Journal, if the
accounts are maintained as per mercantile system of accounting, 3)ledger 4)carbon copies of bills, serially numbered and carbon
copies or counterfoils of receipts issued in respect of sums exceeding Rs 25, 5)original bills for expenses exceeding Rs. 50
and payment vouchers for petty expenses. However in a case where the cash book maintained by the person contains adequate
particulars in respect of the expenditure incurred, then vouchers are not necessary in respect of expenses upto Rs 50. Persons
engaged in medical profession are, in addition, required to maintain daily case register in the prescribed Performa (Form No. 3C)
and inventory, as at the beginning and end of the year, of stock of drugs, medicines and other consumables accessories used for
the purpose of the profession.

Books or books of accounts have also been defined u/s 2(12A) as including ledgers, day-books, cash books, account-books and
other books, whether kept in the written form or as print-outs of data stored in a floppy, disc, tape or any other form of
electro-magnetic data storage device.

Document has been u/s 2(22AA) as including an electronic record as defined in clause (t) of sub section (1) of section 2 of the
Information Technology Act, 2000.

For how many years books of accounts are required to be preserved:
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Every year the record of books of accounts grows up and the cupboards filled up more and more. Every assessee wants to know for
how many years he should keep the records of his books of accounts. Rule 6F(5) provides that the books of accounts and other
documents* are to be kept for at least 6 years from the end of relevant assessment year. That means from the assessment year 2009-10
one should keep books of accounts upto the assessment year 2003-04 i.e. books of accounts of financial year 2002-03.

The time limit for issuing notices for assessment or reassessments have been prescribed u/s 149, after the end of such prescribed
time no notice can be issued and no assessment can be framed, therefore the assessee will not need books of accounts of the
concerned year. Keeping in mind the time limit as provided u/s 149 for issuing notice the following suggestions are made regarding
preservation of books of accounts:

1) If the assessee has made an appeal against any assessment order of any year then the books of accounts of such year should be
preserved until the final decision of such appeal.

2) Where the assessment in relation to any Year has been reopened u/s 147 within time u/s 149, in such case all the books of account
and documents shall continue to be kept till the assessment so reopened has been completed.

3)Books of accounts for only 7 financial years should be preserved.

Where the books of accounts should be kept:
-------------------------------------------

The current year’s books of accounts should be maintained and kept at the principal place of business or profession as per Rule 6F(3).
There is no specific rule as to where the books of accounts of earlier years should be kept. Consequences for failure to maintain
books of accounts: Failure to maintain books of accounts and other documents or to retain them as required u/s 44AA attracts penalty
of Rs. 25000 u/s 271A. The penalty can be imposed by the assessing officer or CIT (Appeal).

The Income Tax Appellate Tribunal Delhi in its decision (1998) 97 Taxmann 273 (Magzine)/60T.T.J. 278 has held that there is no rule
made to the effect that which books of accounts are required to be made by the persons carrying on business covered u/s 44AA (2),
therefore if the assessee has kept the details of Incomes and expenditures then no penalty shall be levied u/s 271A.

Similar decision was made by Amritsar bench of Tribunal in case of Sujan Singh v. AO [2007] 110 TTJ (Asr.) 818 wherein it was decided
that Rule 6F has not been made applicable to the persons carrying on business or Profession other than those mentioned u/s 44AA(1)
and covered u/s 44AA(2). The case of the assessee falls u/s 44AA (2), as the assessee was carrying on a business of poultry farm.
The board has not specified or notified the books of account to be maintained by persons covered under sub-section 2 of section 44AA.
Therefore, rule 6F is not applicable to the case of the assessee- ITO v. Dinesh Paper Mart [1999] 64 TTJ (Nag.) 674 : [1999] 70
ITD 274(Nag.) relied on.

After levying penalty for non maintenance of books of accounts, no penalty can be levied for not getting the books of accounts audited:
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Guwahati high Court has held in its decision (1996) 222 ITR 691 that if the penalty u/s 271A has been levied on an assessee for non
maintenance of books of accounts then thereafter no penalty shall be levied*u/s 271B for not getting the books of accounts audited.
_______________________________________________________________

 

[carnot11]

Hello,

Many (including me) are still confused on how to deal with gains / loss from F&O.

I found articles on the internet - links given below.

Credit to respective authors / blogs / website / magazines , etc..

I re-produce for immediate access.

http://www.smartpaisa.in/2013/01/se...hares-stocks-derivatives-futures-options.html

http://www.outlookmoney.com/article.aspx?286519

Please check for latest rules / regulations of IT department.

