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Income from Trading: Business Income or Capital Gains?

Markets in India are considered to be among the most exciting markets in the world. The number of Individuals treating trading as a full-time Business is increasing at a light fold pace. But, there is still a lot of confusion regarding the tax treatment of Trading Income. Should it be classified as Business Income or Trading Income?

Income from Trading: Is it Business Income or Capital Gains?

What’s the Confusion?

The ambiguity here is regarding the Tax Treatment of Trading Income — Business Income or Capital gains. There have been ample cases where Taxpayers have received notices from their Assessing Officer due to incorrect tax treatment of Income from Trading activity. One major Contributor to this confusion is the different Tax rates for Capital Gains i.e 20% and Business Income which is taxed at slab rates.

CBDT Clarifies

A circular was issued by the CBDT on 29th Feb 2016. This circular (refer to the image below)-It offers taxpayers a choice on how they want to treat Trading Income. But with a condition — Taxpayers have to follow the same method for the subsequent years. However, changes are allowed under certain major circumstances — in which case sufficient proof needs to be provided to the ITD.

Note: This Condition is only applicable to Listed Shares and Securities only.

Income from Trading in Equity/Mutual Funds

Taxpayers should evaluate the following criteria to decide the best method to treat their Trading Income: 

Intensions Of the Taxpayers

AO (Assessing officer)will take into account the Intensions of the Taxpayers when they wish to report their Trading Income. AO will classify Income from Trading as Capital Gains if the intention is to earn Dividend and Interest Income. In case, the AO believes that the intention is to earn profits, the AO will classify individuals trading as a full-time Business. Hence, the Taxpayer will have to file ITR-3 or ITR-4 (Incase of presumptive schemes).

Treatment in Previous Year 

An AO might classify a Taxpayers Trading Income based on how they have treated their portfolio in the Previous Year. If their Trading Income was classified as a Business Income, Taxpayers will have to continue registering as a Business Income. 

Trade Frequency 

The AO will also consider the frequency of trading. If the trade is done frequently, AO will classify the Income as Business Income. This Income will be shown under the head ‘Income from Business and Profession’ and will be required to file ITR-4. Contrary to that, if a Taxpayer doesn’t trade for a period of 12 months, it will be considered as Capital gains. 

 Income from Trading in Derivatives

A Derivative is a financial instrument whose value is derived from the underlying asset or group of assets. It is common knowledge that Futures and options are one of the most used Derivatives is. Futures is a contract to buy/sell an underlying asset on a specific date and time in the future. An option is a contract with the right to buy or right to sell an underlying asset at a predetermined price on a specified future date. In the case of Derivatives, ITR-3 or ITR-4 (for presumptive schemes) needs to be filed. 

Since F&O trading is done with the primary intention of earning profits and the delivery being received by the investor, it is a Non-speculative Business Income. Subsequently, it falls under the head ‘Profit & Gains from Business and Profession’ and hence Derivates have to be treated as a Business Income. 

Income from Intraday Trading

Intraday Trading means buying and selling Stocks on the same day. There is no delivery of the stock and ownership is not transferred to the trader. Hence, Intraday Trading is considered to be a Non-Speculative Business Income.

And because of the nature of the trade, we can say that the intention of a trader here is to earn profits. And it falls under the head ‘Profit & Gains from Business and Profession

Our Opinion

It is safe to say that Traders wishing to conduct Intraday Trade or Futures & Options Trade will have to treat their Income as Business Income. And for the traders who wish to trade in Equity and Mutual Funds, they would have to consider the three criteria mentioned above. 

Traders should also keep in mind the Tax Audit Applicability before filing their Returns as it has been changed in the Budget 2020.

Naturally, Taxpayers would want to save on taxes, while AOs would want to collect more taxes and complete their targets. We feel that this confusion is due to the Difference in Interests and Responsibilities between Taxpayers and AOs.

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Got Questions? Ask Away!

  1. Hey @dhruvi16 ,

    Income or loss from Swing Trading will be taxable under the head Income From Business and Profession. You need to prepare and maintain books of accounts for your trading activities. You can claim all the trading related expenses while preparing your books of accounts. Hence keep the invoices and supporting of all the expenses with you. For example, keep the invoices of fees paid to an advisor, software purchased for trading analysis, online subscriptions paid etc.

    You need to file ITR-3.

  2. I am a full time share market investor. Do I need to have a current bank account?

  3. Hi Aayushi,

    Investors and traders are usually required to have trading accounts to participate in capital markets. The preference between savings and current bank account may vary depending on the individual.

  4. In case of individuals if turnover doesnot exceed Rs 25 lacs and/or income doesnot exceed Rs 2.50 lacs and option of Presumptive income not availed then books of accounts are not mandatory.However,for reporting loss in F and O you have to fill up data on PAnd L account inITR 3.However,PAnd L in ITR3 Is for those who maintain books of accounts.So will this lead to problems in validation?

    Show less

  5. Hey,

    1. In this case, you need to include only savings and current account balance and not Fixed deposits
    2. And in this case, it will be your fund balance with Zerodha.

    Hope this helps

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