Thursday, 15 September 2022

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.



For any suggestion or queries you can reach out to me at caakshatmodi@gmail.com or at 9028912025.

You can follow me on other social media handles from below links :-

https://www.linkedin.com/in/akshat-modi-2ba297a0


https://www.facebook.com/akshat.modi.372


https://www.instagram.com/akshat3636


https://twitter.com/ModiAkshat?t=k5aO4-AqiuUKUXfnu4Fsdg&s=08


https://t.me/fcaakshatmodi


https://g.page/r/Caz8pLU7ya9SEA0




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.

Monday, 12 September 2022

DELAY IN PAYMENT OF INCOME TAXES BY ONE DAY, WHAT IT COSTS TO YOU?

 


Hello everyone

Many of you must be aware about the provisions about paying Advance Tax under the income tax act 1961, but how accurately is the question we will discuss today.

 Advance Tax

 The provision says that if a person’s estimated tax liability exceeds Rs 10,000 in a year, he has to pay advance tax in the year of earning that income itself in four installments.

The tabular presentation of due date is produced below for your reference:-

 

Due date

Advance tax payable

On or before 15th June

15% of Advance tax

On or before  15th September

45% of Advance tax

On or before  15th December

75% of Advance tax

On or before  15th March

100% of Advance tax

 

Let’s take a simple example to understand things further.

Suppose Mr. Jain’s yearly tax liability comes out to be Rs. 4,00,000/-. So he should pay advance tax as follows to avoid any interest payment.

 

Date

%

Amount

14-06-2022

15%

                     60,000.00

14-09-2022

45%

                 1,20,000.00

14-12-2022

75%

                 1,20,000.00

14-03-2023

100%

                 1,00,000.00

 

          TOTAL

                 4,00,000.00

YEARLY TAX LIABILITY

 

                 4,00,000.00

 

Since Mr. Jain has hired a good tax consultant, he pays the advance tax one day before the due date always, thanks to the office staff of tax consultant who reminds Mr. Jain every quarter about paying Advance tax in time.


Now let’s take a scenario of Mr. Tiwari who manages his business as well as taxes by himself and pays advance tax every time just one day after the due date i.e. on 16th, due to his pre occupancy in business related work.

Let’s see what this one day delay can costs to him.

Again the yearly Tax Liability is Rs.4,00,000.

 

Due Date of Payment

Date of Payment

%

Amount

Interest under sec 234C

15-06-2022

16-06-2022

15%

                     60,000.00

1,800

15-09-2022

16-09-2022

45%

                 1,20,000.00

3,600

15-12-2022

16-12-2022

75%

                 1,20,000.00

3,600

15-03-2023

16-03-2023

100%

                 1,00,000.00

1,000

 

 

TOTAL

                 4,00,000.00

 

10,000

 

 Now let’s break the interest calculation under section 234C.

Since, Mr. Tiwari has paid the advance tax but with one day delay, the common understanding among the general public is pay one day interest and get rid of the taxes, but this is not the case.

Here delay in one day is costing you 3 months interest. Let’s see how :

Since 15% of tax i.e. Rs 60,000 is to be paid by 15-06-2022 and up to 15-06-2022 Mr. Tiwari has paid Rs.0, he shall be liable to pay simple interest at the rate of one per cent per month for a period of three months on the amount of the shortfall from fifteen per cent or forty-five per cent or seventy-five per cent, as the case may be, of the tax due on the returned income.

Well, this may sound irrational to pay interest for 3 months for a single day delay in payment but this is the law and everyone must adhere to it.



 “Beware of False knowledge; it is more dangerous  than ignorance

“ DO TAKE TAX COMPLAINCES SERIOUSLY”

               “THINK TWICE, ACT WISE”


Study Material and important links :-

1. https://www.incometaxindia.gov.in/Pages/tools/income-tax-calculator-234ABC.aspx

2.  Section 234A, 234B ,234C of the Income tax act .

What is Section 234A relating to Interest payable for default in furnishing the return of income?

