Important Keyword: Foreign Asset, ITR, Schedule FA.
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Schedule FA (Foreign Assets) Disclosure in ITR
In the current financial landscape, individuals are expanding their investment horizons by including foreign assets in their portfolios. This strategic move not only allows them to leverage global opportunities but also serves as a hedge against the uncertainties of regional market dynamics. However, the undisclosed inclusion of foreign assets or income in the tax returns of Indian residents could potentially lead to tax evasion and financial opacity.
To address this concern and ensure transparency in financial reporting, the government has implemented stringent measures such as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Under this legislation, Indian residents are mandated to disclose any foreign assets they hold while filing their income tax returns. This disclosure is facilitated through Schedule FA (Foreign Assets), a crucial component of the tax filing process.
Applicability of Schedule FA
This schedule is mandatory for Resident and ordinarily resident individuals who are holding assets outside India.
In the case of Non-resident and Resident but not ordinarily resident persons, schedule FA is not applicable.
Note: If an individual is holding foreign assets but does not have any other income, they are still required to file the income tax return by disclosing such foreign asset holdings.
Foreign Assets that are required to be declared
The resident assessee must declare the following foreign assets in Schedule FA:
Any property or investments held outside India, such as shares, bonds, life insurance, real estate, or other valuable assets. Incomes received from sources outside India, like dividends, interest, or capital gains. Authorization to sign in any account situated outside India, be it a bank, custodian, depository, or trading account.
Ownership or any financial stake in a foreign entity, like being a partner in an overseas business or benefiting from a foreign private trust. If the taxpayer has any beneficial interest in any of the above-mentioned assets, it is also mandatory to report it in their income tax return. Here, a beneficial owner is an individual who has directly or indirectly paid for the asset. Additionally, if the asset is held for the immediate or future benefit of the person who provided the payment or for someone else, they are also considered a beneficial owner.
It is to be noted that all the holdings and incomes should be reported in INR in schedule FA.
Relevant period for Reporting
Taxpayers need to report their foreign asset holdings for the relevant calendar year, which runs from January 1st to December 31st.
For instance, if a taxpayer is filing their return for the Financial Year 2022-23, they must report holdings as on December 31st, 2022.
How to disclose Foreign Assets in ITR
In schedule FA, there are 10 tables in which you must declare your foreign assets and incomes.
Table
Particulars
What to report
A1
Details of Foreign Depository Accounts held (including any beneficial interest) at any time during the calendar year
Saving or term deposit account in foreign banks
A2
Details of Foreign Custodial Accounts held (including any beneficial interest) at any time during the calendar year
Details of funds transferred from bank account to demat account in foreign countries
A3
Details of Foreign Equity and Debt Interest held (including any beneficial interest) in any entity at any time during the calendar year
Share or securities, restricted stock units, Exchange Traded Funds
A4
Details of Foreign Cash Value Insurance Contract or Annuity Contract held (including any beneficial interest) at any time during the calendar year
Life Insurance or any annuity contract in a foreign country
B
Details of Financial Interest in any Entity held (including any beneficial interest) at any time during the calendar year
Voting power in foreign companies or Partnership in LLP or firms are situated outside of India
C
Details of Immovable Property held (including any beneficial interest) at any time during the calendar year
Buildings or House properties owned in Foreign countries
D
Details of any other Capital Asset held (including any beneficial interest) at any time during the calendar year
Saving or term deposit accounts in foreign banks
E
Details of account(s) in which you have signing authority held (including any beneficial interest) at any time during the calendar year and which has not been included in A to D above
Accounts in which you are an authorized signatory or holding signing authority
F
Details of trusts, created under the laws of a country outside India, in which you are a trustee, beneficiary, or settlor
Trust where you are settlor, trustee, or beneficiary
G
Details of any other income derived from any source outside India which is not included in,- (i) items A to F above and, (ii) income under the head business or profession
Any other incomes outside India which are not included above.
Conversion into INR
The reporting in Schedule FA needs to be in INR only, so while reporting we need to convert foreign currency into INR using below mentioned conversion rate:
Income or Asset
Conversion rate
Date of conversion
Peak value
Convert using TTBR
Date of peak value
Initial value
Convert using TTBR
Date on which initial investment is made
Incomes received from asset
Convert using TTBR
Closing rate as on 31 December
Let’s illustrate this with an example.
