Equity Trading Income: Delivery, Intraday, Futures & Options

Equity trading includes means buying and selling of various financial instruments such as delivery stocks, intraday, futures, and options, etc. The buying and selling of stocks and securities are done with an intention to create an investment portfolio or to earn profits due to fluctuations in prices.

Different forms of trading include Equity Delivery, Intraday, Futures, Options, Commodity Trading, Currency Trading, etc. Therefore, it is important to understand the different types of trading to calculate trading turnover, determine the applicability of Tax Audit, determine applicable ITR Form, calculate tax liability, etc. Let us understand the different types of equity, intraday, futures, and options trading in detail.

Equity Intraday Trading

When a trader buys an equity share and sells it on the same day, it is called Equity Intraday Trading. The intention is to earn profits from the fluctuation of prices in a single day. In the case of Equity Intraday Trading, there is no delivery of shares and therefore ownership is not transferred. For Income Tax, Equity Intraday Trading is considered as a Speculative Business Income since trading is done without the delivery of shares and with an intention to earn quick profits.

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Example of Equity Intraday Trading

Below is the Price of 1 Equity Share of Sun Pharma

Date Time Price (INR)
29th January 2020 11:00 AM 445
29th January 2020 2:30 PM  451

Akshay buys 100 shares of Sun Pharma on 29th January 2020 11:00 AM and sells them on 29th January 2020 2:30 PM

  • This is called Equity Intraday Trading since the shares are bought and sold on the same day
  • Profit = 100 shares * (451 – 445) = Rs. 600
  • Since the shares are not transferred to the trader’s Demat account, it is considered as a Speculative Business Income

Equity Delivery Trading

When a trader buys an equity share from the stock market and retains it for more than 1 day, it is called Equity Delivery Trading. It is called delivery trading because the intention of this purchase is to hold the share for a time long enough for the ownership to be transferred to the buyer. In this case, the share is delivered to the trader’s Demat account.

The intention is to earn short/long term capital gains. Equity Delivery Trading is considered as either Capital Gains or Non-Speculative Business Income.

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Types of Equity Shares

Equity shares are also referred to as ordinary shares. They are one of the most common kinds of shares. Equity shares are classified as per the type of share capital.

  • Authorised share capital: This is the maximum amount of capital a company can issue. A company can raise such capital by issuing equity shares. However, companies can increase the authorized share from time to time.
  • Issued share capital:
    • This is the portion of authorised capital that a company offers to its investors
    • For example, if the nominal value of one stock is INR 100 and a company has issued 40,000 such shares, then its issued share capital will be INR 40 lakh
  • Subscribed share capital:
    • This refers to the portion of issued capital upon which investors accept and agree
    • Referring to the above example, in case investors have purchased 25,000 shares of that company, then its subscribed capital would be INR 25 lakh. If investors buy all the stocks that a company has issued, then issued and subscribed equity shall be the same
  • Paid-up capital:
    • The amount of money investors pay against its holdings of a company’s stock is its paid-up capital
    • Since most companies accept the entire subscription amount at one go, and therefore, subscribed and paid capital are the same thing.
    • Furthermore, if a stock is trading at a premium, then that excess amount is accounted as shares premium

There are a few other types of shares

  • Right shares:
    • Right shares refer to the shares that a company issues to its existing shareholders to purchase new shares at a specific price within a particular period
    • In other words, the right shares are those new stocks on which existing stakeholders can lay claim before such issuing company opens them up to public trading
    • Such stocks are issued to protect the ownership rights of existing shareholders
    • Similar to bonus shares, companies issue the right shares on a pro-rata basis as well
  • Sweat equity shares:
    • Organizations often compensate employees or directors for their exceptionally well performance by issuing sweat equity shares to reward them
    • Several companies use this compensation method to enhance employee retention by endowing them with a stake in that organization’s assets and ownership
  • Bonus shares:
    • Bonus shares are those stocks that companies issue to the existing shareholders without any additional charge
    • Usually, companies provide these bonus shares to shareholders instead of paying out dividends
    • Furthermore, organizations issue bonus shares on a pro-rata basis.
    • So, if Mr. Ansh holds 100 shares of ITC Ltd and the company announces its decision to issue 1:4 as a bonus, then he will receive 25 additional shares for free
  • Voting and non-voting shares:
    • Generally, most types of equity shares carry voting rights because of the stake in ownership it entails.
    • However, in some cases, companies can issue shares with the condition that it will confer differential or no voting right at all to such shareholders

