How are profits from intraday and F&O trading taxed?

Income Tax Income from Business or Profession
63

I read a thread about this on Zerodha tradingqna posted in May 2015. I am giving the link here: What is the difference between absolute, indicative, and Tax P&L on Zerodha Q? - General - Trading Q&A by Zerodha - All your queries on trading and markets answered

I shall explain what’s given there by way of this example: I sell an option for a premium of 300/- on 15 Dec. It goes to 10/- at market close on Mar 31 and position remains open. Finally the option expires worthless at the end of April in the new FY. As per the explanation in this thread, my Indicative Profit is 10/- when i have actually made an actual profit of 300/-. The thread also says for tax purposes on F&O, Indicative P&L is considered. So do i pay tax on 10/- (indicative profit), when i have actually received 300/- in my bank? This seems really bizarre. Could you throw some light on the correct position please?

Also, according to me, there is nothing such as Indicative P&L. Theere is P&L and there is also Tax P&L which is prepared only to facilitate tax return filing. Am I correct in this thinking?

I had asked this query on Zerodha Support portal. But they advised me to get in touch with you (Quicko).

Thanks

64

Hello prasad!

Firstly, F&O or intraday trading is considered as a business and hence tax is calculated on indicated P&L

Where as in case of equity, like stocks, where you hold them for either short term (less than year) or long term (more than a year), the profits or losses are considered as capital gains or losses and not business income. Therefore, they are treated on their Absolute or Realised P&L under STCG or LTCG taxation.

Further,

Lets differentiate between absolute and indicative P&L
Lets assume you bought at Rs. 100 and sell at Rs. 400 with charges like brokerage, STT, etc of Rs. 50/-.

Absolute P&L = 400-100 =300
Indicative P&L = 300-50 or 400-100-50 = 250

So,
Absolute: (this is also called realised P&L)

Absolute profit is absolute profit is representative of Mark to margin differences that have accumulated in your account over a certain period of time. It does not include the cost of transaction that you have been encured while transacting at exchanges for example brokerage cost et cetera.

Indicative: (realised p&L +/- expenses incurred in transactions)

Indicator for operators most accurate manager of real earnings, real earning being the actual take home money you have made in your trading that is the transaction cost brokerage et cetera are all deducted from the mark to margin profits in order to get the actual amount that is credited to your account.

So, when you report for F&O taxation, your profits - expenses (brokerage, etc.) = indicative Profits are taken into account for taxation, similarly, in case of losses, your losses + expenses = indicative losses are reported for taxation.

It does not have anything to do with the option premium on 31st of March or expiry period or the value at expiry.

Hopes this helps, still an expert opinion is recommended for authentication and right information.

65

Do we have to consider intraday trading income or loss under presumptive taxation and apply 6% rate on the turnover
OR
this is speculative income/loss and no impact of turnover on these takes place
I bought 22000 Call option today and sold before 3:30pm, Do I have to calculate turnover for taxation purpose or just pay tax on speculative income. In case it speculative income/loss, I assume we can not claim any expenses like brokerage exchange tax , stt, gst from the income?

66

Hey @SSB,

In the case of futures and options, even if you buy and sell on the same day, it will be treated as a non-speculative business. Hence, you can either report 6% of the turnover or actual profits, whichever is higher and opt for the presumptive taxation scheme.

However, if you have losses you will have to report it as normal business income and cannot opt for the presumptive taxation scheme. If you report it as normal business income, you can also claim expenses like STT, brokerage charges etc.

Hope this helps!

67

Thanks, In your earlier reply it was stated as below

Hey @SSB,
Income from F/O is considered non-speculative business income and that from intraday trading is considered speculative business income.

68

Hey @SSB,

By intraday trading, I meant intraday trading of equity shares which is considered speculative business. In the case of F&O, regardless of the holding period, it would fall under non-speculative business.

69

My Auditor say he will file Itr3 No account case for Intraday and stcg and dividend income is he right?

70

Hey @Vikash689,

Yes, one can opt to report their business under the no-accounts case if their turnover is less than ₹25L and profits do not exceed ₹2.5L.

Hope this helps!

71

I’m an individual and currently my source of income is through trading in fno and cash segment. I want to know from a tax purpose, if I should open an LLP or partnership firm or should I just stay put as an individual.

Can I claim all the expenses I pay such as stt, brokerage, internet, rent, electricity bill etc as an individual?

72

Hey @Rahul_Bisht,

Here’s a thread that you can refer to: Can I set up an LLP for trading?

Moreover, you can claim all of these expenses. I’ve written about this in detail here: List of Expenses a Trader can claim

Hope this helps!