Where the return of income for any assessment year is furnished after the due date or is not furnished, the assessee shall be liable to pay simple interest at the rate of one per cent for every month or part of a month for the period commencing on the date immediately following the due date upto the date of furnishing the return (in cases where return is furnished after the due date) or upto the end of the Assessment Year (in cases where no return is furnished) on the amount of shortfall in total income tax payable by the assessee.

In simple words, interest @ 1% per month is payable on the amount of income tax paid after the due date for filing of the return.

What is Section 234B relating to Interest payable for default in payment of advance tax?

An assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by such assessee is less than ninety per cent of the assessed tax, the assessee shall be liable to pay simple interest at the rate of one per cent for every month or part of a month for period from the date on which the payment of advance tax became due on the amount of shortfall in the amount of advance tax paid.

In simple words, interest @ 1% per month is payable on the amount of income tax paid after the end of the financial year.

What is Section 234C relating to Interest payable for deferment in payment of advance tax?

An assessee, (other than an assessee who declares profits and gains in accordance with the provisions of sub-section (1) of section 44AD or sub-section (1) of section 44ADA, as the case may be) who is liable to pay advance tax under section 208 has failed to pay such tax or

the advance tax paid by such assessee on its current income on or before the 15th day of June is less than fifteen per cent of the tax due on the returned income or the amount of such advance tax paid on or before the 15th day of September is less than forty-five per cent of the tax due on the returned income or the amount of such advance tax paid on or before the 15th day of December is less than seventy-five per cent of the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of one per cent per month for a period of three months on the amount of the shortfall from fifteen per cent or forty-five per cent or seventy-five per cent, as the case may be, of the tax due on the returned income;

the advance tax paid by the assessee on the current income on or before the 15th day of March is less than the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of one per cent on the amount of the shortfall from the tax due on the returned income.

Provided that (a) if the advance tax paid by the assessee on the current income, on or before the 15th day of June or the 15th day of September, is not less than twelve per cent or, as the case may be, thirty-six per cent of the tax due on the returned income, then, the assessee shall not be liable to pay any interest on the amount of the shortfall on those dates.

(b) an assessee who declares profits and gains in accordance with the provisions of sub-section (1) of section 44AD or sub-section (1) of section 44ADA, as the case may be, who is liable to pay advance tax under section 208 has failed to pay such tax or the advance tax paid by the assessee on its current income on or before the 15th day of March is less than the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of one per cent on the amount of the shortfall from the tax due on the returned income.

For any suggestion or queries you can reach out to me at caakshatmodi@gmail.com or at 9028912025.

You can follow me on other social media handles from below links :-

https://www.linkedin.com/in/akshat-modi-2ba297a0


https://www.facebook.com/akshat.modi.372


https://www.instagram.com/akshat3636


https://twitter.com/ModiAkshat?t=k5aO4-AqiuUKUXfnu4Fsdg&s=08


https://t.me/fcaakshatmodi


https://g.page/r/Caz8pLU7ya9SEA0

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.

 

 

 

 

Sunday, 11 September 2022

CAPITAL GAIN ON SALE OF PROPERTY OTHER THAN HOUSE PROPERTY & HOW TO SAVE INCOME TAX?

 


Recently one of my friend sold a plot for Rs. 49,00,000/- in March 2022. Can you guess the purchase amount paid by his Grandfather?

It’s unreal!! only  Rs. 1200 in the year 1985. So the amount has multiplied by 4000 times over the period of 37 years and in CAGR (Compound Annual Growth Rate) terms it has given an annual return of 25.20%.

Having made some extraordinary gains, he came to me for filing income tax return and asked the most common question, how to save income tax on these massive gains.

So here is what I advised him:-

1.  Since plot is not a residential house property, the option to claim exemption under section 54 is not available.

 

2.  So in order to save taxes and claim exemption he has 2 options:

a.   Section 54EC : Invest in Capital Gain Bonds.

b.  Section 54F   : Invest in new House Property.

 

3.  There are certain conditions and restrictions in both sections and is dealt below separately:-

 

4.  Section 54EC :

a.   Amount to be invested:- Amount of Capital Gain to be invested(Profits) and not the entire sales proceeds.

 

b.   Time limit:- Within Six months from date of transfer.

