Query regd. taxation of business income.

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  1. shri86

    shri86 New Member

    Hello ,

    I have a query regd. taxation of business income. Consider the following :

    - Income is generated from trading in stock markets ( derivatives segment ), hence the income is categorized as business income.

    - Currently all transactions are done from my personal account. I would like to share the income with my mother to lower total tax outgo.

    - I thought of forming a partnership firm with myself and my mother as partners and trading from the company's account. But I read somewhere that a flat 30% tax is applicable on the company's income.

    - In the above case, a better option is to trade with 2 different trading accounts where each one of us would be paying tax as per their personal tax bracket they fall into.

    Is forming a company better option ? Or in my case, trading individually is better tax wise (assuming I can still claim expenses occurred while conducting the trading business ) ?

    Kindly suggest which option would be better to save tax.

    Thanks in advance!
  2. ZED

    ZED Well-Known Member

    In my personal opinion, if the objective is merely gaining income from stock trading (and investments) then as such there is no real benefit of forming a CO. Tax rate of Co. is high , plus when dividend will be declared then too will be taxed. Furthermore if dividend income is more than 10 Lacs then shareholder will be liable to pay tax @ 10% + surcharge and cess on the income exceeding 10 Lacs [S.115BBDA]

    If you compute the effective rate of tax on your real earning then it can be more than 50%. That's something to consider.
  3. shri86

    shri86 New Member

    Okay, so that makes incorporating a partnership firm less favorable option. I have below mentioned assumptions for continuing the trading business in our personal accounts :

    1. I hope we can claim expenses/losses occurring in the business with the income earned in it. Correct me if I am wrong.

    2. I am assuming there isn't any maximum permissible turnover limit allowed for business done without incorporating a firm. Correct me if I am wrong. The intention is to figure out if I can continue to scale up in current setup or will I need to take the company formation route somewhere down the line.

    If both of my above assumptions are correct , I will continue trading in my personal trading accounts.

    Kindly confirm.

    Thanks in advance !
  4. ZED

    ZED Well-Known Member

    Whether its going to be partnership firm or a company? Earlier you were saying Co.

    If profit are to be deemed as profit as per S.44AD then it shall be deemed that all the expenses have been allowed.
    For carrying forward any loss, you will have to get the books of accounts audited.

    Theres non under the Income tax Act. I don't think that there is such a provision but my experience in stock market is a bit low so I am not giving any assurance as to this point.
  5. shri86

    shri86 New Member

    Ok, it seems you gave your advice assuming that I was planning to start a company instead of Partnership firm.
    Is there a difference in taxation ?
    If I start trading under Partnership firm's account, is there any benefit as far as taxation is concerned ?
    I thought 30% flat tax is applicable on Partnership firm as well, correct me if I am wrong.
  6. ZED

    ZED Well-Known Member

    There is a little difference. For eg in case of Co, dividend is chargeable to tax by way of dividend distribution tax and may further be charged in the hands of share holder u/s 115BBDA (as discussed in the previous post). But, in case of partnership firm , the profit of the firm is taxed and the amount which is given to partners is totally exempt from there income (except under certain circumstances)

    The remuneration, salary, bonus, commission, interest, to the partner is deductible subject to certain conditions.
    Note: The same shall be deemed to have been provided if S.44AD is opted.

    S.44AD is available to individual, HUF and partnership firms and NOT TO COMPANIES (even LLPs are not covered)

    I really don't see much benefit , unless the partnership firm decides to carry some other business.
    As you have observed, the tax rates are high and S.44AD can be availed by individuals also.
    Infact if the expenses are going to be low , I will recommend to not to form partnership and each assessee (you and your mum) to claim benefit of S.44AD independently. That way upto turnover of 4 crore, benefit of S.44AD can be availed.

    Further, the remuneration etc have certain limits and criteria. Plus, whatever would be deduction allowed as remuneration etc, will form part of income of assessee (you and your mum) and shall be taxable.
    shri86 likes this.
  7. shri86

    shri86 New Member

    Thanks a lot for the detailed clarification. This helped !
    ZED likes this.
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