Enjoy,
Carnot

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Taxation On F&O Trading

In the Finance Act, 2005, measures were taken to rationalise the tax treatment of derivatives. It said that transactions in derivatives on recognised stock exchanges shall not be considered as speculative transaction.

Had it been a speculative transaction the losses could only be set off against income from speculative transactions and be carried forward for four years.

Business Income vs Capital Gains
There have always been differences between the taxpayer and tax authorities on the classification of F&O income—whether it is business income or income from capital gains—but it entirely depends on certain facts and circumstances:

■ Linking commodity derivative transactions with existing business;

■ Frequency of the transactions and holding period;

■ Volume of transaction; and

■ Motive behind the transactions.

In this context, one should note that no single factor is decisive and the effects of all the factors should be considered to determine whether the income is in the nature of business income or capital gains.

For example, if the individual is a trader in shares, currently offering his income as business income and carries out F&O transactions at the same time, then the income from F&O will be treated as business income. So, an investor, who has transacted in derivatives has to independently ascertain the nature of the derivatives transactions and decide accordingly.

F&O Income As Business Income
If income from F&O is considered as business income then it has certain implications.

■ Securities transaction tax (STT) and administrative expenses are deductible.

■ Losses can be set off against income from business, house property and other sources, but not against one’s salary income.

■ According to the new rules, unabsorbed losses can be carried forward for eight years and set off against one’s business income.

■ If the turnover exceeds `1 crore, tax audit compliance is necessary.

There is a recent clarification by the finance minister that trading in commodity derivatives shall not be treated as ‘speculative transactions’.

Determination Of Turnover
For derivatives transactions, the following are included in ‘turnover’ for purposes of tax audit under Section 44AB of the Income Tax Act, 1961:

■ Total of favourable and unfavourable differences;

■ Premium received on sale of

options; and

■ Difference in respect of reverse trades entered into.

Example
If one makes a profit of `25 lakh (favourable) and books a loss of `13.5 lakh (unfavourable) in a fiscal from F&O trading, the ‘turnover’ will be `38.5 lakh (total of favourable and unfavourable differences), there is no need for a tax audit. If the turnover exceeds `1 crore, tax audit is applicable.

F&O Income As Capital Gains
If income from F&O is treated ascapital gains then it has certainimplications:

■ Such gains are usually short-term and taxable at normal slab rates.

■ Expenses related to sale or purchase of transactions, such as brokerage, are deductible, but STT is not.

■ Short-term capital loss can be set off against any capital gains and carried forward for eight years.

Conclusion
As F&O transactions can be classified either as income from business or capital gains, salaried individuals must first be aware of the form that needs to be filled in (see Know Your ITR Forms). To avoid any further confusion, one should also critically analyse the nature of income from derivatives and list it under the appropriate head.

The due date for filing income tax returns is 31 July, but when income from futures and options is considered as business income and is subject to tax audit, then the due date becomes 30 September.

==========================================================================================

Income Tax and STT

Taxation of profit or loss from securities transactions depends on whether the activity of purchasing and selling of shares / derivatives is classified as investment activity or business activity. Treatment of STT also depends upon whether the income from these securities transactions are included under the head “Income from Capital Gains” or under the head ‘Profits and Gains of Business or Profession’.

Scenario 1: ‘Income from Capital Gains’

This refers to the scenario where the assessee is either Salaried or is engaged in some other business or profession and trading in securities is not the main line of business. In such cases gains or losses from securities transactions are taxed under the head “Income from Capital Gains”. Gains or losses are subject to Short Term Capital Gains (STCG) or Long Term Capital Gains (LTCG) tax depending upon the period of holding, i.e., if the holding period is less than 1 year, gains are classified as STCG and if the holding period is equal to or greater than 1 year, gains are classified as LTCG. Any equity share, which has been sold through a recognised stock exchange and on which STT has been paid, is entitled to exemption from LTCG under Section 10 (38) of the Act. Similarly, in case of STCG of such shares, the gains shall be taxed only at 15%, plus surcharge and education cess under section 111A of the Act.

