Here’s a revision before we move forward:
If you hold equity investments for more than one year, your income is classed as a long-term capital gain (LTCG). Or, if the holding time is between one day to one year, then the gain is a short-term capital gain (STCG). A frequent trader or someone whose primary source of income is investing/trading should show their capital gains as business income.
In this chapter, we’ll take a look at the taxation of trading declared as business income. This falls into two categories:
– Taxation of trading/business income
There is no single tax rate for income from a business. Both speculative and non-speculative profits must be included in your total income, along with any salary, additional business incomes, bank interest, rent revenue or other sources. To ascertain the applicable taxes due in the Financial Year 2020-21, please refer to Chapter 1 of the relevant legislation.
To illustrate, let’s consider the following scenario:
My annual salary: Rs. 1,500,000/-
Short-term capital gains from delivery-based equity: Rs. 80,000/-
Profits from F&O trading: Rs. 120,000/-
Intraday equity trading gains: Rs. 50,000/-
In order to determine my tax liability, I need to calculate the total income by adding my salary and business earnings (excluding capital gains):
Total income (salary + business earnings) = Rs. 1,500,000 (salary income) + Rs. 120,000 (profits from F&O trading) + Rs. 50,000 (intraday equity trading gains) = Rs. 1,670,000/-
Now, I need to calculate the tax based on the applicable tax slabs:
0 – Rs. 250,000: 0% tax – Nil
250,000 – Rs. 500,000: 5% tax – Rs. 12,500/-
500,000 – Rs. 1,000,000: 20% tax – Rs. 100,000/-
1,000,000 – Rs. 1,670,000: 30% tax – Rs. 201,000/-
Therefore, the total tax liability would be: Rs. 12,500 + Rs. 100,000 + Rs. 201,000 = Rs. 313,500/-
In addition, I have earned Rs. 80,000/- through short-term capital gains from delivery-based equity, which is subject to a flat tax rate of 15%. Thus, the tax liability for this would be: Rs. 80,000 x 15% = Rs. 12,000/-
Hence, the overall tax amount would be: Rs. 313,500 + Rs. 12,000 = Rs. 325,500/-
This example aims to provide a basic understanding of calculating tax obligations based on different sources of income. It is essential to keep these key points in mind when reporting trading as a business income for tax purposes.