Example of Equity Delivery Trading

Below is the Price of 1 Equity Share of Sun Pharma

Date Time Price (INR)
29th January 2020 11:00 AM  445
29th January 2020 2:30 PM 451
30th April 2020 1:00 PM 441

Akshay buys 100 shares of Sun Pharma on 29th January 2020 11:00 AM and sells them on 30th April 2020 1:00 PM

Equity Futures

When a trader expects the price of a share to move up or move down in the near future, they can enter into a Futures Contract. Therefore, a Futures contract is an agreement to buy or sell an underlying asset on a future date at a pre-agreed price. The trader is required to deposit advance money called ‘Margin’ with the brokerage house to ensure that they do not default in case of a loss. Once the trader squares off the futures position or the Futures Contract expires, the margins are unblocked. In the case of a Futures Contract, the buyer’s gain equals the seller’s loss and vice versa.

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Example of Futures Trading

The price of the Futures contracts constantly fluctuates based on demand. Therefore, in the developed market today the futures price is based on demand and supply and one can check the average price on the stock exchange to see the price at which the future is available for them to buy.

  • Underlying Asset – Sun Pharma Share
  • Current Price of Underlying Asset – Rs. 451.55
    This is the current price of the stock which changes based on the trading done.
  • Price of Futures – Rs. 452
    This is the minimum buy price of one shares’ future and also fluctuates with demand for the futures contract.
  • Minimum Lot Size – 1250
    Lot Size is the minimum number of shares that a trader needs to buy or sell to enter a Futures Contract. So it means that the trader should buy or sell in multiples of 1250 shares of Sun Pharma to enter into this Futures Contract.
  • Current Date– 29th January 2020
  • Expiry Date – 30th Jan 2020
    This is the date on which the Futures Contract would expire. The Futures Contract expires on the last Thursday of the month. So in the case of Sun Pharma, the contract would expire on 30th Jan 2020 which is the last Thursday of January

Interpretation of Example: Since the expiry date is in less than a day and the futures price is close to the shares’ current price. However, this also means that the delivery of this share on the future date will be at Rs. 452 regardless of the current price of the share then i.e. even if the shares’ price was to increase to Rs. 460 on 30th Jan 2020 you would still buy them for Rs. 452. The future allows you protection from price fluctuation.

Given below is the snapshot of Futures Contract of Sun Pharma:

Options Trading

Options is a contract with the right to buy or right to sell an underlying asset at an agreed-upon price today (strike price) on a specified future date. Hence, the buyer of an Option receives the ‘Right to Buy’ or ‘Right to Sell’ the underlying asset at a specified future date. Therefore, the seller of an Option has the ‘Obligation to Buy’ or ‘Obligation to Sell’ the underlying asset at a specified future date. The buyer may or may not exercise the option and thus pays a premium to the seller to attain this right. This is called ‘Option Premium’.

  • Buyer of Call Option – Right to Buy the underlying asset at the strike price on a future date
  • Buyer of Put Option – Right to Sell the underlying asset at the strike price on a future date
  • Seller of Call Option – Obligation to Buy the underlying asset at the strike price on a future date
  • Seller of Put Option – Obligation to Sell the underlying asset at the strike price on a future date
Buyer of an Option has a limited loss (premium paid) and unlimited profit while the Seller of an Option has an unlimited loss and limited profit (premium received)
Tip
Buyer of an Option has a limited loss (premium paid) and unlimited profit while the Seller of an Option has an unlimited loss and limited profit (premium received)

Example of Call Option

Akshay buys a Call Option on Nifty Index from Raj at a price of Rs. 1000 and expiry of one month from today. Akshay pays a premium of Rs.10 to Raj.

