Understanding Income Heads & ITR Forms for Traders and Investors

As a trader or investor, it is crucial to have a clear understanding of the income heads and income tax return (ITR) forms relevant to your financial activities.

In this article, we will explore the income heads applicable to traders and investors and discuss the corresponding ITR forms.

Q Am I a trader or investor or both?

A Investor is an individual who engages in long-term investments with the intention of earning income through appreciation of capital and dividends. When shares are sold, the income derived is subject to taxation known as "capital gains," which is further categorized into long-term or short-term capital gains depending on the duration of share ownership.

& Trader is an individual who participates in buying and selling activities with the intention of making profits from the increase in prices. Their income from trading is treated as business income.

Furthermore, the income generated from equity intraday trading is classified as speculative business income. On the other hand, income from trading in Futures and Options (F&O) is categorized as non-speculative business income. Additionally, the income derived from equity delivery trading can be treated either as capital gains or business income.

Additionally, one can be both a trader and an investor at the same time.

Q What if I have identified myself as Investor?

A In that case, you will deal with two types of taxation:

• Long-Term Capital Gain (LTCG): This applies to equity delivery-based investments where the holding period is more than 1 year. If you sell your equity shares or equity-oriented mutual funds after holding them for more than 1 year, the resulting gain is considered as LTCG. As per the current tax laws, LTCG on listed shares and equity-oriented mutual funds exceeding INR 1 lakh is taxable at a flat rate of 10%.

• Short-Term Capital Gain (STCG): This applies to equity delivery-based investments where the holding period is less than or equal to 1 year. If you sell your equity shares or equity-oriented mutual funds within 1 year of holding them, the resulting gain is considered as STCG. STCG is taxed at a flat rate of 15% as per the current tax laws (if STT is applicable).

Q What if I have identified myself as a Trader?

A Traders engaged in buying and selling securities or derivatives are classified under the business category. As per the Income Tax Act, 1961, profit or loss arising from such activities is reported as business income.

• Speculative Business Income refers to income generated from speculative transactions, where the purchase or sale of commodities occurs without actual delivery. This includes intraday trading and short-term trades. The definition of Speculative Transaction excludes derivative transactions, which means that equity F&O (Futures and Options), commodity trading, and currency trading are considered non-speculative in nature.

• Non-Speculative Business Income, on the other hand, encompasses income derived from business activities involving actual delivery of the underlying assets, such as equity F&O trading, commodity trading, and currency trading.

If an individual engages in frequent buying and selling of stocks for shorter durations, it is advisable to categorize such activities as non-speculative business income rather than Short-Term Capital Gains (STCG).

Taxation: In contrast to capital gains, business income does not have a fixed tax rate. Instead, both speculative and non-speculative business income must be combined with your other sources of income, and taxes must be paid based on the tax slab in which you belong.

Q How to calculate Trading Turnover?

A The calculation of trading turnover varies depending on the type of trading activity:

• Equity Intraday Trading: The trading turnover for equity intraday trading is calculated based on the Absolute Profit generated.
• Futures & Options Trading (Equity, Commodity or Currency): For futures and options trading in equity, commodity, or currency, the trading turnover is calculated using the Absolute Profit.
• Equity Delivery Trading: In the case of equity delivery trading and mutual fund trading, the trading turnover is calculated based on the Sales Value of the transactions.

Q So which forms should I file?

A If a trader generates income from capital gains, they should file their income tax return using the ITR-2 form.

If a trader earns business income, they should file their return using the ITR-3 form. This means that if you are into F&O trading and intraday equity trading, you need to file ITR-3.

However, if the trader has opted for the Presumptive Taxation Scheme, they can use the ITR-4 form to file their income tax return. 

Recommended Read : TAX HARVESTING – Save tax Upto Rs. 10,000 on LTCG

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