- Wealth PMS (50L+)
This post is on popular demand, and at the outset let me also call it out that I am no expert in this space.
The reason I am doing this post is, One – It helps us get a sense of the rules of taxation that would apply to this strategy, Two – It is to understand the post tax returns of the strategy
NOTE – This post does not intend to substitute the advice of a Chartered Accountant nor does it go into the ITR Form related specifics
With that said, lets dive in.
As you would know CM Chase has two components to it, a Passive component and an Active component, if you are new to Chase read this first. Remember,each of those components would be taxed differently.
Here’s a overview of the steps involved in calculating taxes.
Step 1 – Whats your Tax Classification?
Income tax rules allow you to declare yourself as an Investor or a Trader, this declaration is key to how you would be taxed on your gains made through your Equity oriented ETF or MF product & your NIFTY Futures trades. More about classification here.
Capitalmind’s house recommendation is to classify oneself as a ‘Trader’ for its various benefits.
Step 2 – Taxation on Chase Passive Component
This is the instrument in which we would invest the notional equivalent amount. Typically in a NIFTY Index ETF or MF
Tax Treatment of Profits on ETF/MF
If you declare yourself as an Investor, i.e Declare profit from the sale of Equity oriented MF/ETF as Capital Gains, then you would need to pay (LTCG) long term capital gains – Exempt u/s 10(38) of IT act up to Rs 1,00,000/- and beyond which it will be taxable at 10%.
If you declare yourself as a Trader,i.e. Declare profit from the sale of Equity oriented MF/ETF as Business Income, In such case, you can claim the expenditures incurred in earning this income. You can also add this income to profits or losses incurred due to trading of the futures component of the Chase strategy, discussed in the next step. You would be taxed on the basis of Slab rates.
More about the tax slab rates here.
Tax Treatment of Losses on ETF/MF
If you declare yourself as an Investor, i.e. Declare losses from the sale of Equity oriented MF/ETF as Capital Losses – Capital losses in one year can be carried forward and set off against long term capital gains in another year. This can be done for eight successive years, so long as you file your taxes within the prescribed time window for a given year.
If you declare yourself as a Trader,i.e. Declare losses from the sale of Equity oriented MF/ETF as Business losses – This loss can be treated as a ‘Business Loss’ and can be set off against Business Income under any head except Salary Income. This can again be done for eight successive years, so long as you file your taxes within the prescribed time window for a given year.
Step 3 – Taxation on Chase Active Component
The active component is traded through NIFTY Futures which comes under the category of ‘Derivatives’.
Since in trading derivatives there is no transfer of ownership or delivery of the underlying asset in case of futures, the income from it cannot be taxed under the head ‘Capital Gains’ and likewise for losses. It always comes under the category of non-speculative profits/losses. If you are wondering why non-speculative, that’s because these products are also used for hedging.
Treatment of Profits from Futures
If you declare yourself as an Investor, it will fall under the head Income from other sources.
If you declare yourself as a Trader, it will fall under the head Income from Business & Profession.
In either case, the income will be taxed on a net basis, i.e. after deducting the costs, taxation will be based on Slab rates applicable.
The good thing about filing your return as a business is being able to claim what you’ve spent on it. Sometimes claiming expenses can lead to a business loss and that is fine too.
Do claim expenses which have been spent on the business. Brokerage, subscription to Capitalmind, Chartered Accountant’s fees, telephone bills, internet costs, etc.
Treatment of Losses on Futures
Losses from non-speculative category can be set-off against any other business income except salary income the same year. So they can be set-off against rental income, capital gains, bank interest but only in the same year.
You can carry forward non-speculative losses up to the next 8 years, however, carried-forward non-speculative losses can be set-off only against any non-speculative gains made in that period.
Step 4 – Calculating Turnover & the need for for a Tax Audit
Calculating turnover is required to determine the need for an Audit, it has no bearing on the tax liability.
Calculating Futures Trading Turnover
Based on this ICAI Guidance note, we determine the method of calculating turnover.
To calculate the turnover of the Chase – Futures trades, you just need to add up all the profits and loss values in absolutes. Here’s an example.
a) If your total turnover crosses Rs. 5cr / Profits or Losses – You need an Audit
b) If the total turnover is less than Rs. 5cr But you have reported losses – You need an Audit
c) If the total turnover is less than Rs. 5cr + you have reported Profits that is less than or equal 6% of the turnover then you need an audit.
There’s also a Presumptive taxation scheme for businesses with a turnover less than Rs. 2cr, 6% on the turnover would be considered as income and you would need to pay taxes on that income.
But the scheme itself has a lock-in-sort-thing of 5 years, in the sense, you would need to follow the scheme for a minimum of 5 years. Also, you would need to pay advance tax as a part of the scheme, however no audit needed and no books of accounts are to be maintained. If you make losses (and want to take advantage of that) or your profits are less than 6% of the turnover, you are better off avoiding the presumptive scheme.
Step 5 – Calculate your Taxes and File your returns!
Capitalmind Chase Taxation examples for FY 2018-19 and 2019-20
It’s recommended that you create a Balance Sheet and Profit & Loss Statement for yourself yearly, irrespective of whether you would need a tax audit or not.
That would give you a sense of how your assets are growing, plus the Profit & Loss statement for the year would tell you if you are adding to your assets or taking away from it.
The example here is meant only to give you an idea of what kind of profits / losses & turnover values you can expect when trading Capitalmind Chase since these are the values that would make the basis of your taxable income.
Assuming there are no other trades that you have made during the year, as you can see in FY 2018-19 we would not need any Audit. The taxable income would be arrived at only after subtracting all the expenses that you would need to claim over the amount Rs. 296064.41.
Let’s say you have a fixed cost of Rs. 1,00,000. Then your net income would be Rs. 196064.41. You would now need to add income from other sources that you may have like Salary and so on and arrive at the tax payable based on tax slabs.
Likewise for the FY 2019-20 you may have net losses after deducting expenses. Again you would add income from other sources/heads and calculate your net tax payable.
Hope this post give you a sense of the structure and process that you would need to follow to arrive at the tax payable if you trade Capitalmind Chase.
Some references for Further Reading
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