Shreya, a resident individual, works at Amazon Inc. She exercised Employee Stock Options (ESOPs) on two occasions: September 16, 2022 (valued at INR 484) and February 25, 2023. However, for the income tax return of FY 2022-23, Shreya only needs to report the ESOPs exercised in September 2022 due to the calendar year period.
During the period from January 2022 to December 2022, the ESOPs reached their peak value at INR 493. The closing value as of December 31, 2022, was INR 346. Therefore, she needs to report these details under Table A3 of Schedule FA while filing her income tax return, ensuring compliance with tax regulations.
Tax on Income from Foreign Assets
It’s crucial to recognize that owning foreign assets doesn’t inherently trigger tax liabilities. However, any income generated from these assets is subject to taxation.
When you sell your foreign assets, you’re liable to pay capital gains tax. Conversely, other types of income such as interest or dividends from these assets fall under the category of Income from Other Sources. Similarly, if you earn rental income from foreign assets, it’s taxable under the head Income from House Property.
To ensure compliance and avoid penalties, it’s essential to report all such incomes under Schedule FSI in your income tax return.
Penalty for Non-disclosure of Foreign Assets
Under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, failure to report or providing incorrect information about foreign assets may lead to penalties. The Assessing Officer (AO) has the discretion to impose a penalty of INR 10 lakhs. Additionally, individuals could face imprisonment ranging from a minimum of 6 months to a maximum of 7 years, along with fines.
It’s noteworthy that the penalty of INR 10 lakhs is applicable for each year of non-disclosure. Therefore, if a taxpayer fails to disclose foreign assets for multiple years, they could face cumulative penalties.
Important Keyword: Income from trading, Income Tax, ITR.
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Calculation of Trading Turnover
Income from trading in shares and securities is classified as income from business and profession for tax reporting purposes. To ascertain whether Tax Audit is applicable under the Income Tax Act, it’s essential to calculate the turnover generated from trading activities. It’s important to note that while turnover calculation is crucial for determining Tax Audit applicability, the actual tax liability is not directly dependent on turnover figures.
Turnover calculation is particularly relevant for various trading activities including future and options trading, intraday trading, and share trading, all of which are considered as business activities for tax purposes. Accurate turnover calculation aids in ensuring compliance with tax regulations and facilitates proper assessment of Tax Audit requirements as per the Income Tax Act.
How to calculate Trading Turnover?
Calculating turnover for income tax purposes in trading activities involves different methods depending on the type of trade, such as Equity Intraday, Equity Delivery, Equity F&O, Currency Trading, Commodity Trading, etc. Turnover is determined based on absolute profits generated from trading.
Absolute profit refers to the total of positive and negative differences in trading outcomes. There are two primary methods for calculating trading turnover: the Tradewise method and the Scripwise method. While the Tradewise method is considered more accurate, the Scripwise method is commonly utilized due to its simplicity in turnover calculation.
It’s crucial to understand that regardless of the method used, the overall profit or loss remains consistent. However, there may be significant variations in turnover calculations between the two methods.
Tradewise Turnover
Under the Trade-Wise method, absolute profit is calculated as the sum of the absolute value of profit and loss for each trade conducted during the financial year.
For instance, let’s consider a trader who has executed multiple trades in a given financial year:
Trade 1:
Buys 400 units of ABC Ltd at INR 100 on 25/01/2022
Sells 400 units of ABC Ltd at INR 90 on 26/01/2022
Trade 2:
Buys 200 units of ABC Ltd at INR 45 on 25/02/2022
Sells 200 units of ABC Ltd at INR 50 on 26/02/2022
To calculate the absolute profit:
Loss from Trade 1 = (90 – 100) * 400 = Rs. -4,000
Profit from Trade 2 = (50 – 45) * 200 = Rs. 1,000
Absolute Profit = Rs. 4,000 (Loss from Trade 1) + Rs. 1,000 (Profit from Trade 2) = Rs. 5,000
Scripwise Turnover
Under the Scrip-Wise method, absolute profit is computed as the sum of the absolute value of profit and loss for each scrip traded during the financial year.
