Just a random thought… Is it a wise option to trade in F&O segment as a registered Pvt. Ltd. company instead of an individual?
I am asking this question because of the followings -
I am a novice in terms of business income taxation system, so please excuse me if both of my above logic is completely wrong.
Yes you can totally do that to save on tax. Infact you can even register as an OPC(One person Company) or an LLP (Limited Liability Partnership) these forms of incorporation will reduce the compliance burden. Many HNIs and large-account traders do that.
But the hard part is that you may need to get an NBFC license from RBI in the case of you doing this solely for the purpose of F&O trading you will fall under something called a 50-50 test. When the financial assets of the companies comprise of more than 50 % of the total assets and the income from financial assets amounts more than 50 % of the gross income, such businesses need to register with the RBI as an NBFC. And getting an NBFC license is a painful process and requires min capital upwards of 2 cr as permanent liquidity and many other hoops.
Certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company. RBI - FAQ
Besides, the tax rate of 22% applies only as long as you keep the money within the company, once you withdraw for personal use, that amount will be treated as your income and be taxable at relevant slab rate.
So, if you have a few crores and hoping to generate a lot of returns, go on with registering a company or LLP. Or else, you are stuck here with me and everyone else.
Yes you can trade.
Thanks a lot for the detailed info.
Looks like the process is too complicated to start with.
Can we get tax holiday (for 3 yrs) by registering as a company or LLP?
Tax holiday is only for eligible startups not every new company/LLP. There are certain criteria to qualify, the most important being
“Aims to work towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property or bio-technology”
Hey @sachinsp15
The private limited company is assumed to have many tax advantages. There are some industry-specific advantages, but taxes are to be paid at a flat rate of 25% or 30 % on profits (as applicable), also Minimum Alternate Tax (MAT) applies here.
Moreover, To pay taxes on 22% there are so many conditions u/s 115BAA which should be complied and the company cannot claim so many deductions here which are generally allowed.
Furthermore, To incorporate the company having the main objective of trading you need to get an NBFC license from RBI. Also, there are so many years around compliances that needs to be followed for every PLC.
Talking about the tax holiday scheme for startups, there also company needs to satisfy the eligibility criteria for claiming this benefit and also obtain certification from the Inter-Ministerial Board setup for eligible purposes of a company.
If you can manage to pass through all those conditions, then only it would be wise to trade in the F&O segment as a registered Pvt. Ltd. Company.
Hope this helps!
Furthermore, To incorporate the company having the main objective of trading you need to get an NBFC license
Are brokerage charges, stt and other charges are same for personal account and company acoount ?
Most of the charges remains same. Please refer this -
IT Jegan talks about this. The important thing to note is that doing as a corporate account, you need to be making a certain amount of monthly profits to make it worthwhile.
Thanks a lot for this, Rejeesh!
Just asking, which regulator will conduct this “50-50 test”? And what might be the consequences of failing it?
It is a regulatory framework established by (and enforced) the RBI. But it can be flagged off to RBI by any statutory body (such as ROC, SEBI, Income Tax Dept.). The consequences include cancellation of your license and dissolution of business. But all they are really asking is to comply by the RBI act and circulars and conduct legitimate NBFC business when the primary source of your income is from financial assets. Read more here Frequently Asked Questions (rbi.org.in) Nothing spooky but puts additional compliance and regulatory burden on the business.
Thanks a lot!
The only thing that you need to take care of is that 50% of the assets of the company must not be Financial Assets AND 50% of the income of the company should not come from Financial Assets. Why? Because if this happens, then the private limited company will become a “Deemed NBFC”, and will attract penal action from RBI.
The next question could be what constitutes financial assets?
Stocks, Mutual Funds, Preference Shares, Derivatives.
Note that “Fixed Deposits” are exempted from this definition, for the purposes of being called an NBFC.
Also, please note that in order to fall under the ambit of “Deemed NBFC”, both the conditions of Assets and Income have to be fulfilled. If a company has more than 50% of assets in financial assets, but less than 50% income from financial assets or vice versa, then it won’t fall under deemed NBFC.
@Quicko and @nithin I found this information on a site so based on this my question is if I do FnO trading and before ending financial year if I withdraw all capital and profits in bank. In this case first rule is not violating correct and if both rules not violated then we don’t need to register as nbfc.
Ah no, you can’t just withdraw capital once a year and get around that requirement.
Going by above definition, if one pledges FD and gets trading income , he would not be required to get nbfc since we can’t say more then 50% assets are financial. right.
@nithin if we register as a investment advisor with sebi then Pvt ltd can do trading without NBFC license ?
These entities are exempt from registering as a NBFC:
Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.
RIAs are not exempt