The Disrupted Journey

The Disrupted Journey

1) Some passengers were on a beautiful journey in a luxury bus headed to a beautiful hill station. 

2) They were going up a hill and were looking forward to reach the top of the hill.

3) The bus was full of passengers all so very excited.

4) All of a sudden there was a landslide and the road got blocked. (The Pandemic Struck the Market)

5) The bus could go no further. 

6) Some passengers alighted and moved on while some young lads entered the bus and drove it down to the plains. 

7) These young guys bought themselves  Hang Gliding gears and drove the bus to the same point of landslide 

8) From that point they would Hang Glide down to the plains while the bus would be driven down with the balance original passengers in it.

9) The Hang Gliders would now again take the bus to the same point for another round of Hang Gliding experience 

10) As a result the Hang Gliders were having a Great time and Experiencing Fun while the original passengers were moving up and down the hill aimlessly. 

11) The travel company when contacted told the original passengers to have patience and assured them that in the long term the road would get cleared. 

12) The travel company could have otherwise suggested the passengers alight from the bus, take some rest in a hotel and then take a new bus to a new nearby destination even though the new destination was a little less exciting than the original destination.

13) But they just kept saying to the original passengers to have patience.

NOW LET US GET INTRODUCED TO THE CHARACTERS OF THIS STORY

A) The Hang Gliders in are "Traders" who love the volatity of the Market

B) The original passengers in the bus are the long term investors struck by the market fall due to Pandemic 

C) The Travel Company is the Advisor 

D) The other less exciting hill station is Debt Fund Returns & the new bus is Debt Investing 

E) The original Bus is an Equity Fund going up and down  because of the Traders' and Speculators' interest and excitement.

F) They are driving it up and down and making the best of the opportunity of the market while the original investors are having a meaningless ride of notional profits and real losses. 

G) This is the market scenario today. 

A Great Advisor is not one who keeps telling his investors to have long term patience but the one who advises action by helping them to restructure and rebalance their portfolio.

The Investors need to have a decent  experience despite the market correction and severe volatity period just like the passengers deserved a better experience of another destination even as the road was getting cleared.

Taxation for Stock Market Transactions (Speculation)

Here we will discuss on all aspects of taxation when trading is declared as a business income, which can be categorized either as:

1. Speculative business income – Income from intraday equity trading is considered as speculative. It is considered as speculative as you would be trading without the intention of taking delivery of the contract.
2. Non-speculative business income – Income from trading F&O (both intraday and overnight) on all the exchanges is considered as non-speculative business income as it has been specifically defined this way. F&O is also considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of underlying contract. Even though currently almost all equity, currency, & commodity contracts in India are cash settled, but by definition they give rise to giving/taking delivery (there are a few commodity future contracts like gold and almost all agri-commodity contracts with delivery option to it).Income from shorter term equity delivery based trades (held for between 1 day to 1 year) are also best to be considered as non-speculative business income if frequency of such trades executed by you is high or if investing/trading in the markets is your main source of income.

Taxation of trading/business income

Unlike capital gains there is no fixed taxation rate when you have a business income. Speculative and non-speculative business income has to be added to all your other income (salary, other business income, bank interest, rental income, and others), and taxes paid according to the tax slab you fall in. You can refer to chapter 1 for tax slabs as applicable for FY 2015-16.

Let me explain this with an example:

• My salary – Rs.1,000,000/-
• Short term capital gains from deliver based equity – Rs.100,000/-
• Profits from F&O trading – Rs.100,000/-
• Intraday equity trading – Rs.100,000/-

Gives these incomes for the year, what is my tax liability?

In order to find out my tax liability, I need to calculate my total income by summing up salary, and all business income (speculative and non-speculative). The reason capital gains is not added is because capital gains have fixed taxation rates unlike salary, or business income.

