Hi, I use a investment management service to invest money abroad. They charge a fixed % of profits every month as performance fee. When I report these earnings in the tax return, is it possible to claim the management fees as deductions ? If yes, can you tell me how & what form to put this information into? Thanks
Hi,
I am assuming you are talking about Indian taxation.
You can deduct it from the profit only if you are showing this income as a business income. If you are showing this income as a capital gain then you can deduct it
Please feel free to call/ revert in case you need more clarity.
Thanks and regards
Abhishek Dugar
CA CS B.Com
Hi
How do you show the investment income in the income tax returns?
You can claim the management fees expenses if you are showing it as a business income.
# my answers are based on Indian Taxation.
Thanks. Let me clarify that I'm asking with regards to tax situation of a friend who is Indian resident only. He is a simple salaried employee. I mean he doesn't run a business, doesn't own/isn't founder of any registered corporation & the foreign investment account is in his name, not in the name of any corporation (even if the money was invested by me & I have control of his account, not in a 'legal' paper agreement manner but just verbal friendship manner (& yes I'm an NRI)). So I have 2 follow up questions: 1. Am I right in assuming he needs to report the income in his tax return (& also the max balances in Schedule FA) because the account is in his name? 2. Is it possible to show the income as business income & deduct the management fees expenses in this situation? Will he need to register a company or file as a sole proprietor? Can a person act like sole proprietor & show transactions in his personal accounts as 'business transactions' ?
1. Yes. The income needs to be disclosed and taxes have to be paid.
2. This actually depends on the quantum of transactions and also what shall be beneficial- showing it as business income or capital gains. The tax treatment for both incomes is different,. Both have their respective pros and cons. For example, in capital gains, you get indexation benefits of the costs while in business income, you get deduction of expenses.
Hello,
1.If he is showing the share transactions as business income then he can claim management expenses but if he is showing it as capital gains then he cannot claim the expenses.
2. FA is to be filed only when his total income crosses 50 lacs during the year.
3. No company needs to be registered.
Trust this clarifies your query.
Feel free to call / get back in case of further clarifications.
Thanking You.
Regards,
Rohit R Sharma
BCOM, FCA, LLB, CERT. FAFP
Hi, Thanks folks for the nice answers & clarifications. They've been very informative. Appreciate it! Lakshita, it's for short term currency (forex) trading transactions (no FEMA violations here, as source of original deposit funds isn't from India) so I guess indexation benefit would be negligible in this case in comparison to expenses. Rohit, can you please cite me the law/instruction/rule which says "schedule FA" needs to be filed only when income crosses 50 lacs? I really didn't know that, nor could find that rule/instruction anywhere. Is that only when the individual files as sole proprietor (in ITR-4)? Also, just to confirm, to file this as business income (including his regular salary (with TDS consideration etc.)), it will need to be filed using ITR-4, right? Thanks again.
Hi,
It will be through ITR 3 not ITR 4.
One more follow up question folks, as we know, this is kind of 'passive income' for the sole proprietor (his primary job is Software Engineer in a company), & it's pretty clear he isn't actively involved in the trading. In fact, he's paying an investment service to execute trades in his account. In this scenario, does he need to own a trade license if the income exceeds certain limit (like I'm reading online... 9 lacs (limit for trade license) or 20 lacs (limit beyond which one needs GST license) or 50 lacs (Pvt Ltd. company formation))? If yes, what kind of license will be applicable for offshore currency trading? Rohit, still waiting for your answer regarding 50 lac limit for schedule FA.
Hi,
No, you don't need any GST/ trade license for securities trading.
No, there's no requirement for such license.
I read with interest your queries and the answers provided by other experts. I just want to add few points:
1) The income earned by your friend, who is a resident in India, is earned outside India but is still taxable in India. He will be entitled to claim double taxation relief, if any taxes are paid in the country in which such income arose.
2) As your friend is a passive investor, the nature of his income is not business income but can be capital gains or income from other sources.
3) The management fees paid deducted by the service provider is expenditure incurred wholly for the purpose of realising earning income. If its a capital gain, then the sale consideration can be reduced by the expenses incurred on such sale. If its income from other sources or even business, still the management fees can be claimed as an expenditure.
4) If the income is more than Rs 50 Lakhs, the details of all moveable and immoveable assets shall be given in Schedule FA.
5) The income may be received in his individual capacity but he should be able to establish sources for the investments.
As regards other legal requirements, the other experts have given clarifications on which I have no other views.
