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Basic Income Tax Rules FY 2014-15

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You must file your taxes every year.

Remember that last day of filing tax for financial year 2014-15 is August 31, 2015. You can file after that too, but you may have to pay a fine which should be avoided to save money.

If you are not a tax expert you should outsource this to a tax professional.

Even though you outsource, as a stock trader its always good to know some basic rules of Income tax.

So here are some very basic rules:

1. Trading Profits treated as Business Income – All profits made in derivatives (Future and Options) and Intraday trading (day trading) are treated as business income. Business income is added to your total income from all sources including salary or other businesses.

2. Trading Losses are carried froward and can be adjusted against the profits made from any business (not just stocks) for eight years. Losses cannot be adjusted against salary income. Intraday losses cannot be adjusted against business profits or salary income, they can be adjusted against any Intraday or speculative losses for the next 4 years.

Important Note: If you do not file your IT return by the last date you cannot carry forward the losses incurred in this financial year. In case you make a profit trading next year, you will have to file taxes on those and you will not be able offset the profits by adjusting against the losses you made trading this year. So please file you taxes before 31 August 2015.

3. Long Term Capital Gains – Any stock or “equity” mutual funds bought from a legal stock exchange or fund house held for more than 365 days (1 year) is treated as long term capital gain and is 100% exempted from tax, even if profits runs into lakhs of rupees. All dividends are also exempted from tax.

NOTE: If you are doing a SIP (systematic investment plan) on a mutual fund then for profits on investments made in last one year will be treated as short term capital gains.

4. Short Term Capital Gains – If you sell a stock or “equity” mutual fund before 365 days then it falls under the short term capital gains. Here you will have to pay 15% of the profits made as tax.

5. Debt Mutual Funds – If sold within 3 years profits are added to total income and taxed accordingly. If sold after 3 years profits to be calculated after indexation and the remaining profit to be taxed at 20%. No need to show any profits “without” indexation since you have already shown after indexation.

Note that every year government declares a percentage to calculate indexation. After this is deducted, a major chunk of profits from the mutual funds will be out of tax preview and the holder only needs to pay a small amount as tax essentially making the entire profit tax free.

6. Fix Deposits – All profits made from fixed deposits are added to your total income and taxed accordingly. It does not matter if the FD was done for 1, 5 or 10 years. Therefore its highly recommended that you keep excess cash in debt “income” mutual funds rather than Bank Fixed Deposits. Debt “income” mutual funds give an average return of almost 10% which is better than current FD rates. On top of that if you can hold them for more than 3 years, you need not pay taxes on profits made. If you bring into inflation – FDs give ZERO or NIL returns.

If your total profits from F&O trading + salary or business income is less that 2.5 lakhs in a financial year there is no need to file income tax return. But I strongly advise you fill because it helps in improving credit and taking loans.

Disclaimer: I am not a tax expert but this is something that I think everyone should know. These rules may change from time to time and I will write a new page for the next financial year or edit this one. Filing taxes is not as easy as it looks out to be. So please consult a tax professional. I outsource my taxes to a highly qualified tax consultant. This saves my time for financial calculations and to pay taxes, plus he makes sure there are no errors and I pay my taxes on time.

How to get a tax adviser who charges reasonable rates?

One of the best ways is to ask your friends to recommend one. Or search your FaceBook friends or their friends – I am sure there are plenty of tax professionals in India and you should get a good one.

You can also Google – just type your place name + tax professional. Search the same in FaceBook – I am sure you will get one.

Most of them charge anywhere from Rs. 2000 to Rs. 10,000/- for calculating your income, making a P&L statement and filing taxes depending on how complex your financial statements are.

Tip: These statements are big so I recommend not to keep a hard copy, as within years it gets huge and tracking gets difficult. You can always ask them to give you a soft copy. Open an account in DropBox and keep all the files there. DropBox will give you 2 GB storage free for life. This is enough for your whole life. Create folders for every year – keep soft copies of your bank statements, P&L statements created by Taxman, and income tax return files. Everything can be kept in a pdf format. Later on if required retrieving them will be easy and it saves a lot of time.

Again, please file you taxes on or before August 31, 2015 for FY 2014-15. DO NOT get lazy. There is plenty of time – get all papers (soft copy only) by the end of this week and hand over to the tax professional by 17th of August 2015 (Monday). Tell them to calculate and fill the tax returns before end of this month. Save the money you will have to pay as late fee by filling taxes this month itself. Please do not miss the deadline.

IMP: Please just do not rely on this post. It has very basic information. Filing taxes is complex and better done by a tax professional so please consult a tax professional.

If you are a tax adviser or professional please leave your thoughts in the comments section. This will help stock and option traders looking for information on filling taxes in India.

Many Thanks.

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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 4 comments… add one }
  • Babu

    Just visit http://zerodha.com/varsity/module/markets-and-taxation/

    My friends, Nithin and Karthik done a simple & super job for every type of trader in detail..

    All the best to all…


    • Babu,

      Thanks for the link. In fact I also wanted to include it in the post but its so huge that I didn’t. Its actually an University of Tax Education. 🙂

      The idea of the post was to just inform the basics of taxation which I think my newsletter subscribers should know hence the name of the post – “basic income tax rules 2014-15”. Most of my subscribers are having a full time job so they may not be able to read a long post – therefore just the basics was included.

      And more than that I wanted to remind all my subscribers the last date of filing returns i.e. 31-8-2015. I want them to save money on late fine.

      Hope you understand.
      Cheers 🙂

  • Venkitachalam

    One thing I would like to add is that for people between 60 and 80 years of age, non taxable income limit is Rs. 3,00,000.

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