Total income (salary + business) = Rs.1,000,000 (salary income) + Rs.100,000 (Profits from F&O trading) + Rs.100,000 (Intraday equity trading)  = Rs 1,200,000/-

I now have to pay tax on Rs 12,00,000/- based on the tax slab –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 10% – Rs.25,000/-
• 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,
• 1,000,000 – 1,200,000: 30% – Rs.60,000/-
• Hence total tax : 25,000 + Rs.100,000 + Rs.60,000 = Rs.185,000/-

Now, I also have an additional income of Rs.100,000/- classified under short term capital gains from deliver based equity. The tax rate on this is flat 15%.

STCG: Rs 100,000/-, so at 15%, tax liability is Rs.15,000/-

Total tax = Rs.185,000 + Rs.15,000 = Rs.200,000/-

I hope this example gives you a basic orientation of how to treat your income and evaluate your tax liability.

We will now proceed to find a list of important factors that have to be kept in mind when declaring trading as a business income for taxation.

Carry forward business loss

If you file your income tax returns on time July 31st for non-audit case and Sept 30th for audit case, you can carry forward any business loss that is incurred.

Speculative losses can be carried forward for 4 years, and can be set-off only against any speculative gains you make in that period.

Non-speculative losses can be set-off against any other business income except salary income the same year. So they can be set-off against bank interest income, rental income, capital gains, but only in the same year.

You carry forward non-speculative losses to the next 8 years; however do remember carried forward non-speculative losses can be set-off only against any non-speculative gains made in that period.

For example consider this – my hotel business income is Rs 1,500,000/-, my interest income for the year is Rs.200,000/-, and  I make a non-speculative loss of Rs 700,000. In such case my tax liability for the year would be –

My gain is Rs 1,500,000/ from business and Rs.200,000/- from interest, so total of Rs.1,700,000/-.

I have a non speculative business loss of Rs.700,000/-, which I can use to offset my business gains, and therefore lower my tax liability. Hence

Tax liability = Rs.1,700,000 – 700,000 = Rs.1,000,000/-

So I pay tax on Rs.1,000,000/- as per the tax slab I belong to, which would be –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 10% – Rs.25,000/-
• 500,000 – Rs.1,000,000 : 20% – Rs.100,000/-,

Hence, Rs.125,000/- goes out as tax.

Offsetting Speculative and non-speculative business income

Speculative (Intraday equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.

If you incur speculative (intraday equity) loss of Rs.100,000/- for a year, and non-speculative profit of Rs 100,000/-, then you cannot net-off each other and say zero profits. You would still have to pay taxes on Rs 100,000/- from non-speculative profit, and carry forward the speculative loss.

For example consider this –

• Income from Salary = Rs.500,000/-
• Non Speculative profit = Rs.100,000/-
• Speculative loss = Rs.100,000/-

I calculate my tax liability as –

Total income = Income from Salary + Gains from Non Speculative Business income

= Rs.500,000 + Rs.100,000 = Rs.600,000/-

I’m required to pay the tax on Rs.600,000 as per the slab rates –

• 0 – Rs.250,000 : 0% – Nil
• 250,000 – Rs.500,000 : 10% – Rs.25,000/-
• 500,000 – Rs.600,000 : 20% – Rs.20,000/-,

Hence total tax = Rs.25,000 + Rs.20,000 = Rs.45,000/-

I can carry forward speculative loss of Rs.100,000/-, which I can set-off against any future (upto 4 years) speculative gains. Also to reiterate, speculative business losses can be set-off only against other speculative gains either the same year or when carried forward. Speculative losses can’t be set-off against other business gains.

But if I had speculative gain of Rs 100,000/- and non-speculative loss of Rs 100,000/- they can offset each other, and hence tax in the above example would be only on the salary of Rs 500,000/-.

What is tax loss harvesting?

Towards the end of a financial year you might have realized profits and unrealized losses. If you let it be, you will end up paying taxes on realized profits, and carrying forward your unrealized losses to next year. This would mean a higher tax outgo immediately, and hence any interest that you could have earned on that capital which goes away as taxes.

You can very easily postpone this tax outgo by booking the unrealized loss, and immediately getting back on the same trade. By booking the loss, the tax liability for the financial year would reduce.  We at Zerodha are the only brokerage in India presently giving out a tax loss harvesting report, which will spot all opportunities for you to harvest losses. Click here to learn more.

