I have gone through the thread and thanks everyone for contributing such valuable information, however just to get some clarity I have the question below.
Question - I want to set up a separate legal entity for trading Futures & Options only, what would be the most suitable option for me. I would be using my own money to trade only Derivatives (no cash market transactions) and not solicit money from anyone outside my family
Partnership Firm
LLP
Private Limited Firm (Domestic Company)
Purpose of setting up a separate legal entity;
Apart from 31.2% (inc Cess), there is additional 15% surcharge on my income
Setting up a seperate legal firm would enable me to show more expenses related to trading compared to what I can show on an Individual against āIncome from Businessā category.
You could show all those expenses even if you didnāt set up a separate entity, trading in your individual name and using ITR3. It doesnāt make sense as a private limited as you will also need to pay additional dividend distribution tax over and above the corporate tax for the money you take out. That dividend distribution tax now is as per your income tax slab, so you could pay as much as 60% (25% corporate+ tax on the highest slab on dividends).
While you could set up a partnership, there isnāt any additional benefit. The best way is to just do it in your individual name, you will end up saving the additional costs you will have to pay a CA in case of a partnership.
You can choose to open a partnership firm to reduce your total tax liability if your =trading profits exceed 50 lakhs per annum. The maximum surcharge for a partnership firm is 12% for profits above 1 crore.
The additional cost for auditing and other compliances for partnership firm would be a lot higher when compared to an individual.
The one way I was thinking to legally lower my tax incidence was to create a partnership firm or private Ltd firm and then pay salaries to family members who fall in lower tax bracket, this way the salary would be paid before calculating net profit for the partnership firm/Pvt Ltd firm and the personal income tax rate applicable on my family member is way lower than 35% applicable on my income. (I read there are limits to salary paid in a partnership firm related to book profits though).
@Quicko executive suggested on a call that I should open a Pvt Ltd firm (instead of partnership or LLC firm) with an approximate cost of ~8-9K for setting the firm and another ~20K annually as compliance cost. @Quicko let me know if the numbers are correct/close to reality or in case in am missing anything
Special thanks for Tradingqna - Thanks everyone in this thread/forum for contributing and enhancing knowledge. Lot of stuff shared here is just amazing
Annual compliance cost of 20000 Rs. is too low for a private ltd company. Clarify the same with Quicko again.
Online tax portals charge 1000 for simple ITR filing on behalf of a salaried taxpayer with no other sources of income.
You could pay salaries to family members which will be taxed at a lower rate. However, the remaining profits in the company cannot be easily cashed out as dividends are taxed according to your own tax slab.
You could be a proprietor and employ staff who are paid salaries. You donāt need to be a partnership or Pvt ltd. You need to take registration of Professional tax if salary exceeds Rs 15k per month (Karnataka). It might differ based on states. In a proprietorship, you as a proprietor can also take a salary.
In a partnership, the partners can also take salaries (limit of 60% of profits) apart from paying salaries to others.
Btw, if you are structuring all of this just to pay salaries where it is not due (illegitimate), if spotted by the IT department can be disallowed completely and can have penalties. Best to avoid all of this just to reduce taxes unless your family members are actually helping you out in the business of trading.
Looks like for now itās best to trade under my own name and file ITR3 No complex accounting structure to take car off with just a simple yearly ITR3 and advance tax payment.
If someone who has created a separate legal entity and traded derivatives has found it to be beneficial, please do share your experience and if itās worth it
@Quicko ,
Someone called me from Quicko 10 days back and said that an expert will get in touch with me to discuss the annual compliance cost for partnership firm. However, nobody reached out to me.
@nithin Is it legal for 4/5 partners to come together form a partnership firm purely for trading equities+FnO, open a partnership demat on zerodha and trade using the pooled money of partnership. What are the possible implications? Can the trader(one of the partners) be paid an additional remuneration(apart from profit share) while others get only profit share? Also considering a 20L profit on 1cr capital what will be taxation on individual partners?(30% will be on firmās profit I presume). Will be greatful if u reply. TIA.
But is this arrangement legal as the firm will purely trade and no other activities atleast at the outset. Also how easy/hard is it to add capital every quarter or so and eventually even close the firm a few year down the line assuming a shift to llp/pvt co offering other services as well?
Yes, the clearing corporation will settle the shares. If suppose shares are not available, the exchange will conduct the auction and deliver to the buyer. even after the auction if the shares are unavailable they will do a closeout. (cash settlement which is very rare).
