As we grow and compound our portfolio, we have to pay more taxes as individuals. What are our options to scale the trading business to :
minimize the effects of Taxes
Enjoy the deductions of trading expenses.
One of them is to have multiple trading accounts , in the name of your family members. (But that is also only till profit reaches certain amount) Apart from that what other options do we have? Has anyone in this community set up a firm / Pvt company for tax benifit, claim deductions ?
Trading as a company has issues, check this. You will end up needing an NBFC license.
If you are trying to save on income taxes by dividing trading into your family member accounts, I guess you know that there are potential issues with that as well. Income tax returns have to be filed in their names and there can be scrutiny where they are required to meet the Income-tax officers. I think it is not worth the hassle.
As an individual, the best you can do is to show trading as a business and then claim everything you spend towards trading from your internet bills to cable bills (for watching CNBC ) as an expense.
I agree to this as long as the profits are below HNI threshold, whose effective tax rate is 43%!
With Other options- again there are so many hinderances.
Pvt Company - There is complication of NBFC and RBI getting involved.
LLP - Trading cannot be the sole objective of LLP
Partnership Firm- Unlimited Liability.
Sole propritor - same as Individual
HUF - anyone here who is trading under can enlighten more on this.
Which one is most beneficial to save on taxes legally? Aren’t there anyone here who can advice based on their jouney/experience.
We risk so much, our hard earned money, savings, and when we make profit, dont feel like sharing 43% with government.
HUF will be as good as another family member. But if you are saying after a certain point your family members are not enough to cover your income, I am afraid another person in the form of HUF will be of much help.
Yes, such high tax rates is not fair but it is how it is. The only way we can avoid paying high tax is by not earning such high income.
In contrast, people who make money through LTCG (Business owner/Equity) are only taxed when they sell and only pay 10% when they do so. Returns from buy and hold equity is lower than trading and with higher risk, but can try to design systems in a way such that most of the gains have over 1 year holding periods.
Even better if you can create a growing business where returns can be exponential, but that is easier said that done …
LTCG is clear, but STCG vs business income can still be an issue if you have many transactions.
From chapter 3,
For equity delivery based investments, if you are holding stocks for more than a year, you would have received some kind of dividend and even if you didn’t, you can show them all as investments and claim an exemption under the long term capital gain. If you are buying and selling stocks frequently (yes it is an open statement, but there is no rule which quantifies ‘frequent’) for shorter terms, it is best to declare that as non-speculative business income instead of STCG.
Another thing to keep in mind is that if investing/trading on the markets is your only source of income, and even if your trading activity is moderate, it is best to classify income from all your equity trades as a business income instead of capital gains. On the other hand, if you are salaried or have some other business as your primary source of business, it becomes easier to show your equity trades as capital gains even if the frequency is slightly higher.
Categorising it as STCG or Business income is in our hands. Of course frequent BTST is subjected to be changed as Business income, but doing short swing trades, albeit frequently, can still be categorised as STCG. If AO has an objection, then we can fight it/ change it. Why to declare in the initial stage and pay unneccesary tax ?
Yeah, still some of the difference will be negated by STT which cannot be deducted for investments.
I have not started trading overnight yet, so have not checked how much difference it might make.
In equity intraday alone, stt alone can easily remove say 20-40% of returns. Overnight i guess it will depend on holding period.