I’m a full-time trader and engage in all types of trading. Can I report my delivery-based trades as business income instead of capital gains? If so, would that allow me to claim expenses like STT, and office costs? How do I report this and are there any specific rules that should be considered?
When it comes to stock market gains, traders generally fall into three categories: delivery-based, futures & options (F&O), and intraday trading. Usually, delivery-based trades—where you buy and hold stocks—are taxed as capital gains, while F&O and intraday trades are treated as business income.
However, delivery-based transactions can also be reported as business income.
Why would someone do that? Well, there are certain tax advantages and flexibility that might make it worth considering like,
- Business income is taxed at slab rates for individuals, which might result in a lower tax liability compared to the fixed tax rates applicable to capital gains.
- Business losses can be set off against all types of income in the current financial year, unlike capital losses, which can only be adjusted against capital gains.
- Expenses directly related to your trading activity like office rent, Securities Transaction Tax (STT), brokerage fees, and interest on trading loans can be deducted from your income, reducing your taxable amount.
Now, how does one decide that whether they can report their capital gains as business income? This decision usually depends on:
- Volume of trading:
- If you trade frequently and regularly, your income is better classified as business income.
- If trades are occasional, they can be shown as capital gains.
- Your intent:
- If your primary activity is trading in securities with the goal of earning profits, it can be counted as business income.
- If you trade occasionally with a focus on long-term appreciation or dividends, it’s better to classify it as capital gains.
However, these distinctions can often seem ambiguous, and to address this, the Central Board of Direct Taxes (CBDT) issued a circular outlining key considerations for classifying such income based on the type of security:
- Listed securities: No matter how long you hold them, you have the option to classify your income as either capital gains or business income.
- Unlisted shares: Income from the sale of unlisted shares is usually treated as capital gains. This is because, these shares are usually held by individuals who are also owners or key stakeholders in those companies. In most cases, they are viewed as long-term investments rather than instruments for regular trading or quick profit-making.
How to report equity delivery trades as business income?
When you decide to report your equity delivery trades as business income, the first step is to ensure you have proper books of accounts and financial statements, including a balance sheet and a profit & loss statement. These documents will help you track and report your trading activity accurately.
While filing the ITR,
- Use the sale value of shares sold during the financial year as your gross revenue.
- From revenue, you can reduce the value of opening positions, purchases and direct expenses. Opening positions shall include holdings at the beginning of the FY.
- Then, reduce the amount of expenses like office rent, STT, Interest on loan taken for trading, etc. from the revenue to derive to the net profits.
- Finally, add the closing value of holdings and positions as on 31st March of the FY. The net taxable income from business and profession will now be taxed at slab rates.
Note: You also need to report the values in the balance sheet, which shall include, capital invested, cash and bank balance, closing balance of loan taken, closing value of holdings, etc.
Points to remember:
- If you classify delivery trades as business income, stay consistent in subsequent years unless circumstances change. Inconsistency can lead to scrutiny or litigation from the Assessing Officer (AO).
- Maintain proper books of accounts. If your turnover exceeds ₹10 crore you will need a tax audit under section 44AB.
- Income from bonds and mutual funds is always treated as capital gains, not business income, as these are considered investments.