Tax Planning: Convert FNO profits to STCG

There is nothing illegal that am doing here. I have not contravened any provision of the Act. It doesn’t matter if its a case of audit or not. For this very purpose the report won’t be qualified.
I see people are so scared of audit here. As long as you have nothing to hide there is nothing to be scared of.

This I agree. In the worst case scenario, if supreme Court also rules against you then your income will be recalculated.

If AO is not satisfied with your computation he will issue a SCN asking for an explanation. Now this can happen to anyone. A person having 2lakh income or the one who is having 200 crore income. Its their right to seek for an explanation.
Reply to that with relevant provisions.
If he is still not satisfied he will pass on order. You have right to file your appeal to CIT, ITAT, high court and supreme Court.


Is there any time limit to that? Can a tax agent ask for explanation on like 10 year old income also?

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In budget 2021, the time limit to re-open income tax assessment cases has been reduced to 3 years from 6 years from the end of the relevant assessment year. Also, in case of serious tax evasion, the assessment can be reopened until 10 years, only when concealment of income is more than 50 lakh.

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I am beginning to wonder if there is a put side strategy to convert FNO income to STCG :grinning:
Any thoughts @Jason_Castelino ?

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We can definitely build one.

  1. Buy deep ITM put on Monday of expiry week.
  2. Simultaneously buy the underlying stock at CMP
  3. On expiry give delivery of stock at the strike price.
  4. Your STCG profit will increase by the difference of your Purchase price and the strike price.
  5. You FNO profit will decrease by the amount of premium paid + FNO charges.
  6. Funds required shall be slightly on the higher side since you have first buy stock with full value and then also keep full value of the contract on the last 2 days of expiry.
  7. Since no future contract is required to be taken, you will save cost on it.

Let me know if I missed anything.


Hey, one more question.

Why are we doing this 8 days before? Not on expiry day or 1-2 days before?

We are going to do it on expiry week only! Monday of the expiry week (T-4),

Mainly because the theta component will have least effect on deep ITM options on expiry week, think so

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Yes. So take it as close as expiry. Last two days you cannot enter into new contracts. So Tuesday.

But if you are going for put strategy, then you also have to take delivery of stock. So do not take a chance of buying on Tuesday. There is a possibility of short delivery also. So I took a day earlier. That is Monday.

Where have I mentioned that we should do it before 8 days?

@Jason_Castelino So consider the scenario - 15 days before expiry SBI is at Rs. 125 and 150 CE of that month is trading at say about Rs. 5, and I buy this call option and at expiry the price is Rs.175, so my 150 CE would have intrinsic value of 25, if I close the position before expiry I will have an FnO gain of Rs.20 and taxed at slab rate , I decide to take delivery for whatever reason and sell say after 20 days and say sell price is same at Rs. 175 only (IMO if I sell any share after I have it in my demat account should be considered as Capital Gains and I am considering this as STCG), here my argument is my cost of acquisition of shares is Rs.155 [Rs. 150 (Strike Price I paid at exercise) + Rs. 5 (premium I paid for acquiring that option) )] and hence my profit is Rs. 20 only, obviously here the tax rate is 15% considering it STCG. Both the profits should be same intuitively also as both conditions are same, if you look from cash flow perspective in first scenario I paid Rs.5 as premium and sold the same option to someone for Rs. 25, hence Rs.20 profit, and in second scenario I know that I can sell it at 175 and from buying side I did spend 5+150 only once in paying the premium and then in exercising, so here also profit is Rs. 20 only.

So coming back to your example your sell price is 196 but your cost of acquisition is 198.3 (48.3+150), and here I have a doubt if the way you have treated your trades if that is allowed or not because you are trying to expense the entire premium as a loss in the business income side of it where as if you did not have any FnO profits you would have considered option premium as cost of acquisition of shares to reduce the STCG and hence the tax.

I have never taken any physical delivery so I do not know if an ITM option shows as a loss in profit or loss statement and if that is the correct way of evaluating this position, I would imagine on the last day this option would have some intrinsic value and the difference between this intrinsic value and the premium you paid would be the profit or loss for this position even if you take delivery of the stock.

