Tax on pooled money

I am an option seller, I have used my money with some of my friends’ money in my personal account(basically pooled some money in my account). I have made decent profit. Now I have to return everyone their money and profit also. How will I file the tax? Do I have to pay tax on all the returns made on pooled money since all was linked with my PAN? is their any way to pay tax only on the profit I have made on my share of money?

@Sakshi_Shah1 can you help with this ?

Hello @Sukanta

Since the trading is done on your PAN, the entire profit must be reported in your Income Tax Return and tax must be paid on it at applicable rates.
However, since you are sharing profit with your friends, you can claim it as a valid business expense against your profit. Further, you must report money taken from friends as loan received and money repaid as repayment of loan in your books of accounts.

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Thank your for elaborate reply @Sakshi_Shah1
but can any individual show any expenses unless he/she has corporate trading account?

Yes. You can claim it is as a valid business expense if such transactions are from a personal bank account. However, by corporate trading account, if you mean, bank account of a private limited company, the rules will change.

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Thank you again @Sakshi_Shah1.
I am using my personal account but I was told to open an Current account to borrow money from others, so it is a current account on my name, I was using total 30L capital in last FY. I have made around 9L, from which I have to return 7L, so this 7L I can claim as business expenses.
But is there any upper limit up to which I can claim it as Business expenses?
If i want to do this in a professional way, instead of taking money only from friends only, what are the processes i should follow?
Is there any service provided by Quicko where I can discuss with some expert regarding this topic in details? I would love to pay for that service if available.

Hey @Sukanta

Since trading activity is considered to be a business, transactions must be done through a current account. There is no upper limit for claiming business expenses. However, the expenses that you claim must be valid with relevant proofs that you can submit if a notice is issued by the Assessing Officer.

There are other options available for doing this in form of a professional business. You can buy the plan for our service ‘Ask an Expert’ where you get to connect with a tax expert for 30 minutes on a meeting to resolve your tax queries.

Here is the plan link - Ask an Expert

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i asked the bank . the banker told me that individual can’t open the current account !

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@HIREiN you can open current account in private banks as individual, I talked to various banks, SBI said as you are saying but in ICICI and HDFC bank, they said individual can open.

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while paying ; should TDS be deducted ?

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TDS is required to be deducted on specified payments. As per our opinion, such profits shared can be claimed as an Interest Expense on the borrowed loans. TDS under Section 194A is applicable in case of Interest payments. However, it is required to be deducted by an individual deductor only if he was subject to Tax Audit in the previous financial year.

Read More - Section 194A - TDS on Interest

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i m a full time professional intraday trading business .

I buy a car . Can i claim depreciation expense from my profit ; if i do trading from saving individual account ?

Can i claim depreciation expense from my profit ; if i do trading from current individual account ?

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Do we have to make an agreement MOU in writing ?
In plain paper or in stamp paper ?
What should be the value of stamp paper ?
Is notary of the agreement required ?

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If you are using the asset for your business, you can claim depreciation on it and adjust it against your profits. However, if the AO (Assessing Officer) questions the same, you must be able to prove that the asset was used for the purpose of business.

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Relevant proofs for claiming business expenses could be in form of invoices, bills etc for daily expenses, agreement for rent expense, challans for tax payments, broker statements for trading expenses etc.

You can read more about it here - What Expenses Can a Trader claim in Income Tax Return?

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so . can do the same with savings bank account also . right ?
then , why did u emphasize on the current account as below ?

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for “profit sharing” what should be relevant proof ?

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Hey @HIREiN

It is recommended that any transactions related to a business should be operated through a current account. However, it can done through the savings bank account. Infact, most of the individual stock traders use savings account for trading transactions. However, if you’re doing it in large volumes, opening a current account is advisable.

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If there is profit sharing, it should rather be done through a separate entity and not through an individual’s account. However, if the money is borrowed, you should report is as a loan received. On repayment of the money, it should be reported as loan repaid and the interest on such loan can also be claimed as an expense. Bank entries for these transactions is a documentary proof. You can also provide a confirmation of account statement duly signed by both the parties as a proof to the AO if asked for.

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is there any upper cap limit for the interest payment .
i think , we are not allowed to deduct interest more than 24% p.a.

what if my profit sharing comes to 5% per month of the capital borrowed ; will that also be allowed as interest on loan ?

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