BTST (ATST) – Is it speculative, non-speculative, or STCG?

BTST (Buy today Sell tomorrow) or ATST (Acquire today sell tomorrow) is quite popular among equity traders. It is called BTST when you buy today and sell tomorrow without taking delivery of the stock.

Since you are not taking delivery, should it be considered as speculative similar to intraday equity trading?

There are both schools of thought, one which considers it to be speculative because no delivery was taken. However I come from the second school, which is to consider it as non-speculative/STCG as the exchange itself charges the security transaction tax (STT) for BTST trades similar to regular delivery based trades. A factor to consider is if such BTST trades are done just a few times in the year show it as STCG, but if done frequently it is best to show it as speculative business income.

Advance tax – business income

Paying advance tax is important when you have a business income. Like we discussed in the previous chapter, advance tax has to be paid every year – 15% by 15th Jun, 45% by 15th Sep, 75% by 15th Dec, and 100% by 15th March. I guess the question that will arise is % of what?

The % of the annual tax that you are likely to pay, yes! When you have a business income you have to pay most of your taxes before the year ends on March 31st. The issue with trading as a business is that you might have a great year until September, but you can’t extrapolate this to say that you will continue to earn at the same rate until the end of the financial year. It could be more or less.

But everything said and done, you are required to pay that advance tax, otherwise the penalty is 12% annualized for the time period it was not paid for. The best way to pay advance tax is by paying tax for that particular time period, so Sept 15th pay for what was earned until then, and by March 15th close to the year end, you can make all balance payments as you would have a fair idea on how you will close the year. You can claim a tax refund if you end up paying more advance tax than what was required to pay for the financial year. Tax refunds are processed in quick time by IT department.

You can make your advance tax payments online by clicking on Challan No./ITNS 280 on https://incometaxindiaefiling.gov.in/

Also, here is an interesting link that helps you calculate your advance tax – http://www.incometaxindia.gov.in/Pages/tools/advance-tax-calculator.aspx. You can also check this link to see how exactly interest or penalty is calculated for non-payment of advance tax.

Balance sheet and P&L statements

When you have trading as a business income, you are required to like any other business create a balance sheet and P&L or income statement for the financial year. Both these financial statements might need an audit based on your turnover and profitability. We will discuss more on this in the next chapter.

Turnover and Tax audit

When is audit required?

An audit is required if you have a business income and if your business turnover is more than Rs 1 crore for a financial year. In case of digital transactions (equity transactions are 100% digital), this turnover limit is Rs 2 crores. For equity traders, an audit is also required as per section 44AD in cases where turnover is less than Rs.2 Crores but profits are lesser than 6% of the turnover and total income is above minimum exemption limit.

We will discuss this in detail in the next chapter.

However let us understand what audit really means.

The dictionary meaning of the term “audit” is check, review, inspection, etc. There are various types of audits prescribed under different laws like company law requires a company audit; cost accounting law requires a cost audit, etc. Likewise the Income-tax Law requires the taxpayer to get the audit of the accounts of his business/profession from the view point of Income-tax Law if he meets the above mentioned turnover criteria.

Check this link for FAQ’s on tax audit on the income tax website for more.

Audit can also be defined as having an accountant verify if you have prepared all your accounts right. In this case it is getting an accountant check if you have created a correct balance sheet and P&L statement for the year. Ideally this audit should be done by the IT department itself, but considering the number of balance sheets out there it is surely impossible for IT department to audit each one of them. Hence we need a Chartered accountant (CA), who is a qualified professional and authorized by Income tax department to perform audits on balance sheet and P&L statements. You the tax payer can use any CA of your choice.

What role should a CA play?

Ideally a CA is required to only audit and sign on the balance sheets and P&L statements. But a CA also typically ends up creating your balance sheets and P&L statements and will audit them only if required.  We will in the next chapter briefly explain how a CA typically creates these two statements.