Note - I am not arguing if the sale after exercising the shares is STCG or not, IMO it should be STCG only, I am arguing if we can treat the premium we paid of a CE option which expired as ITM at expiry as loss and reduce the entire amount from the FnO profits.

Disclaimer - I might be wrong here, I tried to find resources that clearly state if an exercised option premium can be taken as loss or not, didn’t find any, will be very happy to be proven wrong as this really is a novel approach for tax planning.

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@Jason_Castelino : How Zerodha tax Pnl report shows the FNO CE entry ? As 144900 loss? Buy = 48.3 and sell=0?

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If the example you gave is a real one then you would have done it last year (as SBI price was in this range last year only), so did you already file the ITR for this and were there any issues ?

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Hi @ZeroIndian

If you are getting delivery of shares in your Demat account then the shares are considered as the asset or investments of the assessee. Once, the shares are treated as investment, then it depends on intention of the assessee to treat the same as stock in trade or capital asset.
As per the CBDT Circular, the Assessing Officer (“AO”) cannot challenge the intention of assessee of how to treat the shares. But in two cases AO can challenge the intention:
a) If the assessee keeps on changing the treatment of shares every time, then AO can challenge the intention of assessee or,
b) If the genuineness of the transaction is questionable, the above option is not available to the taxpayer and the Assessing Officer should consider the treatment of income after considering the provisions of the Income Tax Act.
For further reference, you can refer to the article mentioned below:

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Since I pay 0.1% STT on buy & sell when doing BTST trades. I can assume, the stocks are delivered in my demat account. Otherwise, it would be kinda “illegal” for them to charge 0.1% STT to me, right?

Since, they are delivered, I can treat it as STCG. Did I understood Quicko’s reply correctly?

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Thanks @Quicko .

Thanks to @Jason_Castelino 's comments, I went and took a closer look at the case law around this issue. Here is what I learned: my assertion that a frequent trader does not have recourse to claiming STCG is not entirely true. Instead, here is what I now believe (Note: I am not an expert in any of this):

  1. If you are a frequent trader, and you claim STCG on some sales, then the AO can (and has, in many cases) assess these instead as business income and apply the higher tax rate (and possibly, the fines that come along with this revision). You will have to fight the system to get this assessment overturned. Sometimes this fight goes on for many years, across various appellate authorities, up to the High Court/Supreme Court.

  2. If you are a frequent trader, and you wish to claim STCG on some sales, then the safest thing is to keep separate portfolios for the two types of trades. I saw a few judgments where the court ruled in favour of the assessee because the assessee was able to convince the court that they had two sets of portfolios, one for investment and one for trading. I am not entirely sure what would suffice as “keeping separate portfolios”. Here is what I think:

    • If you do the two types of trades from separate demat accounts, you are fine.

    • If you do both types of trading from the same demat account, then keeping track of different ledgers for the two types of trades should also suffice.

  3. If you are a frequent trader, and you claim STCG on some sales, and you haven’t used “separate portfolios”: if your AO thinks you are trying to wiggle out of paying tax, they will do the re-assessment of these profits as business income, and then it is up to you whether to fight it in appeals. The eventual (after various rounds of litigation) outcomes of these appeals fall on both sides: in some cases the final judgment favours the AO, and in others, the assessee. I could not suss out a clear pattern to the reasoning applied by the various courts.

I now summarise the points that may be of interest to this community, from the most recent judgment that I could find on this matter. The case is Ramilaben D. Jain Vs ACIT (Bombay High Court). The date of the judgment is 20 Aug 2018, and the case pertains to Assessment Year 2007-08.

Note that this is a paraphrasing based on my (possibly faulty) understanding of the order; please see the linked page for the original judgment. It is written in clear language which we can all understand (except for some very long sentences, perhaps!).

  1. The assessee is a housewife, and she claimed both STCG on sale of shares and speculative income from trading in her returns for AY 2007-08.

  2. The AO denied this distinction, and treated the entire income as business income. (I assume this resulted in higher tax for the assessee, along with fines for delayed payment etc.)

  3. The assessee went on appeal to the Commissioner. The Commissioner denied this appeal, and upheld that all of the claimed STCG should in fact be treated as business income.

