You can classify yourself as an Investor if you hold equity investments for more than 1 year and show income as long term capital gain (LTCG). You can also consider yourself an investor and gains as short term capital gains (STCG) if your holding period is more than 1 day and less than 1 year. We also discussed how it is best to show your capital gains as a business income if the frequency of trades is higher or if investing/trading is your primary source of income.

In this chapter we will discuss all aspects of taxation when trading is declared as a business income, which can be categorized either as:

1. Speculative business income – Income from intraday equity trading is considered as speculative. It is considered as speculative as you would be trading without the intention of taking delivery of the contract.
2. Non-speculative business income – Income from trading F&O (both intraday and overnight) on all the exchanges are considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of the underlying contracts. Even though currently almost all equity, currency, & commodity contracts in India are cash-settled, but by definition, they give rise to giving/taking delivery (there are a few commodity futures contracts like gold and almost all agri-commodity contracts with the delivery option to it).Income from shorter-term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if the frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.

5.2 – Taxation of trading/business income

Unlike capital gains, there is no fixed taxation rate when you have a business income. Speculative and non-speculative business income has to be added to all your other income (salary, other business income, bank interest, rental income, and others), and taxes paid according to the tax slab you fall in. You can refer to chapter 1 for tax slabs as applicable for FY 2020-21.

Let me explain this with an example:

• My salary – Rs.1,000,000/-
• Short term capital gains from delivery based equity – Rs.100,000/-
• Profits from F&O trading – Rs.100,000/-
• Intraday equity trading – Rs.100,000/-

Gives these incomes for the year, what is my tax liability?

In order to find out my tax liability, I need to calculate my total income by summing up salary, and all business income (speculative and non-speculative). The reason capital gains are not added is that capital gains have fixed taxation rates unlike a salary, or business income.

Total income (salary + business) = Rs.1,000,000 (salary income) + Rs.100,000 (Profits from F&O trading) + Rs.100,000 (Intraday equity trading)  = Rs 1,200,000/-

I now have to pay tax on Rs 12,00,000/- based on the tax slab –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 5% – Rs.12,500/-
• 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,
• 1,000,000 – 1,200,000: 30% – Rs.60,000/-
• Hence total tax : 25,000 + Rs.100,000 + Rs.60,000 = Rs.172,500/-

Now, I also have an additional income of Rs.100,000/- classified under short term capital gains from delivery based equity. The tax rate on this is flat 15%.

STCG: Rs 100,000/-, so at 15%, tax liability is Rs.15,000/-

Total tax = Rs.185,000 + Rs.15,000 = Rs.200,000/-

I hope this example gives you a basic orientation of how to treat your income and evaluate your tax liability.

We will now proceed to find a list of important factors that have to be kept in mind when declaring trading as a business income for taxation.

5.3 – Carry forward business loss

If you file your income tax returns on time July 31st for non-audit case and Sept 30th for audit case, you can carry forward any business loss that is incurred.

Speculative losses can be carried forward for 4 years and can be set-off only against any speculative gains you make in that period.

Non-speculative losses can be set-off against any other business income except salary income the same year. So they can be set-off against bank interest income, rental income, capital gains, but only in the same year.

You carry forward non-speculative losses to the next 8 years; however, do remember carried forward non-speculative losses can be set-off only against any non-speculative gains made in that period.

For example, consider this – my hotel business income is Rs 1,500,000/-, my interest income for the year is Rs.200,000/-, and  I make a non-speculative loss of Rs 700,000. In such a case, my tax liability for the year would be –

My gain is Rs 1,500,000/ from business and Rs.200,000/- from interest, so total of Rs.1,700,000/-.

I have a non-speculative business loss of Rs.700,000/-, which I can use to offset my business gains, and therefore lower my tax liability. Hence

Tax liability = Rs.1,700,000 – 700,000 = Rs.1,000,000/-

So I pay tax on Rs.1,000,000/- as per the tax slab I belong to, which would be –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 5% – Rs.12,500/-
• 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,

Hence, Rs.112,500/- goes out as tax.

5.4 – Offsetting Speculative and non-speculative business income

Speculative (Intraday equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.

If you incur speculative (intraday equity) loss of Rs.100,000/- for a year, and a non-speculative profit of Rs 100,000/-, then you cannot net-off each other and say zero profits. You would still have to pay taxes on Rs 100,000/- from non-speculative profit and carry forward the speculative loss.

For example, consider this –

• Income from Salary = Rs.500,000/-
• Non Speculative profit = Rs.100,000/-
• Speculative loss = Rs.100,000/-

I calculate my tax liability as –

Total income = Income from Salary + Gains from Non Speculative Business income

= Rs.500,000 + Rs.100,000 = Rs.600,000/-

I’m required to pay the tax on Rs.600,000 as per the slab rates –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 5% – Rs.12,500/-
• 500,000 – Rs.600,000 : 20% – Rs.20,000/-,

Hence total tax = Rs.12,500 + Rs.20,000 = Rs.32,500/-

I can carry forward speculative loss of Rs.100,000/-, which I can set-off against any future (up to 4 years) speculative gains. Also to reiterate, speculative business losses can be set-off only against other speculative gains either the same year or when carried forward. Speculative losses can’t be set-off against other business gains.

But if I had a speculative gain of Rs 100,000/- and non-speculative loss of Rs 100,000/- they can offset each other, and hence tax in the above example would be only on the salary of Rs 500,000/-.