Many investors in the stock market are not aware of the implications of the tax on their investment. Buying and selling of shares as well as dealing in derivatives have an impact on the income of the investor and the same should be reflected on their Income Tax Return [ITR].
It is mandatory for investors to file an annual return of income and their income statement should include all the gains and losses from investment in derivatives. One of the most popular forms of derivative is Futures & Options [F&Os]. It is basically a contract to buy at a future date.
Investors tend to get confused when they have more than one type of stock market investments. It is important to maintain records of transactions in order to ensure that they are appropriately reported. To gain tax benefits by carrying forward the losses or setting off the losses, it is essential to file an annual return of the income. F&O income is considered as a non-speculative income and hence income from it will be considered as a normal business income and any loss incurred will be considered as a normal business loss.
How to report the income
Investment in the stock market can be made through a demat account. Income generated from dealing with F&Os is always considered as a business income. The advantage of doing so is that it will allow taxpayers to claim the expenses incurred in the business as a deduction. These expenses may include telephone bills, the commission of a broker, Internet charges, salary of employees, and any other expenses that are directly related to the business. Business owners are required to file ITR-4 in order to report their income or loss from the business.
When reporting the income under capital gains, the short-term gain will be taxed as per the regular income tax slabs. The expenditure will not be deemed to be deductible and the short-term capital loss will be adjusted against the capital gain acquired through other sources. The losses can be set off against rental income, interest income, and any capital gains generated in the financial year. The losses cannot be adjusted against salary income. Besides, the loss can also be carried forward for eight consecutive years.
In case of intraday trade, the transaction will be considered as speculative. This loss can be carried forward for four years only. Any loss in intraday trade can only be adjusted against the gain in speculative business. Additionally, intraday and F&O will have separate expenses and they can be bifurcated accordingly. It is advisable to report the losses since it will bring down the total taxable income.
Investors need to understand how to file income tax and the implication of each transaction on the business and file the return correctly.
Bookkeeping and audit
In case the turnover of the business exceeds INR 1 crore, it is mandatory to get the accounts audited by an auditor. A penalty of minimum 0.5% of turnover is imposed, in case the accounts are not audited. It may be extended up to a maximum of INR 1.5 lakh. The business owner will be required to maintain necessary records of all transactions. In order to avail of the benefit of expenses as a deduction, it is essential to maintain complete records for individuals whose income exceeds INR 2.5 lakh per annum or annual turnover of the business exceeds INR 10 lakh.
Thorough understanding and knowledge of tax implications will help investors prepare their financial statement and report the same. It is important to comprehend the regulations before beginning your investments.