TAXATION OF EQUITY AND DERIVATIVE (F&O) TRADING.

 

Hello everyone

 

As the massive success story of discount brokers such as zerodha & upstox is known to everyone, lets dig into the taxation part of the transactions done using these brokerage platforms, but without going deep into complexities and quoting exact provisions of the income tax act 1961.

In simple words let’s understand the income tax liability that arises on profits made while trading in equity shares and futures and options.

 

Category-1

 So first thing first, if you are self-employed or in employment and you apply only in IPO's or you are not so active trader and you trade only in equity shares than your income from trading will fall under short term or long term capital gain(if holding period of equity shares is more than 12 months than long term).

  

Tax Rate :-

 ·       Long Term :- 10% on Long Term Capital Gain.(If your LTCG is upto Rs 1 lac in a financial year then you need not have to pay long term capital gain tax, and above  Rs 1 lac pay 10% tax over and above gain of Rs 1 lac.)

 ·       Short Term:-15% on Short Term Capital Gain. This is irrespective of slab rates of your salary or business income or any other income  

 Category-2

 Here comes a class of traders who does intraday trading of only equity shares.

So intraday trading is treated as speculative income under the income tax act 1961, because:-

 1. You are not taking actual delivery of shares while purchasing or selling.

2. Shares are not credited in your demat account while purchasing or selling.

 These types of traders speculate price of particular shares and derive profit/ loss as per the trades going in their favor or not.

It’s known as speculative business income or speculative business loss under the income tax act. (Although it’s not your business, its termed and taxed accordingly in income tax act)

 

Category-3

 Now comes the third category of traders who do:-

 1. Short term, long term trading of equity shares(can be classified as short term or long term gains or normal business income)

                              +

2. Intraday trading of equity shares (speculative business income)

                               +

3. Intraday or delivery based trading of futures or options (derivatives)(normal business income)

 

What are derivatives?

Ø So anything which derives it value from an underlying asset/thing is derivative.

Ex- Reliance futures or Reliance options price is dependent on Reliance equity share; hence Reliance futures and options are derivative product of Reliance Equity share.

I hope this give some understanding of what is derivative.

 

Coming back to taxation part of third category of traders:-

If your main business is trading in share market than you can combine all trading (short term/long term/derivatives) under your normal business income except intraday trading of equity shares which is specifically classified as speculative business income.

 

What is the difference between Normal Business income/ Loss and Speculative Business Income/Loss ?

 The answer to above question can very well be summarized in below mentioned columnar table:-

 *Setting off losses means that if eligible, you can deduct your losses from your total income and reduce your taxable income amount. This will mean that a lower rate of taxation will apply based on your income tax slabs and your tax liability will reduce because you have made some losses that have been set off while paying income tax on profit from commodity trading.

Above article summarizes the taxation part on a macro level, do drop a comment if you want a detailed article with practical example.

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Disclaimer :- This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.