Section 194 : TDS on Dividend from Equity Shares

What is Section 194?

Under Budget 2020 applicable from 1st April 2020 i.e. FY 2020-21, the Finance Minister abolished Dividend Distribution Tax (DDT). As a result, the dividend received on equity shares and mutual funds which were earlier exempt is now taxable at slab rates. It is taxable in the hands of the shareholder. Since the income would be taxable in the hands of the shareholder, TDS would be applicable. As a result, the Finance Minister made an amendment to the existing Section 194 to add a provision to deduct TDS on Dividend from Equity Shares.

As per section 206AA if the deductee fails to provide the PAN to deductor then he would suffer deduction at higher of the rates of deduction as: At the rate specified in the relevant provision of the Act, or, At the rate or rates in force, i.e., the rate prescribed in the Finance Act (Finance Act 2019 for FY 2019-20), or At the rate of 20%
Tip
As per section 206AA if the deductee fails to provide the PAN to deductor then he would suffer deduction at higher of the rates of deduction as: At the rate specified in the relevant provision of the Act, or, At the rate or rates in force, i.e., the rate prescribed in the Finance Act (Finance Act 2019 for FY 2019-20), or At the rate of 20%

The Company paying a dividend on equity shares should deduct TDS under section 194. The deduction is at 10% on the number of dividends, only if a resident shareholder’s total dividend in a financial year exceeds INR 5,000. Section 194 is applicable from 1st April 2020 i.e. FY 2020-21 onwards.

As per section 206AB, if the aggregate of TDS and TCS for deductee is INR 50000 or more in each of these two previous years and deductee has not filed the returns of income for two previous years immediately prior to the previous year in which tax is required to be deducted then he would suffer deduction at higher of the rates of deduction as: At twice the rate specified in the relevant provision of the Act; or At twice the rate or rates in force; or At the rate of 5%
Tip
As per section 206AB, if the aggregate of TDS and TCS for deductee is INR 50000 or more in each of these two previous years and deductee has not filed the returns of income for two previous years immediately prior to the previous year in which tax is required to be deducted then he would suffer deduction at higher of the rates of deduction as: At twice the rate specified in the relevant provision of the Act; or At twice the rate or rates in force; or At the rate of 5%

Section 194 – TDS on Dividend from Equity Shares

  • Deductor
    • The company distributing dividends to the investors of equity shares should deduct TDS on such dividends. The deductor must deposit the TDS and file the TDS Return on TRACES.
  • Deductee
    • Shareholder resident in India earning dividend income on equity shares will receive the amount after TDS under Sec 194. Shareholder resident in India earning dividend income on equity mutual funds will receive the amount after TDS under Section 194K. NRI investors/shareholders, earning dividend income will receive the amount after deduction of TDS under Section 195.
  • Nature of Payment 
    • Sec 194 covers the payment of Dividend on Equity Shares to a resident shareholder exceeding INR 5000 in a financial year.
  • Time of Payment
    • TDS shall be deducted at the time of credit of income to payee account or at the time of payment, whichever is earlier. If the payee of the amount credits the amount to be paid to “suspense account” or any other account, it is considered as ‘deemed payment’ and the payer must deduct TDS on such credit.
  • Rate
    • Deductor should deduct TDS u/s 194 at the rate of 10% if the dividend amount exceeds INR 5000. If the payee does not provide the PAN, TDS shall be deducted at the rate of 20%
  • TDS Certificate
    • Deductor shall issue Form 16A to the deductee as the Tax Credit Certificate of the amount deducted as TDS. The Deductor can download Form 16A from the account on TRACES. Using Form 16A, the deductee can claim credit of the tax deducted while filing Income Tax Return.
  • TDS Return
    • After depositing TDS with the income tax department, the deductor should file Form 26Q on TRACES. The details of the dividend payment are part of this report. The deductor, after filing the report, should provide Form 16A to the deductee.
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FAQs

Is TDS required to be deducted on dividend paid to NRI shareholder ?