For example, let’s consider a trader who has executed multiple trades for a particular scrip within a given financial year:
Trade 1:
Buys 400 units of ABC Ltd at INR 100 on 25/01/2022
Sells 400 units of ABC Ltd at INR 90 on 26/01/2022
Trade 2:
Buys 200 units of ABC Ltd at INR 45 on 25/02/2022
Sells 200 units of ABC Ltd at INR 50 on 26/02/2022
To calculate the absolute profit:
Net Loss from Scrip ABC Ltd = Rs. -4,000 (Loss from Trade 1) + Rs. 1,000 (Profit from Trade 2) = Rs. -3,000
Absolute Profit = INR 3,000
Trading Turnover Calculation for Tax Audit Applicability
To ascertain the requirement for Tax Audit, turnover will be computed for Equity, Intraday, and Future and Options (F&O) trading, as illustrated in the following examples.
Turnover for Equity Intraday Trading
Company
Quantity
Buy Date
Buy Price
Sell Date
Sell Price
P/L
Britannia
5
25/10/2021
5390
25/10/2021
5350
-200
Britannia
17
24/11/2021
4830
24/11/2021
4880
850
Trading Turnover for Equity Intraday Trading = Absolute Profit
Tradewise Turnover = 200 + 850 = INR 1050
Scripwise Turnover = -200 + 850 = INR 650
Turnover for Equity Delivery Based Trading
If the Equity delivery based trading is considered as a Business income then the turnover calculation will be as below:
Company
Quantity
Buy Date
Buy Price
Sell Date
Sell Price
P/L
Britannia
2
14/11/2021
5855
26/11/2021
5995
280
Britannia
9
10/02/2022
5740
10/03/2022
5600
-1260
Trading Turnover for Equity Delivery Based Trading = Sale Value
Trading Turnover for Futures Trading = Absolute Profit
Tradewise Turnover = 2175 + 9080 = INR 11255
Scripwise Turnover = -2175 + 9080 = INR 6905
Please note that the calculation for turnover in options trading has been revised according to the eighth edition of the guidance note dated 14/08/2022, effective from Assessment Year 2022-23. Previously, turnover for options trading was determined as “Absolute Profit + Premium on Sale of Options.”
Important Keyword: income from trading, Income Tax.
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Tax Loss Harvesting for Stock Traders
Investing in the stock market is often driven by the goal of generating profits. However, there are occasions when certain stocks may not perform as expected due to various factors such as the company’s financial health or external market conditions. As a result, investors may incur losses on their investments. Nonetheless, investors can employ a strategy known as tax loss harvesting to mitigate these losses.
Tax loss harvesting involves strategically selling shares that have experienced losses in order to offset any realized gains within the same financial year. By doing so, investors can effectively reduce their overall tax liability. This proactive approach allows investors to make the most of their investment portfolio by leveraging losses to optimize their tax situation.
What is Tax Loss Harvesting?
At the close of a financial year, some of the shares and mutual funds in your portfolio may show an unrealized loss. This means that if these assets were sold, the selling price would be lower than the purchase price, resulting in a loss. Conversely, some shares and mutual funds may have already been sold at a profit, resulting in realized gains.
Let’s consider an example to illustrate how this works:
Shares or mutual funds showing unrealized losses are sold before the end of the financial year, thereby realizing the loss.
This realized loss can then be used to offset other profits, thereby reducing the overall tax liability.
Essentially, this process involves harvesting unrealized losses to minimize taxes.
If the trader wishes to maintain their investment in the asset, they can repurchase it to keep their portfolio unchanged. Typically, traders are willing to incur transaction costs for these transactions rather than facing higher taxes.
In summary, tax loss harvesting involves strategically selling assets with unrealized losses to offset gains and reduce tax liability, while also considering the impact on the overall investment portfolio.
Example of Tax Loss Harvesting
Below is a snapshot of the P&L Statement of a trader as of 28.03.2022. The tab refers to short-term equity trades.