Important points to note:

•STCG and LTCG rates of 15% and NIL are available only if the specified security is sold through a recognised stock exchange. Private deals or transactions, not routed through a recognised stock exchange in India, will not be covered
•the purchase of the specified securities could be through any mode and need not be through a recognised stock exchange
•The exemption is not available to transactions where STT has not been paid
•Since LTCG is exempt, Long Term Capital Loss, arising from these specified securities, cannot be set-off against any other gain/income. This loss shall lapse
•As per section 40(a)(ib) of the Income tax Act, STT cannot be claimed as an expense in computing the income chargeable under Capital Gains

Scenario 2: ‘Profits and Gains of Business or Profession’

This refers to the scenario where main business of the assessee is trading in securities. In such cases the gains or losses are classified as business income, which is taxed at the regular rate of income-tax. STT paid in respect of taxable securities transactions entered into in the course of business shall be allowed as deduction under section 36 of the Income-tax Act. Until 31st March 2008, the amount of STT paid was allowed as rebate under section 88E of the Income-tax Act. However, with effect from 1st April 2008, rebate available under section 88E has been discontinued.

Appendix

“Securities” is defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, to include:

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ii) derivative;
(iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes;
(iv) security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(v) Government securities;
(vi) such other instruments as declared by the Central Government; and
(vii) rights or interest in securities

 

[carnot11]

Hello,

Something on Capital gains treatment.

I found articles on the internet - links given below.

Credit to respective authors / blogs / website / magazines , etc..

I re-produce for immediate access.

Please check for latest rules / regulations of IT department.

http://www.business-standard.com/article/pf/the-long-and-short-of-capital-gains-111061900036_1.html

Enjoy,
CArnot
===============================================

Tax rates, holding period and indexation norms vary across assets like property, stocks

With the tax filing deadline fast approaching, it is time to start planning your tax returns. And as preparation, acquaint yourself with the complex capital gains tax structure first.

Basically, capital gains tax is applicable on sale of capital assets such as property, gold, shares, mutual fund (MF) units, bonds and debentures. Depending upon the holding period, these assets are classified as long-term or short-term. The latter are those that are typically held for less three years or lesser. By corollary, assets held for more than three years are termed as long-term.

A READY RECKONER ON CAPITAL GAINS TAX RATES

Capital asset (transactions                           Long-term tax rates (%)
not covered by STT)                           Without indexation     With indexation 

Listed stocks*                                     10                      20 

Unlisted stocks                                    -                        20 

Listed debentures                                  10                         - 

Unlisted debentures                                20                         - 

Equity MFs*                                        10                       20 

Non-equity MFs                                      10                     20 

Immovable Property                                -                           20 

*If transaction is covered by STT, then applicable STCG is 15%, no LTCG
# STCG for all asset types as per applicable slab rates

The only exception are shares, debentures, MF units and deep discount bonds. These assets are considered long-term in nature if held for more than a year. Shares, MF units and bonds need not be listed or quoted. Debentures, however, have to be listed to qualify for the one-year period.

Indexation
Starting with FY81-82 as the base year, the RBI notifies the Cost Inflation Index (CII) every year. Indexed cost is arrived at by multiplying the cost with the ratio of CII for the year of sale and year of purchase. Indexation essentially adjusts cost for inflation thereby reducing the amount of capital gains. For example, say a property that was purchased in April 1992 for Rs 10 lakh is sold in February 2011 for Rs 75 lakh. In this case, the capital gain would normally have been Rs 65 lakh (Rs 75 lakh - Rs 10 lakh). However, this would be unfair to the taxpayer since the value of the rupee in 1992 was not the same as it is today. Hence the cost would be suitably inflated as per the indices for the specified year. The CII for FY92-93 was 223 and that for FY2010-11 is 711. Therefore, the indexed cost in the above example would work out to Rs 31.9 lakh (Rs 10 lakh multiplied by 711/223). The resultant capital gain of Rs 43.1 lakh is much lower than the non-indexed Rs 65 lakh.

Tax Rates
Long-term capital gain (LTCG) tax rate is 20 per cent after reducing indexed cost. However, only in the case of listed securities, MF units and zero coupon bonds, the taxpayer can also choose to pay 10 per cent after reducing the non-indexed cost from the sale price, if the same works out to be lower. This is applicable only for transactions not covered by the Securities and Transaction Tax (STT). If the transaction is covered by STT, then there is no LTCG on sale of listed stocks or equity MF units. For other assets such as property or gold, the 10 per cent option isn't available, long-term tax is payable only at 20 per cent after indexation.

Short-term capital gains (STCG) tax on listed shares and MF units is 15 per cent. For other assets, the short-term gains are simply added to the other income and taxed as per slab applicable.