The importance of the audit process by a CA cannot be understated, apart from all the reporting requirements an audit also helps traders/investors know their financial health, ensure it faithfully reflects the income and claims for deduction are correctly made. It also helps lenders evaluate credibility, and act as a check for any fraudulent practices.

Which ITR form to use? – ITR3 (ITR 4 until 2016), we will discuss more on this in the last chapter. I have come across incidents where people have declared both speculative and non-speculative as capital gains to avoid having to declare business income, and not having to use ITR3. Taking a shortcut like this could mean a lot of trouble if called for an IT scrutiny.

Business expenses when trading – Advantage of showing trading as a business is that you can show all expenses incurred as a cost which can then be used to reduce your tax outgo, and if a net loss for the year after all these costs, it can be carried forward as explained above.

Following are some of the expenses that can be shown as a cost when trading

• All charges when trading (STT, Brokerage, Exchange charges, and all other taxes). I hope you remember that STT can’t be shown as a cost when declaring income as capital gains, but it can be in case of business income.
• Internet/phone bills if used for trading (portion proportionate to your usage on the bill)
• Depreciation of computer/other electronics (used for trading)
• Rental expense (if the place used for trading, if a room used – portion of your rent)
• Salary paid to anyone helping you trade
• Advisory fees, cost of books, newspapers, subscriptions and more…

Key takeways from this chapter

1. Speculative business income if trading intraday equity.
2. Non-speculative if trading F&O, or short term equity delivery actively.
3. Speculative losses can’t be set-off against non-speculative gains.
4. Advance tax has to be paid when trading as a business –15% by Jun 15th 45% by Sep 15th, 75% by Dec 15th and 100% by Mar 15th.
5. Can claim all expenses if income from trading shown as a business income.

Impact of RBI moratorium extension on you

The Reserve Bank of India announced measures to further ease financial stress and improve debt management in response to the COVID-19 crisis. The earlier moratorium which was ending on 31st May 2020, has now been extended by three months, i.e. August 31, 2020.

The extension of the moratorium means all financial institutions are now permitted to allow a moratorium of six months on payments of installments of all term loans and credit card dues arising between 1st March 2020 and 31st August 2020

Please note that the moratorium does not apply to interest charges. If you have Rs 1,00,000 due as on 3rd March 2020 and you take advantage of the moratorium till 31st Aug 2020, the dues payable on 3rd Sept 2020 could be as high as Rs 1,30,000 (Rs 1,00,000 (due amount) + Rs 30,000 (interest amount and additional bank charges)).

The moratorium is short-term relief but can result in long-term stress and ballooning interest at 36-42% CAGR. CRED, therefore, urges those who can to continue paying the total due amount, or as much of it as possible, within the due date.

Please read the FAQs below to understand the moratorium well and its implications. FAQs:- What is the moratorium period for Credit Card dues? Given the circumstances of the global pandemic, RBI has allowed banks to push the 'Billed Credit Card dues' falling between 1st March 2020 to 31st August 2020. This is not an exemption from repaying the amount. The payment can only be "deferred" by 6 months as per RBI circulars. If you take advantage of the moratorium, your credit score may not be impacted by non-payment of credit card dues for 6 months till 31st August 2020, but interest fees will continue to be charged at current rates or as specified by your credit card issuing bank. For credit card dues, billing will be restored on 31st August 2020. To avoid late fees and interest charges from 31st August 2020, you will have to pay your total due amount. If you pay your minimum due, you will avoid late fees but will be levied interest charges on the outstanding amount. If I take this option, will interest charges be levied for the deferred period of payment? The RBI notification has clearly specified that interest will continue to be charged on the outstanding amount during the 6-month deferment period. What do I have to pay after 6 months? Opting for 6 months 'deferment' option allows you to delay the payment of your credit card dues till 31st August 2020. As per our understanding of the circular, you will be expected to pay your outstanding amounts and the interest charges on the due date after 31st August 2020 to avoid late fees and impact on credit score. Will taking this option impact my credit score? Exercising this option may not impact your credit score since the banks may not report it as a "default" to RBI recognized credit bureaus.

