I hold a portfolio of stocks ( some were bought more than 1 yr ago). Now if I start trading in futures, to hedge and to speculate, will it change my stock investments to business income and attract 30% or can i continue to be an “investor” and follow the 15% stcg and 10% ltcg tax rate. And how will my futures income be treated ( from hedging and from speculation). @TAXIQ.IN
You can keep both the portfolio together. You can treat F&O as Business and Equity under Capital Gains
1.) So would I need to maintain books of accounts?
2.) Can expenses be deducted from fno income (including stt)?
3.) Is there any risk that I will have to declare my investment portfolio as business income?
Yes, you will need to maintain books of accounts. In addition to that, if the gross turnover is above 1 crore, you will also need to get audited by registered CA firm. The turnover calculation has lots of ambiguity. Please pay attention & use caution if you are doing many fno trades (profit or loss does not matter). The turnover can very easily reach 1 crore even for a small trader who probably just made a profit of 1000 Rs.
Yes, expenses like internet bill, magazines, rent etc can be deducted from fno income (but not stt I believe). I will suggest you to keep it very minimal, and not to show exorbitant expenses as this may raise a doubt and can cost you much more than what you tried to save. Keep all the relevant bills in physical form should you ever face an investigation or query by the income tax department. Do not claim any expense without a valid bill.
Did not understand this question. Technically speaking, you do not “declare” anything to the income tax department. The form that you use to submit your return, automatically determines the category of your income. Meanwhile you might be declaring something on your trading account with your broker. Those are your personal matters with your broker for reporting & tax projection purpose. It has no link to the income tax department. However, please ensure you pay appropriate amount as the advanced tax on time (I think you should pay advance tax on 40% of your notional income … the figure may be slightly different, but in that range).
Disclaimer: These are my personal opinion and I would request you not to follow them. Please consult a registered CA or a tax consultant for the correct information and only follow the suggestion given by a registered CA or a tax consultant.
Till now I only trade in equity and thus file itr 2. Will it become necessary to pay advance tax if I start trading fno or are there exceptions?
Advance tax is mandatory for everyone, it has no link to fno. I just told you about the rule. Lets say you are earning 50 thousands every month on an average. So your yearly expected income will be 6 lakhs. This is called notional income. You need to consider 40% of it, i.e. 2.4 lakh and pay advance tax on that time to time. However, if your income is very irregular and unpredictable, then your notional income may be less - although you may eventually earn 6 lakhs in a year. It is not a mathematical formula, rather goes by intuition. So you have enough room to play and not pay advance tax unless the income is predictably good. Use your common sense here. Aldo, remember that if trading is your only source of income, you are entitled to the standard deduction of 2.5 lakh and other deductions like 80C etc. So you will pay advance tax only if your notional income is more than that. If you are salaried, chances are you are already paying advance tax on your full salary. That means you are paying much more than 40% of your notional income. So probably you may not need to pay the advance tax on the trading profit unless the profit from trading is substantial.
On a different note my friend, I am trading for more than 10 yrs and initially I was only into equity. Later I slowly also started fno. I have a friendly suggestion to you. Do not come to fno. For last 3-4 yrs that I have started fno trading, I have only incurred losses. I am very good in equity trading (because it follows some logic, some fundamentals, some basic rules of business). I have been able to offset my fno loss through the profit I get from equity. But this is dangerous. Whatever I earned in 5 months from equity, vanished in fno in 5 minutes. Yes, one miscalculation and it took 5 minutes for me to loss 46 thousands. Likewise there are many such instances. Why is fno so loss-making for us ? Because it is highly manipulated by big people. It is completely a satta market where they rule everything, they decide everything and you are being played. Do not come into fno. I am just trying to recover the losses I incurred (and in the process I can see that I am losing more money). Once I recover everything that I lost, I will quit fno. While equity trading means you are basically depending on some company to make profit and in turn you will take part of that profit… it has a real meaning. In fno, you are bating against some short term event like tomorrow Tata Motor’s sales number or Mr Trump’s comment on oil nations etc. You should never put bets against such short term events as those are manipulative in nature. I did this mistake. I thought Mr. Trump is going to provoke the oil nations and oil price will increase and ONGC price will increase - but what happened is Trump did exactly what I expected but a news flash came that ONGC is being pushed by the govt to buy HPCL at very high price (giving some arbitrary example) - the share price went down. You can never control such flow of events. Instead, invest your time on researching good companies, new companies which can become a great company tomorrow. Find them out and invest in them when the market is very low. You will never lose your money. Chances are, you will make 10X returns. Do not come to fno. It is not for people like you or me. Only 2 people will tell you fno is okay - one is your broker who will eat the brokerage if you play fno, another is that big player who wants to suck your money through fno.
Do not listen to me, and 2 years later you will say exactly these things to another new comer
A simple answer:
Your stock investments will continue to be taxed as is. Your future and option trades are always business income regardless of whether you’re hedging or speculating or employing arbitrage strategies.
Read this for more detail:
All your derivative trades are accounted for as business income. But they don’t necessarily attract a 30% tax. Your business income forms a part of your total income which has three other heads (Income from salaries, Income from house property and Other income). Your total income determines the tax slab you fall in. You can check the latest finance bill to check for the current tax slabs. These can change with every Union Budget Announcement.
Coming back to your query, both hedging and speculation profits/(losses) are treated as business income irrespective of whether or not you have an underlying portfolio which you’re hedging against. The underlying portfolio will continue to be taxed at the normal capital gain rates if you classify them as investments every year. Or, you can classify your portfolio as stock-in-trade and treat all gains/losses as business income.
There can be further elaboration based upon conditions and scenarios. You might want to consult an accountant.
Which ITR form to use in above case?
ITR 3, Cheers.
Can we pay no advance tax at all if willing to pay the interest on advance tax liability amount .
Its advised to pay your advance tax liability. However, you can choose not to and pay the interest on it which isn’t a penal provision, it’s compensatory in nature. So you aren’t doing anything wrong, but you’re paying compensation to the IT department for delaying payment.
Please consult your accountant to learn more about the on ground practicalities.