Saving Capital Gains Tax
One cannot save on STCG tax. But, depending upon the asset, LTCG tax may be saved by making certain investments. So, LTCG from sale of a residential house may be saved by investing the gains in another residential property, either one year before or within two years after sale. LTCG on assets other than a residential house may be saved by investing the net sale consideration (and not the capital gain), in another residential property again one year before or within two years from date of sale. If only a part of the consideration is used to buy the new property, proportionate deduction will be available. LTCG tax payable on sale of any asset may be saved by investing the gain amount in bonds under section 54EC. NHAI and REC issue such bonds and a maximum of Rs 50 lakh can be invested in a single financial year

 

[carnot11]

Hello,

Further on the matter of F&O transactions.

https://taxe.wordpress.com/2007/11/21/capital-gains-issues-fo-transactions/

Please check with IT department for latest rules / regulations.

Credit to the original author / blog / website / magazine etc.

I only reproduce for immediate access.

I could not help notice that the following article was posted at the above link on 21.Nov.2007 (hence check for latest rules / regulation of Indian IT department)

Enjoy,
CArnot

=============================================

Capital Gains issues – F&O transactions

21 Nov 2007

Futures & Options (F&O) Transactions – Capital Gains or Business Income?

(I) To Treat under Capital Gains:

•First View: The investor may undertake derivatives transactions to hedge his investment portfolio. The period of any derivatives transaction cannot exceed three months. So just because the investor has to square up his position every three months and then take fresh position does not mean that this is a business transaction.
•Second View: Derivatives are a right to acquire property. Thus, they are properties carrying a value and, hence, should be considered as a capital asset and subject to capital gains
•Third View: Few of the indicative conditions to prove derivatives as capital assets: ◦The derivatives should be held as capital assets (not stock in trade)
◦Normally, The holding period should be fairly long
◦The intention of purchase / sale should be for investment purpose or for hedging investment portfolio
◦The accounting treatment should be as that of investments
◦The frequency of transaction should be less
◦There should not be any separate administrative set up.
◦The source of funds should be your savings and existing sources of income only.

Consequence of showing under Capital Gains:

Long Term Capital Gains: If the gains are long-term, then the taxation will be as per Section 112, wherein if long-term capital asset is a security listed in any recognized stock exchange in India, then the assessee can pay tax by choosing any one of the following options. (Note: Securities as per Section 2(h) of the securities contracts (Regulation) Act, 1956 includes derivatives as securities)
•Option1: Claim indexation and Pay 20% tax
•Option2: Don’t Claim indexation and Pay 10% tax

Long Term Capital Loss: During the year, Long Term Capital Loss can be set off only against Long Term Capital Gains Brought forward LTCL can be set off only against LTCG.

Short Term Capital Gains: If the gains are short-term, then the short term gains will be added to Gross Total Income and normal tax rates of slab rate will apply. Although shown as capital gain and subject to the securities transaction tax (STT), derivatives transaction will not attract the concessional tax rate of 10% applicable to short-term capital gain (on which STT is paid). As per Sec.111A, the benefit of concessional tax rate of 10% is applicable only to equity shares in a company or units of an equity-oriented mutual fund.

Short Term Capital Loss: During the year, STCL can be set off against both LTCG and STCG.Brought forward STCL can be set off against both LTCG and STCG.

(II) To Treat under Business Income:

Income from derivatives trading is more likely to be shown under the head, ‘Business income’, due to the short duration and nature and sheer volume of transactions. Once classified as business income, the next issue arises as to whether it is to be shown as speculative business income or non-speculative business income. Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.Derivatives are not capable of being delivered as they are financial contracts without any physical existence. So the question of non-delivery does not arise. Therefore, derivatives trading is not speculative business. Also as per section 43(5) the gains from derivatives are not speculative.

Consequence of showing under Business Income:

§ Whether the derivatives transaction is shown as business income or capital gain, the tax liability remains the same if one is in the highest tax bracket. It is preferable to show it as business as one can also claim rebate under sec 88E, in respect of STT paid and deduction of expenses when the transaction is shown as business income. Chances of litigation are also less when the derivatives transaction is shown as business income. However, if it is a business income and the turnover exceeds Rs 40 lakh, then a tax audit is required. Failure to get the accounts audited) invites penalty.

§ There is no segregation of long term or short term. Every gain or loss is business income / loss

§ The gains will be taxed normally. No special treatment.