Before Tax Loss Harvesting
Particulars
Amount (INR)
Realised Profit
3,85,000
Unrealized Loss
1,27,500
Total Income
3,85,000
Tax Liability
20,250 [15% of Rs. 1,35,000 (385000-250000)]
After Tax Loss Harvesting
The trader can sell 300 shares of Crest and 250 shares of Deepakfert to realize a loss of INR 1,27,500
Particulars
Amount (INR)
Realized Profit
3,85,000
Realized Loss
1,27,500
Total Income
2,57,500 (3,85,000-1,27,500) The loss set off against Profit
Tax Liability
1,125 [15% of 7,500 (257500-250000)]
By strategically realizing losses through Tax Loss Harvesting, traders can effectively reduce their tax liabilities. Additionally, if a trader wishes to maintain the composition of their investment portfolio, they have the option to repurchase specific shares. For instance, they might choose to acquire 300 shares of Crest and 250 shares of Deepakfert again. This approach not only allows traders to optimize their tax situation but also enables them to preserve the structure of their investment holdings.
Taxation on Trading Income
Before embarking on Tax Loss Harvesting, traders must be equipped to calculate their income tax liability on trading income and understand the applicable tax rates. This knowledge empowers traders to make informed decisions about whether to pursue this strategy. When it comes to taxation, traders have the flexibility to treat their income from trading in equity shares or mutual funds either as Capital Gains Income or as Non-Speculative Business Income, depending on the nature of their trading activities.
Let’s delve into the applicable tax rates:
A. Trading Income Considered as Capital Gains
Equity Shares & Equity Mutual Funds
Debt Mutual Funds and other Securities
LTCG
10% over INR 1 lac
20% with the benefit of indexation
STCG
15%
Slab rates
B. Trading Income Considered as Non-Speculative Business Income – Income is taxable at slab rates as per the Income Tax Act.
For traders treating their trading income as Non-Speculative Business Income, taxation follows the slab rates outlined in the Income Tax Act. This means that the income tax liability is determined based on the trader’s total taxable income for the financial year.
Tax Loss Harvesting presents an opportunity for traders engaged in equity delivery and mutual fund trading. However, it’s important to note that this strategy isn’t applicable to other forms of trading such as equity intraday, equity F&O, commodity trading, and currency trading. In these cases, positions are typically squared off within the same trading day or on specific expiry dates, limiting the opportunity for tax loss harvesting.
Rules for Set-Off
The trader intending to engage in Tax Loss Harvesting should possess the ability to discern which losses can offset which profits, adhering to income tax regulations governing the set off and carry forward of losses. However, the decision to convert unrealized losses into realized losses must be made after careful analysis of the potential income streams against which these losses can be offset. If the loss cannot be set off against existing profits, opting for Tax Loss Harvesting may not be advisable.
For Equity Trading Income treated as Capital Gains:
Long Term Capital Loss (LTCL) can only offset Long Term Capital Gains (LTCG).
Short Term Capital Loss (STCL) can offset both Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG).
LTCL and STCL cannot offset any other income.
For Equity Trading Income treated as Non-Speculative Business Income:
Non-Speculative Business Loss can offset any income except Salary Income.
Note: Traders with only Salary Income cannot offset Non-Speculative Business Loss against it. Hence, if Salary Income is the sole income, Tax Loss Harvesting may not be viable.
Important Keyword: Trading, Income Tax, Stock trading, ITR
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Income Tax on Trading
Stock trading encompasses the exchange of various financial instruments such as shares, mutual funds, commodities, currencies, bonds, and debentures. Investors typically construct portfolios with a long-term perspective, aiming for gradual growth and income generation. On the other hand, traders engage in frequent buying and selling transactions, seeking to capitalize on short-term price movements for rapid profit accumulation.
For tax purposes, the income generated from trading activities is classified differently based on the nature of the trade. Income from equity delivery trading is treated as capital gains, while income from other forms of trading, including intraday trading, futures and options (F&O) trading, commodity trading, and currency trading, is considered business income. This classification determines the applicable tax treatment for the respective trading activities.
Speculative Business Income and Non-Speculative Business Income
Income from trading activities is indeed categorized as business income under the Income Tax Act. This business income can further be classified into two main categories: Speculative Business Income and Non-Speculative Business Income.