Section 195 applies to the dividend paid to NRI investors/shareholders, as per provisions of the Income Tax Act. Hence, TDS needs to be deducted on the dividend at 20% on equity shares and equity mutual funds. Therefore, TDS has to be deducted at 10% as per Sec 194 and Sec 194K for an NRI shareholder.

What is Dividend Distribution Tax (DDT) ?

DDT is the tax paid on declaration, distribution or payment of dividend by an Indian Company at the rate of 15%. Since the Indian Company pays DDT, the dividend income is exempt in the hands of the shareholder or investor.
However, the Budget 2020 applicable abolished DDT from 01.04.2020 i.e. FY 2020-21. The dividend is now taxable in the hands of the shareholder or investor. The company is liable to deduct TDS at 10% if the dividend is in excess of INR 5000.

Speculative Busines Income and Non-Speculative Business Income Tax Treatment

Tax on income from trading as capital gains or business income depends on the nature of the trading. Income from any business or profession is classified under the head “Profits and Gains from Business and Profession” in the Income Tax Return. Read when to treat trading income as a speculative or non-speculative business income. Following types of trading income is considered as Business Income:

  • Equity Delivery Trading – When a trader buys an equity share from the stock market and holds it for more than a day.
  • Equity Intraday Trading – When a trader buys an equity share and sells it on the same day.
  • Mutual Funds Trading – Buying and selling of mutual funds – equity, debt, ETFs, etc.
  • Equity F&O Trading (Futures and Options) – Trading into Futures and Options with Equity Shares as an underlying asset.
  • Commodity Trading (F&O and Intraday) – Trading into commodity instruments and Futures & Options with a commodity as an underlying asset.
  • Currency Trading (F&O and Intraday) – Trading into currency instruments and Futures & Options with currency as an underlying asset.
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Note: Based on the nature of trading, Income from trading in Equity Delivery and Mutual Funds can be classified as either Income from Capital Gains or Business Income.

Speculative Business Income

As per the Income Tax Act, a contract in which the purchase or sale of any commodity including stocks and shares is settled without actual delivery, it is called a Speculative Transaction. Intraday Trading means trading in stock or security by squaring off the trade within the same trading day. Therefore, Equity Intraday Trading is Speculative Business Income.

The definition of Speculative Transaction specifically excludes derivative transactions i.e. equity F&O, commodity (intraday and F&O), and currency (intraday and F&O) trading. The trader enters into such transactions for the purpose of hedging and thus such income is a Non-Speculative Income.

In the case of Equity Intraday Trading, the share does not transfer to the trader’s Demat Account. The broker squares off the position at the end of the trading day for all intraday trades. Therefore, the buyer of the shares does not pay for the full value of shares. Instead, they should deposit the difference between buy value and sell value as a margin to execute the intraday trade.

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Income Tax provisions for Trader having speculative business income:

  • A trader should prepare financial statements and file Form ITR 3 on Income Tax Website
  • A trader can claim expenses directly related to trading income
  • Trading Turnover is the Absolute Profit i.e. sum of absolute values of profit or loss
  • The trader can set off the Speculative Loss only against Speculative Business Income
  • A trader can carry forward losses that remain for 4 years and set them off against Speculative Business Income only
  • Moreover, this income is taxable at slab rates as per the Income Tax Act

Non-Speculative Business Income

Any business income that’s not Speculative in nature is a Non-Speculative Business Income. Hence, this income includes trades in Equity F&O, Commodity (Intraday and F&O), and Currency (Intraday and F&O). Since F&O Trading is a hedge and there is the delivery of the underlying security, it is non-speculative in nature. The definition of Speculative Transactions specifically excludes the Intraday Trading of Commodity and Currency and it is thus a Non-Speculative Income. Additionally, if the trader has significant trading activity in delivery-based equity trading and mutual funds, it is a Non-Speculative Business Income.

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Income Tax provisions for Trader having non-speculative business income:

  • A trader should prepare financial statements and file Form ITR 3.
  • Traders can claim expenses directly related to trading income.
  • Trading Turnover for Futures Trading is the Absolute Profit i.e. sum of absolute values of profit or loss. Trading Turnover for Options Trading is the sum of Absolute Profit and premium on the sale of Options.
  • The trader can set off Non-Speculative Loss in the current year against any income except Salary.
  • The trader can carry forward the remaining loss for 8 years and set off against both Non-Speculative Income and Speculative Business Income.
  • Moreover, this income is taxable at slab rates as per the Income Tax Act.

