Futures and options taxation

[Jayanth_Reddy1]

Hello @nithin
If a person’s trading income through f&o sector is >1cr, how can he manage his tax such that he can pay as low as possible? Is it by setting multiple firms or is it by taking deductions because he might end up paying 40-50% in tax which comes to 40-50 L which might take him half of that FY to generate such revenue…

[Meher_Smaran]

Hey @Jayanth_Reddy1

Welcome to TradingQ&A

Here are some of the threads which have detailed discussion on the topic that you are interested in

How one can setup a Proprietary Trading Firm, any registration needed with SEBI, other formalities, etc?

Trading F&O via LLC or Pvt Ltd

More over you will be paying double income taxes and compliance issues. If your company makes profit it should pay 33% income tax. Net profit if paid as dividend then Company should pay 15% dividend distribution tax. If you receive salary that is also taxed at your slab rates. Highest is 33%. You have to appoint company secretary if it is Pvt. ltd. Additional returns to be filed with MCA charges also apply. Need to conduct board meetings and maintain records. Other licenses fr…

F&O trade as Pvt. Ltd

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 objec…

As it is quite a comprehensive topic, I hope you can check the above threads out. If you still have doubts, maybe @Quicko or Mr.Nithin himself might answer it

[nithin]

@Meher_Smaran

As it is quite a comprehensive topic, I hope you can check the above threads out. If you still have doubts, maybe @Quicko or Mr.Nithin himself might answer it

Wah, Mr Nithin? Full formal this is.

[nithin]

@Jayanth_Reddy1

Hello @nithin
If a person’s trading income through f&o sector is >1cr, how can he manage his tax such that he can pay as low as possible? Is it by setting multiple firms or is it by taking deductions because he might end up paying 40-50% in tax which comes to 40-50 L which might take him half of that FY to generate such revenue…

Not an advocate of complicating life by trying to plan taxes. If someone did earn Rs 1crore+ in profits, it is okay to pay taxes I guess? India is a super poor country and the rich folks paying taxes is what can help 95% of the population that doesn’t earn enough.

Trading is a business income, so all expenses that you incur when trading can be shown as a cost. You can set off any losses with future profits. Check this module on varsity.

Markets and Taxation – Varsity by Zerodha

It is best not to set up multiple firms. If you are setting up firms only with the purpose of trading there are issues. Check this post.

Trading with other people’s money

A company or limited liability partnership (LLP) is created with those wanting their money to be managed being shareholders or partners. Their pooled funds are then used as trading capital. There are a couple of issues with this.

Firstly, an LLP with the objective of investing or trading is not allowed, so people use an alternate objective to create the LLP. This is a clear violation of MCA (Ministry of Corporate Affairs) rules. In the case of a Private Limited or Public Limited company, if more than 50% of revenue comes from financial income (trading), then the company is required to get registered as an NBFC (Non-Banking Financial Corporation) with RBI. One way to avoid this NBFC registration is by becoming a stockbroker and registering with SEBI. Both these registrations come with their compliance requirements, and as a stockbroker, an added cost of having to run a full broking stack as the firm cannot rely on other brokers for trading.

This could also be set up as a partnership firm to avoid the NBFC or SEBI registration requirement, but the issue with a partnership firm is that all partners have unlimited liability. In trading, where potentially there could be unlimited losses, partnership firms are not the right structure for investors.

While running trading through a setup like this allows flexibility in trading and collecting fees, you can’t actively seek new investors in the business promising returns from trading the markets. This would qualify the entity to register as an AIF. Check this SEBI order (Page 14, Point ix) banning the entity and the promoters for actively seeking capital to be invested into the stock markets as an LLP (without AIF license). So at best, if you did create a company or partnership firm, this can be set up only with family (white or allowed) and friends (grey) as a proprietary trading firm (grey). But you can’t actively seek capital from outsiders to manage (black).