Speculative Business Income
You’re correct. According to the Income Tax Act, a speculative transaction refers to a contract where the purchase or sale of any commodity, including stocks and shares, is settled without actual delivery. Intraday trading, where trades are squared off within the same trading day, falls under this category, making it speculative business income.
However, it’s important to note that the definition of speculative transactions specifically excludes derivative transactions. Therefore, activities such as equity futures and options (F&O) trading, commodity trading, and currency trading, where the trader enters into derivative contracts for hedging purposes, are considered non-speculative. As a result, income generated from such transactions is classified as non-speculative business income for tax purposes.
Non-Speculative Business Income
Non-speculative business income covers a broad spectrum of trading activities that aren’t considered speculative. This category includes trades in equity futures and options (F&O), commodity trading, and currency trading. F&O trading, despite involving hedging and the delivery of underlying securities, falls under non-speculative business income due to its structured nature and risk mitigation characteristics.
Intraday trading of commodities and currencies is also classified as non-speculative, as it is explicitly excluded from the definition of speculative transactions. Therefore, income generated from intraday trading in commodities and currencies is considered non-speculative business income.
Moreover, significant trading activity in equity delivery and mutual funds contributes to non-speculative business income. This encompasses buying and selling shares in the equity market and investing in mutual funds with the goal of generating returns.
Income Head, ITR Form & Due Date
Income Head
1. Income from equity intraday trading is a speculative business income. 2. Income from F&O trading is a non-speculative business income. 3. The income from equity delivery trading may be treated as either capital gains or business income.
ITR Form
1. If a trader has income from Capital gain, then they should file ITR 2. 2. If a trader has Business Income, then they should file ITR 3. 3. The trader who has opted for the Presumptive Taxation Scheme should file ITR-4.
Due Date
31st July is the due date for traders to whom audit is not applicable & 31st October is the due date for traders to whom Tax Audit is applicable
Tax Rates for Trading Income
Business income is taxed at slab rates according to the provisions of the Income Tax Act. The tax rates vary based on the taxpayer’s income level and the tax regime they choose to follow. Here are the slab rates for both the old tax regime and the new tax regime:
Slab Rates if Traders Opt for Old Tax Regime
Taxable Income (INR)
Slab Rate
Up to 2,50,000
NIL
2,50,001 to 5,00,000
5%
5,00,001 to 10,00,000
20%
More than 10,00,000
30%
It’s important to note that surcharge is applicable on the total income as per the prescribed surcharge slab rates. Additionally, a cess is levied at 4% on the basic tax and surcharge amount. This means that after calculating the tax liability based on the applicable slab rates and any surcharge, the total tax amount is further increased by 4% to account for the cess. This additional amount goes towards various government initiatives and welfare programs.
Slab Rates if Traders Opt for New Tax Regime
Taxable Income (INR)
Slab Rate
Up to 3,00,000
NIL
3,00,001 to 6,00,000
5%
6,00,001 to 9,00,000
10%
9,00,001 to 12,00,000
15%
12,00,001 to 15,00,000
20%
More than 15,00,000
30%
Calculate Advance Tax on Trading Income
To avoid interest charges under Sections 234B and 234C, traders and investors should anticipate their tax liability to exceed INR 10,000 and pay Advance Tax accordingly. This must be done in quarterly installments due on the 15th of June, September, December, and March. However, if a trader opts for presumptive taxation under Section 44AD, the entire Advance Tax amount must be paid in a single installment on or before the 15th of March.
It’s essential for traders and investors to assess their taxable income for each quarter, compute the corresponding tax liability, and remit the Advance Tax promptly to adhere to regulatory requirements and avoid any penalties.
Set Off and Carry Forward Loss
Traders can utilize the strategy of setting off and carrying forward losses to mitigate their income tax liability effectively.
For Short-Term Capital Losses, they can be offset against both Long-Term and Short-Term Capital Gains. Any remaining loss can be carried forward for up to 8 years to offset against future Short-Term Capital Gains.
Long-Term Capital Losses, however, can only be set off against Long-Term Capital Gains. Similarly, any unabsorbed loss can be carried forward for up to 8 years for future offsetting against Long-Term Capital Gains.