FAQs

Can I set off Speculative Loss against other Incomes?

The trader can set off the Speculative Loss only against Speculative Income. A trader can carry forward the remaining loss for 4 years and set off against Speculative Business Income only. Therefore, the trader cannot set off speculative business loss against any other income except speculative business profits.

Can I set off Non-Speculative Loss against other Incomes?

The trader can set off Non-Speculative against any income except Salary in the current year. A trader can carry forward the remaining loss for 8 years and set off against Business Income (speculative and non-speculative) in future years.

Is Intraday trading in Futures and Options also considered as Speculative Business Income?

No. Intraday Trading in F&O is a Non-Speculative Income. The definition of speculative transactions specifically excludes trading in derivative transactions. Further, such transactions are done with the intention of hedging. Therefore, the Intraday Trading of F&O is considered to be a non-speculative business income.

Long Term Capital Gain Tax on Shares – Equity Shares & Equity Mutual Funds

Up to FY 2018-19, Long Term Capital Gain (LTCG) on the sale of shares and securities on which Securities Transaction Tax (STT) is paid was exempt under Sec 10(38) of the Income Tax Act. However, under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A was introduced to levy 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds and units of business trust in excess of Rs. 1 lac for a financial year. Sec 112A was applicable from FY 2018-19 (AY 2019-20) onwards.

What is Long Term Capital Gain?

The profit or loss on the sale of a capital asset held for more than the specified holding period is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).

Based on the period of holding, here is a summary of Capital Gain on the sale of Capital Assets. Eg: If the listed equity share of a domestic company is sold after 12 months of purchase, the profit or loss is Long Term Capital Gain or Long Term Capital Loss.

Capital Asset Period of Holding
Equity Shares of Domestic Company listed on a recognized stock exchange 12 months
Equity Shares of Domestic Company not listed on a recognized stock exchange 24 months
Equity Shares of Foreign Company whether listed or not 24 months
Equity-oriented Mutual Funds or ETFs (Exchange Traded Funds) 12 months
Debt-oriented Mutual Funds or ETFs (Exchange Traded Funds) 36 months
Debentures or Bonds listed on a recognized stock exchange 12 months
Debentures or Bonds not listed on a recognized stock exchange 36 months
Immovable Property such as land, building or house property 24 months
Movable Property such as jewelry, car, painting, work of art 36 months
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Grandfathering Rule

Traders who would have invested into equity markets with a view to earning tax-free income in the form of Long Term Capital Gains would now have to pay tax as per the new rule. The announcement of 10% LTCG was made on 1st February 2018. Thus, an investor who was holding an investment in equity shares and equity mutual funds as on 31/01/2018, should not be required to pay tax on entire capital gains. Hence, to ensure that LTCG earned up to 31st January 2018 should not be taxed, the Capital Gains earned up to 31/01/2018 would be grandfathered using a formula.

For equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition should be calculated as follows:

  1. Lower of Fair Market Value as on 31/01/2018 or the Actual Selling Price
  2. Step 1 or Actual Cost Price whichever is higher

Section 112A – Calculation of Long Term Capital Gain Tax on Shares

The budget was announced on 01/02/2018 and so the provisions for tax on LTCG are different based on the date of purchase.