  • Buyer of Call Option – Akshay
  • Seller of Call Option – Raj
  • Option Premium – Rs.10
  • Expiry of Contract – 1 month
  • Strike Price or Exercise Price – Rs. 1000

If the price of Nifty on expiry is Rs. 1200

  • Akshay’s Call Option is ‘in the money’. He will exercise the Call Option
  • So, Akshay has the ‘Right to Buy’ Nifty at Rs.1000 from Raj
  • Therefore, Akshay’s Total Profit = 1200 – 1000 – 10 = Rs. 190
  • And since Raj has the ‘Obligation to Sell’ Nifty at Rs.1000 to Akshay
  • Raj’s Total Loss = 1000 – 1200 + 10 = Rs. -190

If the price of Nifty on expiry is Rs. 800

  • Akshay’s Call Option is ‘out of the money’. Therefore, he will not exercise the Call Option
  • And hence, The Call Option lapses
  • Therefore, Akshay’s Total Loss = Rs. -10
  • And Raj’s Total Profit = Rs. 10

Example of Put Option

Akshay buys a Put Option on Nifty Index from Raj at a price of Rs. 1000 and expiry of one month from today. And, Akshay pays a premium of Rs.10 to Raj.

  • Buyer of Put Option – Akshay
  • Seller of Put Option – Raj
  • Option Premium – Rs.10
  • Expiry of Contract – 1 month
  • Strike Price or Exercise Price – Rs. 1000

If the price of Nifty on expiry is Rs. 800

  • Akshay’s Put Option is ‘in the money’. So, he will exercise the Put Option
  • And so, Akshay has the ‘Right to Sell’ Nifty at Rs. 1000 to Raj
  • Therefore, Akshay’s Total Profit = 1000 – 800 – 10 = Rs. 190
  • Since Raj has the ‘Obligation to Buy’ Nifty at Rs. 1000 from Akshay
  • Therefore, Raj’s Total Loss = 800 – 1000 + 10 = Rs. -190

If the price of Nifty on expiry is Rs. 1200

  • Akshay’s Put Option is ‘out of the money’. So, he will not exercise the Put Option
  • Hence, the Put Option lapses
  • And Akshay’s Total Loss = Rs. -10
  • Therefore, Raj’s Total Profit = Rs. 10
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FAQs

How do I calculate my Trading Turnover?

Trading turnover is calculated in case of equity intraday, futures, and options. In the case of Equity Intraday Trading, Absolute Profit is Trading Turnover. Trading turnover is required for understanding Tax applicability and Tax audit applicability as well.

What is Absolute Profit?

Absolute Profit means the sum of positive and negative differences in a trade transaction. Eg: Loss from Scrip X is Rs. -5000 and profit from Scrip Y are Rs. 8000, absolute profit = 5000+8000 = Rs. 13,000.

Is Trading Turnover same as Contract Turnover?

No. Trading Turnover is different than Contract Turnover.
Contract Turnover is the sum of the purchase value and sales value. It is not considered for income tax purposes. Trading Turnover or Business Turnover is the absolute profit i.e. sum of positive and negative differences. This turnover is considered to determine the applicability of the tax audit and the applicable ITR form.

Got Questions? Ask Away!

  1. Hey @Hari_Haran,

    If your Income other than trading Loss is less than 2.5 lac & turnover less than crore , you won’t require Audit. You need to fill ITR 3

  2. Hi @Anoop

    Due date for filing the return has been extended.

    Due Dates to File Income Tax Returns for FY 2020-21 ( AY 2021-22 )

    Category of Taxpayer Original Due Date Extended Due Date
    ITR Filing when Tax Audit is not Applicable 31st July 2021 30th September 2021
    ITR Filing when Tax Audit is Applicable 31st October 2021 30th November 2021
    Tax Audit Report Filing 30th September 2021 31st October 2021
    Due Date for Filing Belated/Revised ITR 31st December 2021 31st January 2022

    So, You need to file ITR by 30th September 2021 when Tax Audit is not Applicable.

    Hope this helps!

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