Taxes for stock traders are not well understood in India. There a lot of subtle distinctions here. If your trading activity is quite small then you can just show these as part of your regular returns under the head of capital gains and losses. However, if your turnover is large or if your share of F&O is big then you need to show these as business income. Rules of income tax for stock traders in India stipulate that you need not have a company incorporated to file business income. Even individuals can file for business income if their trading activity crosses a threshold limit during a particular financial year or if the income from trading activity is substantial. Let us understand how to calculate tax on share trading in India and the compliance and audit procedures entailed.
Reporting of all gains and losses for the purpose of compliance..
That is your primary responsibility as a stock trader. If your trading activity is very small and gains marginal, then it is ok to show it as part of your normal income. If it is larger, then you need to report these gains to the tax authorities on a regular basis. Remember, your trading accounts are currently already mapped to your PAN number and henceforth to your Aadhar number too. Hence it is very easy for the tax authorities to establish an audit trail to your trading profits via your PAN number and Aadhar card. If you are not prompt in reporting your profits and losses from trading activity then you are likely to get a notice from the Income Tax Department for non-compliance. Liability to pay tax or otherwise is a different matter altogether.
Which IT forms to file when you are trading regularly in equities and F&O..
As mentioned earlier, if trading activity is substantial then you are required to report it as business income. From FY16-17, the relevant form to be used for filing returns for individuals with income from trading in equities is Form ITR-3. You may have filed Form ITR-1 or ITR-2 in the past but going ahead if you are having trading profits then you need to file your returns in ITR-3 only. The advantage of using ITR-3 is that relevant expenses of the trading activity can also be set off against your trading income and the tax payable only on the net income.
Understanding what can be claimed as expenses..
An important question from the compliance point of view is what can be claimed as legitimate expenses for the trading business. The brokerage and other statutory charges paid by you as represented by the contract notes can be straight away claimed as eligible expenses. Similarly, relevant expenses like your telephone bill, the internet charges, any broadband charges, cost of employees recruited for the purpose of trading can all be included in the cost. If you have rented an office then the rent can be set off and if you own equipment then the depreciation can be claimed as business expenses.
What are the records that you need to keep as an equity trader..
The Income Tax Act behoves that if you are a trader in equities then you need to maintain detailed records of transactions and other expenses in your office premises. For example, regular contract notes, trading statements, demat statements and a consolidated statement of statutory charges needs to be maintained in physical form. Additionally, the person also needs to maintain detailed records of invoices / receipts for the expenses claimed in the books. For rental property or leased equipment, the stamped contract notes should also be maintained systematically for records. Bank statement and bank reconciliation is the key to any record keeping.
Nuances of audit and filing of returns..
Taxes for stock traders are based on self-assessment but this must be backed up by audit of your financials and records. To understand how to calculate tax on share trading, the compliance and audit part is extremely critical. Tax audit is required of your books if your turnover exceeds Rs.2 crore in a financial year or if your declared income is less than 8% of your turnover. Remember you cannot set off your losses against your gains if the audit is not done periodically and the returns are not filed on time. Income tax for stock traders in India pre-supposes that your relevant returns are filed before September 30th each year where audit is applicable. There are penalties applicable if you do not maintain records or if your audit is not done on time.
As a trader in equities (whether you are intoequity trading or F&O trading) there are some additional compliance and audit requirements. It is essential for you to understand and follow these procedures to avoid any regulatory hassles going ahead.