Particulars

Up to 31/01/18 01/02/18 Onwards
Date of Purchase Shares bought on or before 31/01/2018 Shares bought on or after 01/02/2018
STCG (sold within 365 days) STCG @ 15% STCG @ 15%
LTCG (sold after 365 days) SP = price at which shares are sold SP = price at which shares are sold
CP = Follow these steps:

Higher of the following:

(i) Price as on 31.01.18 or Actual Selling Price whichever is less

(ii) Actual Cost
CP = price at which shares are bought
LTCG = SP – CP LTCG = SP – CP
Tax = 10% (LTCG – Rs.1,00,000) Tax = 10% (LTCG – Rs.1,00,000)

Examples for Grandfathering Rule

  Case I Case II
Purchase Date  1st Jan 2018 10th Feb 2018
Purchase Value 2,00,000 2,00,000
Sell Date  10th Jan 2020 10th Jan 2020
Sale Value 3,50,000 3,50,000
Grandfathering rule applicable Yes No
Actual Cost * 2,40,000 ** 2,00,000
LTCG
= Sale Value – Actual Cost
1,10,000 1,50,000
Exempt Exempt up to INR 1 Lakh Exempt up to INR 1 Lakh
Tax Liability 1,10,000 – 1,00,000= 10,000 * 10%
= 1,000
1,50,000 – 1,00,000= 50,000 * 10%
= 5,000

*Note: Actual Cost is the Cost of Acquisition to calculate capital gains 

**Calculation of Actual Cost using FMV (Case I)

  Condition Amount (INR) Qualifying Amount
Step 1 Lower of:

Actual Selling Price
or
FMV on 31st Jan 2018
Lower of:

3,50,000 or 2,40,000  

2,40,000
Step 2 Higher of:

Value in Step 1
or
Purchase Value
Higher of:

2,40,000 or 2,00,000

2,40,000
  Actual Cost   2,40,000

Income Tax on Long Term Capital Gain

The tax rate of a capital asset is determined on the basis of the nature of capital gain i.e. LTCG or STCG.

Capital Asset STT LTCG STCG
Listed equity share of a domestic company Yes 10% in excess of INR 1 lac u/s 112A 15% u/s 111A
Listed equity share of a domestic company No 10% without indexation slab rate
Unlisted equity share of a domestic company No 20% with indexation slab rate
Listed equity share of a foreign company Yes / No 10% without indexation slab rate
Unlisted equity share of a foreign company Yes / No 20% with indexation slab rate
Equity Mutual Fund or ETF Yes 10% in excess of INR 1 lac u/s 112A 15% u/s 111A
Debt Mutual Fund or ETF No 20% with indexation slab rate
Listed Debentures or Bonds No 10% without indexation slab rate
Unlisted Debentures or Bonds No 20% without indexation slab rate
Land, Building, House Property, Car, Jewellery, Paintings, Art of Work NA 20% with indexation slab rate

Long Term Capital Gain Tax on Shares – Equity Shares and Equity Mutual Funds

Date of Purchase Date of Sale Tax Treatment
On or before 31/01/2018 On or before 31/01/2018 Exempt u/s 10(38)
On or before 31/01/2018 Between 31/01/2018 and 01/04/2018 Exempt u/s 10(38)
On or before 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
* LTCG up to 31/01/2018 exempt
* LTCG after 31/01/2018 – Tax at 10% in excess of Rs. 1 lac
On or after 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
Tax at 10% in excess of Rs. 1 lac
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Exemption from LTCG

The taxpayer having income from the sale of a long term capital asset can claim an exemption under Section 54 to 54GB of the Income Tax Act if he/she fulfills the conditions.

A taxpayer can claim the exemption by reinvesting the proceeds from the sale into a specified capital asset. Such exemption would lower the capital gains and save taxes on the same. However, the taxpayer must hold the new asset for the specified period as per the relevant section. However, if he/she sells the asset before the specified time period, he/she must report it as an income in the relevant financial year and pay tax at the applicable rate.

The taxpayer has an option to open an account under the Capital Gains Account Scheme and park the sale proceeds in it till the time they invest in the specified asset to claim the Capital Gains exemption.

FAQs

Is LTCG taxable now?

Yes. Under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A was introduced to levy 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds and units of business trust in excess of Rs. 1 lac for a financial year. Sec 112A was applicable to FY 2018-19 (AY 2019-20) onwards.

What rate is LTCG taxable at?

LTCG is taxable at a flat 10% on income that is exceeding Rs. 1lk. Therefore, it is exempt up to Rs. 1lk.

Is STCG exempt?

No. Hence, STCG is taxable at a flat rate of 15% without any exemption.

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.