Any financial loss arising from trading of options is treated as business loss

Any income or loss arising from trading of options (non-speculative in nature) is to be treated as business income or business loss

I incurred significant loss in FY 2015-16 while trading in options and equity but didn’t declare it while filling IT returns then. Can I declare the same in FY 2016-17 and get tax benefits?

—Amit Kaushik

We presume that you are trading “option in securities" and equities listed in recognized stock exchange in India.

Any income or loss arising from trading of options (non-speculative in nature) is to be treated as business income or business loss.

Characterizing of income/losses arising from trading in listed equities has been a matter of litigation. There are judicial precedents and circulars issued by Central Board of Direct Taxes (CBDT) from time to time outlining the parameters basis which an income arising from trading in equities can be classified as capital gain or loss or business income/loss. In the circular issued in February 2016 [No. 6/2016 dated 29 February 2016], it has been notified that the taxpayer can opt to treat the listed equities as “stock-in-trade" then the gain/loss on transfer of such securities will be treated as business income. Further, the circular also states that for listed shares and securities held for more than 12 months, if the taxpayer has treated the gain/loss on such transfer as capital gains/loss, the same shall not be disputed by the tax authorities. However, once opted, this choice shall remain applicable in subsequent assessment years and the taxpayers shall not be allowed to adopt a contrary stand in subsequent years.

We presume that you would have classified the listed securities as “stock-in-trade" instead of “capital assets" and would report any income/loss as business income/business loss. We note that you have incurred losses while trading in options and listed equities in FY 2015-16. However, you did not disclose/report these losses while filing your tax return for the FY 2015-16. We assume that you have filed your FY 2015-16 tax return within the extended due date (i.e. 5 August 2016). If our assumption is correct, you can revise your 2015-16 tax return on or before 31 March 2018 to report the losses incurred by you. These losses can be set-off against any other head of income except salary income in the FY 2015-16. Any unadjusted losses in FY 2015-16 can be carried forward and set-off against business income for eight consecutive FYs beginning FY 2016-17.

In the alternative, if you did not file your 2015-16 on or before 5 August 2016, you would not be able to revise your return and the loss which you have incurred in the FY 2015-16 cannot be carried forward to FY 2016-17. Also, if you wish to classify the listed securities as “capital assets", then the loss incurred in the FY 2015-16 cannot be set-off against any income including capital gain income even if the tax return is filed within the extended due date.

Just for your information, in case the equities traded are not listed securities, then as per the circulars issued, you may need to prove the intention to the tax authorities. If the intention is to trade securities and earn profits, then, it would need to be classified as ‘Business Income’ and accordingly books of accounts would need to be maintained by you. If the intention is to make investments in equity market, then it can be classified under the held capital gain. Basis your intention and the type of listed/unlisted securities, you may consider claiming the loss in your revised return for the FY 2015-16 as explained above.

I want to understand the EPF withdrawal rule around the 36 months period. Suppose there is some accrued amount in EPFO account for a period of continuous service which is less than 5 years and thereafter one chooses to opt for setting up own business, then it becomes clear that there will be no further contribution for such prescribed 36 months tenure. In such a case, how can the accrued PF amount for 3 years completion period and all interest amounts thereafter for next 36 months before becoming inoperative be withdrawn efficiently to not attract tax?

—Sujit Raman

Under the Indian PF law (the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952), you can withdraw PF balance only if you are not employed with another employer, for at least 2 months after you leave your current job. You can continue to keep your money in the PF account without any further contributions. The interest will be accrued on the outstanding balance. Earlier, interest was not paid for the accounts that remained in-operative for more than 36 months. However, with effect from 11 November 2016, the PF authorities decided to pay out interest.

The cumulative PF balance (i.e. your contribution together with your employer’s contribution and the interest credited thereon) withdrawn from a recognized PF triggers tax liability, if an employee does not render continuous services for a period of 5 years or more to the employer. While determining the period of continuous service, the period of service with previous employer(s) should also be added if the cumulative PF balance with the old employer has been transferred to the PF account of the new employer.

We understand that you have actively contributed to the PF for 3 years and would like to set up your own business/choose entrepreneurial career to which PF law does not apply (assuming employee strength will be less than 20). As the cumulative period of service is less than 5 years (only 3 years), withdrawal of accumulated PF balance will be taxable in the year of withdrawal despite you deciding to keep the account active for 2 years or 3 years after your employment. Accordingly, the tax exemption on PF withdrawal can be claimed only if cumulative years of service where contributions are made exceeds 5 years.

Parizad Sirwalla is partner (tax), KPMG.

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