Imagine you were born in 1900

A very interesting late Saturday evening PERSPECTIVE

For a bit of perspective during these frustrating times, imagine you were born in 1900. 

On your 14th birthday, World War I starts, and ends on your 18th birthday. 22 million people perish in that war. Later in the year, a Spanish Flu epidemic hits the planet and runs until your 20th birthday. 50 million people die from it in those two years. Yes, 50 million. 

On your 29th birthday, the Great Depression begins. Unemployment hits 25%, the World GDP drops 27%. That runs until you are 33. The country nearly collapses along with the world economy. 

When you turn 39, World War II starts. You aren’t even over the hill yet. And don’t try to catch your breath. On your 41st birthday, the United States is fully pulled into WWII. Between your 39th and 45th birthday, 75 million people perish in the war. 

At 50, the Korean War starts. 5 million perish. 

At 55 the Vietnam War begins and doesn’t end for 20 years. 4 million people perish in that conflict. 

On your 62nd birthday you have the Cuban Missile Crisis, a tipping point in the Cold War. 

Life on our planet, as we know it, should have ended. Great leaders prevented that from happening. 

When you turn 75, the Vietnam War finally ends. 

Think of everyone on the planet born in 1900. 

How do you survive all of that?

When you were a younger or even possibly a kid in 1985 and didn’t think your 85 year old grandparent understood how hard school was. And how mean that kid in your class was. 

*Yet they survived everything listed above.*

Perspective is an amazing thing. 

Let’s try and keep things in perspective. 

Let’s be smart, help each other out.

#staysafe #takecare 

#GodBless🙏🏻 

Rs. 50,000/- Crores Special Liquidity Facility for Mutual Funds by RBI

Today as on 27.04.2020

RBI Announces `50,000 crore Special Liquidity Facility for Mutual Funds (SLF-MF)
Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom. The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid.

2. The RBI has stated that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability. With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of ` 50, 000 crore.

3. Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays). The scheme is available from today i.e., April 27, 2020 till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. The Reserve Bank will review the timeline and amount, depending upon market conditions.
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4. Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.

5. Liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.

What RBI’s Rs 50,000 crs boost means for mutual funds..

1. What is this special liquidity facility for mutual funds?

The Reserve Bank of India announced today that it will open a Rs 50,000-crs special liquidity facility for mutual funds (SLF-MF) to ease the liquidity pressure on them.

2. Why were mutual funds facing a liquidity crisis?

Mutual funds were facing a lot of redemption requests after Franklin Templeton Mutual Fund suddenly shut six of its debt mutual fund schemes on Friday. They are unable to sell some of their investments in the debt market due to poor liquidity. In other words, there are no buyers for lower rated instruments. If mutual funds have to sell them, they will be forced to sell it at a steeply lower price. It will result in sharp fall in the net asset values or NAVs of schemes.

3. Why are there no takers for lower rated papers?

Covid-19 crisis is fuelling risk aversion in the markets, especially in the debt market. Everybody wants to play it safe. There are only buyers for top-rated papers and government bonds. Nobody wants to buy lower-rated papers for higher yields because they know they won't be able to sell them if they want to raise money immediately.

4. How will this be solved by RBI SLF-MF?

According to RBI, banks can use funds availed under the SLF-MF exclusively for meeting the liquidity requirements of MFs by(1) extending loans(2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.This means if mutual funds are unable to sell their bonds in the market, they can use this facility to meet redemption requests from investors.

5. How will it benefit investors?

As said earlier, the special window would ease the pressure on mutual funds to sell their investments at a huge discount to meet redemptions. If they are unable to sell their holdings at a fair price in the market, they can use the special window to meet redemptions.

6. Why are debt fund managers elated?

Debt fund managers believe that the RBI move would soothe the nerves of investors rattled by the Franklin Templeton Mutual Fund episode and stop knee-jerk selling decisions by them. Also, they are taking huge comfort from the RBI commitment. RBI said it is committed to take whatever steps necessary to mitigate the economic impact of Covid-19 and preserve financial stability.