In the case of Speculative Business Losses, they can be set off exclusively against Speculative Business Income. The trader has the option to carry forward any unutilized loss for up to 4 years for future offsetting against Speculative Business Income.
Non-Speculative Business Losses, on the other hand, can be set off against any income except Salary in the current year. These losses can be carried forward for up to 8 years to offset against Business Income in future years, providing traders with flexibility in managing their tax liabilities over time.
Calculate Trading Turnover
When trading income is considered as business income, it’s crucial to calculate the trading turnover to ascertain whether Tax Audit is applicable according to the Income Tax Act.
Note: The turnover calculation for options has been revised as per the eighth edition of the guidance note dated 14/08/2022 (effective from Assessment Year 2022-23). Previously, turnover for options trading was computed as “Absolute Profit + Premium on Sale of Options.”
Tax Audit Applicability
The applicability of Tax Audit for stock traders is contingent upon Trading Turnover and Profit or Loss. Here are the scenarios:
If trading turnover is up to INR 2 Cr and the profit is less than 6% of turnover or there’s a loss, Tax Audit applies if the taxpayer has opted out of presumptive taxation in any of the immediate 5 previous years and total income exceeds the basic exemption limit.
For turnovers between INR 2 Cr and INR 10 Cr, where over 95% of transactions are digital via Demat, Section 44AB provisions don’t apply, making Tax Audit unnecessary regardless of profit or loss.
When trading turnover exceeds INR 10 Cr.
Tax Loss Harvesting
Tax Loss Harvesting is a strategy to utilize unrealized losses by selling shares, offsetting them against realized profits to minimize tax liability. Traders should understand the Income Tax Act’s rules for loss set-off before implementing Tax Loss Harvesting.
Important Keyword: Dividend Income, dividend stripping.
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Dividend Stripping
Until the financial year 2019-20, investors commonly engaged in a practice known as dividend stripping to minimize taxes on capital gains and enjoy tax-free dividends. By employing dividend stripping, investors aimed to evade taxes by realizing losses to offset against capital gains, while simultaneously earning tax-free dividends. However, to curb this practice and promote fair taxation, the Finance Minister introduced Section 94(7) in the Income Tax Act during the Budget 2020 announcement.
Moreover, as a significant reform, the government abolished the Dividend Distribution Tax (DDT). Consequently, shareholders are now liable to pay taxes on dividend income received. This measure aimed to streamline the taxation system and ensure that dividends are taxed in the hands of the shareholders, aligning with the principles of equity and transparency.
What is Dividend Stripping?
Dividend Stripping is a strategy where an investor purchases shares or mutual fund units before a dividend declaration and sells them post-dividend. Here’s how it works:
Awareness of Dividend Declaration: The investor learns about an upcoming dividend declaration by a company.
Purchase of Shares/Units: Acting on this information, the investor buys shares or mutual fund units.
Receipt of Dividends: When the dividend is declared, the investor receives dividends on the held shares or units.
Sale of Shares/Units: Subsequently, the investor sells the shares or units at a reduced price post-dividend, incurring a short-term capital loss.
Benefits of Dividend Stripping:
Tax Offset: The short-term capital loss on the sale can be offset against other capital gains, reducing the investor’s tax liability.
Tax-Free Dividends: Dividends received are typically tax-free, providing additional benefits.
Example:
Mr. Amit learns about Company XYZ’s dividend declaration of INR 50 per share. He buys 50 shares at INR 220, investing INR 11,000. After receiving the dividend, he sells the shares at INR 150, incurring a short-term capital loss of INR 3,500. Mr. Amit benefits from tax offsets, tax-free dividends, and earns a net profit of INR 1,000.
However, to prevent tax evasion, Section 94(7) was introduced. This section disregards losses if securities are bought shortly before the dividend record date and sold shortly after. Consequently, the investor cannot use such losses to offset capital gains to the extent of the earned dividend income.
In Mr. Amit’s case, the short-term capital loss of INR 3,500 may not be eligible for tax offset against capital gains due to Section 94(7), while the dividend income of INR 2,500 would be taxable at slab rates.