Under sec 88E, rebate of STT is allowed subject to the following conditions-

1. The income of the taxpayer includes any income chargeable under the head ‘Profit and gains of business or profession’ arising from taxable securities transactions.

2. The assessee furnishes along with the return of income evidence of payment of securities transactions tax in Form No. 10DB (in the case of transactions in stock exchange). The rebate under sec 88E is equal to STT paid by the assessee in respect of such taxable securities transactions. However, the amount of rebate cannot exceed tax calculated at the average rate of tax on the income from securities transactions i.e., Taxable income from securities transactions multiply by tax liability (before rebate, surcharge and cess) divided by net total income

Thumb Rule:

Treat as business income because of following benefits:
1.Claim administrative expenses.
2.STT rebate is available
3.If loss is there, it can be easily set off with incomes from house property, other sources
4.Business for auditors, If turnover is > 40L
5.Normal slab rate tax to be paid (irrespective of treating as capital asset or stock-in-trade) so why not treat as business and claim above benefits also?
6.Avoid litigations, by claiming derivatives as business

 

[carnot11]

Dear All,

There is a lot of confusion about turnover calculation in derivatives segment of Indian stock exchange.
Below is my understanding of the rules followed in industry.

Please check for latest rules / regulations of IT department.

Enjoy,
CArnot
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(b) Derivatives, futures and options:*

Such transactions are completed without the delivery of shares or securities. These are also squared up by payment of differences.
The contract notes are issued for the full value of the asset purchased or sold but entries in the books of account are made only for the differences.
The transactions may be squared up any time on or before the striking date. The buyer of the option pays the premia.

The turnover in such types of transactions is to be determined as follows:

(i) The total of favourable and unfavourable differences shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover.
(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

Examples below are for NIFTY with contract size of 75 units, and for information purpose only.
Please consult a professional / certified tax consultant before filing your IT returns.

First understand the difference between order and trade

Order - Buy 10 lots (750 units) of NIFTY FUTURES @ 7500

Trade -

Possibility 1 - 750 units bought @ 7500 ( 1 trade only)
Possibility 2 - 500 units bought @ 7500 and 250 units boght @ 7499.95 ( 2 trade)
Possibility 3 - 250 units bought @ 7500, 250 units bought @ 7499.95 and 250 units bought @ 7499.9 ( 3 trades)
Possibility 4 - etc etc

Hence we see 1 Buy order may result in either 1 or more trades
Similarly 1 Sell order may result in either 1 or more trades

Each trade executed or position created will have a reverse trade or position.
It means every buy will have a sell and every sell will have a buy.
Unlike equity or cash market, in derivatives market i.e. futures and options, this is the law.

If you do not take the reverse trade, the contract expires and the stock exchange will force the reverse trade (also called exchange square up) on your behalf.
This forced stock exchange initiated square up is also a trade and hence to be considered during turnover calculation

Each trade is independent of the other and Turnover calculation applies to each and every individual trade
Further each contract is independent and different i.e. 7400CE is different from 7500 CE and so is JANFUT different from FEBFUT

Turnover calculation applies to each contract and each trade for the contract in question, independently of any other trade or contract.

If the quantity during initiating trade and reverse trade do not match use the principle of FIRST IN FIRST OUT.

Example is for buy first and then sell
Buy side there are 5 trades and sell side there are 4 trades
Buy //Sell
Qty // Price //Qty //Price
150 //7500 // 75 //7550
225 //7499.95 // 300 //7550.05
225 //7499.9 // 150 //7550.1
75 //7499.85 // 175 //7550.15
75 //7499.8

So using the principle of FIRST IN FIRST OUT we have 7 trades as follows -

Buy//Sell
Qty//Price//Qty//Price
75 //7500 //75 //7550
75 //7500 //75 //7550.05
225 //7499.95 //225 //7550.05
150 //7499.9 //150 //7550.1
75 //7499.9 //75 //7550.15
75 //7499.85 //75 //7550.15
75 //7499.8 //75 //7550.15

Total turnover = addition of turnover of all the trades in a given period.