  4. The assessee went on appeal to the Income Tax Appellate Tribunal, Mumbai. The Tribunal denied her appeal.

  5. The assessee went on appeal to the Bombay High Court against this ruling of the ITAT. The Court denied her appeal, in the linked order.

    The order lists the following about the assessee’s transactions in FY 2006-07, in support of the judgment denying the appeal (I am paraphrasing, please see the original judgment for the verbatim text):

    • 73 transactions in total, of which only one is in the LTCG category
    • Of the 72 transactions on which STCG was claimed, only 10 have holding period more than one month
    • In the majority of transactions the holding period is less than one week
    • Just 10 transactions having holding period of more than one month is not enough to make all these 72 transactions eligible for STCG treatment
    • The trend that the assessee sold more than 80% of their holdings within a week of purchase, supports the finding (by lower authorities) that these trades were all in the nature of business

Here is some verbatim text from the judgment which may be of interest:

The intention of the assessee in indulging in these transactions is to earn profit at the earliest possible occasion and when there is a rise in the price. The assessee is moving as per the stock market trend. At the first available opportunity, the assessee is selling the shares. This type of activity of sale and purchase is rightly termed, not as an investment, but actuated by motive of sale and purchase so as to earn profit at the earliest occasion.

One more point that went against the assessee in this order: she had, in her returns for the previous AY (2006-07), offered all the profit from share sales as business income. The order said that she cannot just flip this and claim STCG for the same type of income in the next year. So this is one other thing to keep in mind if you wish to both do frequent trading and claim STCG.

I am not a lawyer or an expert in taxation/tax law; these are what I understood as a lay person. Please consult your CA/tax lawyer before taking action based on what you read above!


(and possibly, the fines that come along with this revision)

Thank you, How much fine I need to pay? (just asking for a rough estimate).

I don’t know. The only fines I have paid to the IT department are for late payment of advance tax, as happens when we file the return and the software figures out that some advance tax was not paid on time. These fines come in the form of penal interest, and the rate of interest, if I remember correctly, is something like 1% per month of delay, or some such.

I don’t know the penal terms that apply if the AO does a re-assessment and finds that we have to pay more tax. You can find these details in this handout by the IT department.

Totally agree with the points you have mentioned with reference with the case law. In the relevant case law, in my opinion what went against her was she kept changing the head of income. If an assessee is consistent in declaring the income under the same head, then genuineness wont be questioned.
Also, when there are debatable matters and contrary judgements, we cannot really come to a conclusion. It is always on case to case basis.

My suggestion would be to always show the income under the same head even if you have two different Demat accounts and not change as per your convenience and advantage.

I do not think you have enough faith on the opinion of one. :stuck_out_tongue:
I am a Chartered Accountant in Practice. Anyways always good to take second opinion.


First we need to understand what options really are.
An option is a contract where you have a right to exercise it. So when you pay the premium you are paying for the ‘right’ and not for the underlying. So you cost of acquisition of the underlying (Stock) is 150 and not 155.
In business, profit is the difference between sell value and buy value. Since you have not closed your position, you have not sold your ‘right’. So the entire premium paid shall be considered as loss.
Business loss: 5 points
STCG: 25 points

I have tried to put it in simple terms If it isnt clear, kindly let me know and I shall edit this post.

Shows the same way as how I have explained above and I totally agree with them.

When I was typing out this strategy I knew there would be someone asking this. So finally. :stuck_out_tongue: Yes. This was done last year and the returns for the same are already filed and it has been processed too.



I do BTST + Intraday trading on equity shares.

My turnover is less than 2 crore for Intraday but it crosses 2 crore, If I include BTST.

In this case, can I do this:

1.) Show BTST profit as STCG

2.) Use presumptive tax for Intraday profit. So I even need to pay less tax on this, since 6% presumptive tax is better than STCG tax.

But but but

What If next year my turnover cross 2 crore? I cannot change from presumptive tax to STCG for same type of trades right?

So I should show it as STCG from starting to be future safe right?

So this year, I am thinking to:

first convert Intraday profit into STCG. I dont have much FnO profit, mostly intraday. But, I guess, same thing.

then show all profit as STCG.