 

c.   Maximum Limit:- A maximum of Rs.50 Lacs can be invested in any financial year.

 

d.  Lock in Period:- There is lock in period of 5 years, meaning you cannot sell the bonds before 5 years from the date of acquisition.( if sold before 5 years then capital gain exemption claimed in earlier year shall be taxable in the year of transfer)

 

5.  Section 54F :

a.   Amount to be invested:- Amount of entire sales proceeds to be invested and not only the Capital Gain (Profits).

 

b.   Time limit:- Purchase 1 new residential house within 2 year from the date of transfer or construct 1 new residential house within 3 year from the date of transfer.

(Since it’s difficult to find the right house property, one can deposit the net sales consideration in Capital Gains Account Scheme before due date of filing return for relevant assessment year until he finds the suitable house property. The deposit in this account shows the intention of individual that he will buy the residential property within prescribed time limit. Just because the desired property is not yet available for purchase this deposit is being made, the exemption u/s 54F is claimed by depositing the sum in Capital Gains Account Scheme.)

 

c.   Maximum Limit:- There is no maximum limit on amount that can be invested.

 

 The tabular comparison of these provisions is presented below for your reference:-

 

MOST CRITICAL ASPECT THAT YOU MIGHT MISS

 

What Happens if the Amount is not deposited in capital Gain Account Scheme within due date i.e. section 139(1)?

·        Subsection (4) of section 54F plays the most critical role here. It is specifically mentioned to deposit the amount of the net consideration which is not appropriated by the assesse towards the purchase of the new residential house property in capital gain account scheme before due date of return under section 139(1).

·        If an individual fails to deposit the amount within due date, he is left with only two option:-

1.  To purchase the new residential house property within the due date of filing return i.e. 139(4) since the due date u/s 139(1) has already elapsed. The due date of filing return U/s 139(4) is 31-12-2022.

2.  To pay the capital gain tax @ 20 % on the profits earned.

 

·        The time period which was allowed i.e. 2 year /3 year for purchase / construction shall stand withdrawn, because the assesse fails to deposit the amount in Capital Gain Account scheme before due date.

 

·        A major problem which an individual may face is when he deposits the amount after due date and consider this as due compliance under income tax act. Once the due date is over even a single day delay attracts altogether different provisions under the income tax act.

 

 

·        It is advisable to consult a good tax consultant before making any decision that impacts your taxes.

“Beware of False knowledge, it is more dangerous than ignorance”

 

A tabular comparison of different option under section 54F is presented below for your reference:-

Section 54F

Invest in new House Property

 

option 1

option 2

Particulars

Purchase/ construct directly 1 residential house property

Deposit in capital gain Account scheme and further purchase residential house property.

Property sold in financial year

2021-22

2021-22

Due date of return filing(Belated and original)

31-12-2022

31-07-2022

Section

139(4)

139(1)

Time Limit to Purchase House property

Before due date of filing return of income i.e. 31-12-2022.

Amount deposited in CGAS before 31-07-2022, hence extended time of 2 years for purchase and 3 years for construction from date of transfer is available.

 

 

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.

 

Study Material:

1.  ITO vs. Smt. Rosamma Korah [2014] 45 taxmann.com 153 (Cochin – Trib.)

2.    CIT vs VR Desai (2011) 197 Taxman 52 (Ker).


For any suggestion or queries you can reach out to me at caakshatmodi@gmail.com or at 9028912025.

You can follow me on other social media handles from below links :-

https://www.linkedin.com/in/akshat-modi-2ba297a0


https://www.facebook.com/akshat.modi.372


https://www.instagram.com/akshat3636


https://twitter.com/ModiAkshat?t=k5aO4-AqiuUKUXfnu4Fsdg&s=08


https://t.me/fcaakshatmodi


https://g.page/r/Caz8pLU7ya9SEA0

HOW TO FIND THE RIGHT RETIREMENT NUMBER AND CONSTRUCT PORTFOLIO?

Hi folks Do not assume a unreasonably higher number as your retirement corpus and work hard till eternity. Do your maths and get things in p...

most viewed