Total turnover = turnover trade 1 + turnover trade 2 + turnover trade 3 + ……

Let us understand with few examples -

Trade 1 - Jan2016 Futures intraday
---------
Buy, 75 @ 7500
Sell, 75 @ 7550

This trade resulted in profit of Rs. 3750 and the amount 3750 is called the turnover of trade 1.
Turnover trade 1 = (7550-7500)*75 = 3750

Trade 2 - Feb2016 Futures carry forward
--------
Sell, 75 @ 7550
Buy, 75 @ 7625

This trade resulted in loss of Rs. 5625 and the amount 5625 is called the turnover of trade 2.
Turnover trade 2 = (7625-7500)*75 = 5625


Trade 3 - Jan2016 Futures expiry of contract
--------
Sell, 75 @ 7500
Contract expire @ 7400

This trade resulted in profit of Rs. 7500 and the amount 7500 is called the turnover of trade 3.
Turnover trade 3 = (7500-7400)*75 = 7500

Trade 4 - 7500CEJan2016 - Options intraday
---------
Buy, 75 @ 55.55
Sell, 75 @ 60.25

This trade resulted in profit of Rs. 352.5 and the amount 352.5 is 1st part of the trunover of trade 4
You sold the option contract @ 60.25 and hence received a premium of Rs. 4518.75 (=75 x 55.55)

This amount 4518.75 is the second part of the turnover of trade 4
So, turnover trade 4 = 352.5 + 4518.75 = 4871.25

Trade 5 - 7600PEFeb2016 - Options carry forward
---------
Sell, 75 @ 75.50
Buy, 75 @ 76.25

This trade resulted in loss of Rs. 56.25 and the amount 56.25 is 1st part of the turnover of trade 5
You sold the option contract @ 75.50 and hence received a premium of Rs. 5662.50 (= 75 x 75.50)

This amount 5662.5 is the second part of the turnover of trade 5
So, turnover trade 5 = 56.25 + 5662.50 = 5718.75

Trade 6 - 7500PEJan2016 Options expiry of contract
---------
Buy, 75 @ 15.0
Contract expires @ 0.0

This trade results in loss of Rs. 1125, as the option contract expires worthless.
So premium received at expiry (sell side) = 0.0
Turnover trade 6 = 1125 + 0.0 = 1125

Trade 7 - 7700CEJan2016 Options expiry of contract
---------
Sell, 75 @ 45.0
Contract expires @ 0.0

This trade results in profit of Rs. 3375, as the option contract expires worthless
Premium received at sale of contract = 75 x 45 = 3375, which is the first part of the turnover of trade 7
Option contract expires with a value of 0.0

So the difference as a result of reversing buy trade = (45-0) x 75 = 3375
This amount forms the second part of the turnover for this trade 7
So, turnover trade 7 = 3375 + 3375 = 6750

Trade 8 - 7500CEJan2016 Options expiry of contract
---------
Buy, 75 @ 25.0
Contract expires @ 55.0

This trade results in profit of Rs. 2250, and the option contract expires at 55.0
This amount 2250, is the first part of the turnover of trade 8
When the contract expires, reversing trade takes place resulting in sale of the contract and thus premium receipt

So premium received due reversing trade = 55 x 75 = 4125
This amount forms the second part of the turnover for this trade 8
So, turnover trade 8 = 2250 + 4125 = 6375


Hence total turnover for the Derivates segment for the trader is addition of turnover of individual trade 1 to trade 8
So, total turnover = 3750 + 5625 + 7500 + 4871.25 + 5718.75 + 1125 + 6750 + 6375 = 41715.0

As can be seen from above, turnover calculation is difficult but not impossible and definitely not complex.
If in doubt, take the higher value so that you are NOT on the wrong side of the law.

With Income Tax department, it is more advantageous to be NOT wrong rather than being correct, or for the sake of argument with any legal matter.

 

[cloudTrader]

Very nice effort, I am sure this information will help many ... :clapping:

 

[tradedatrend]

Article on Outlook-money reads:
******
onclusion
As F&O transactions can be classified either as income from business or capital gains,
******
So could anybody with authoritative knowledge about taxation can make it clear - is it really possible to put F&O income under Capital gain (obviously it would be STCG)

Because if we could categorize F&O income under Captial Gain, then our maximum tax rate would be 15% for STCG

Please enlighten.

TIA

 

[carnot11]

Hi tradeatrend,

Sadly, there is nobody who to my knowledge has authoritative knowledge about derivatives taxation. If there was, it would be well known on this forum.

Tax rules regarding derivatives are subject to interpretation as per individuals experience and background, even to qualified and experienced CA's.

Stock market industry has adopted ways / methods so as not to get into trouble with tax authorities / department.

We follow the path of least resistance.

Avoid friction and devote your time to fruitful endeavors.

Please read previous posts to help you guide on your query.

Enjoy
CArnot