Tax on Intraday Trading: Understanding How Gains on Intraday Trading Are Taxed
If you intend to begin intraday trading, make sure you are aware of the income tax that applies to any profits made. If you fail to understand the tax implications, you may end up losing a significant amount. Most assets are subject to straightforward tax laws as per the Income Tax Act. However, intraday trade taxes involve a number of different factors. This guide will provide you with thorough assistance to help you comprehend intraday trade taxes and identify which heads apply to them.
Table of Contents
Capital Assets and Trading Assets: A Detailed Overview
A share can be defined as a "Capital Asset," "Trading Asset," or "Stock-in-Trade" on the basis of whether you think of yourself as a trader or an investor. A long-term investor is someone who plans to own stocks or other securities for a significant amount of time. They want to make money from dividends and capital appreciation—the money received from the sale of shares. The proceeds obtained from the selling of stock are applied to "capital gains" taxes. Moreover, depending on how long the shares are held, it is divided into long-term and short-term capital gains.
Traders are people who regularly buy and sell stocks and other securities in an effort to profit from short-term fluctuations in price. Trading revenue is considered business income, and therefore must be reported on tax returns under the heading "Profits from Business or Profession." Depending on their income level, their gains may be subject to up to 30% in taxes based on the appropriate slab rates. To put it briefly, traders pay taxes on their business revenue, whereas investors pay taxes on their capital gains.
Your income will be classified into the following categories based on this classification:
Capital Assets
Long-Term Capital Gain (LTCG) or loss
Short-Term Capital Gain (STCG) or loss
Trading Assets
Income from Speculative Businesses: The revenue obtained by intraday trades is defined as speculative business income as these transactions have a speculative nature. This includes income tax on profits from intraday trading in India.
Income from Non-Speculative Businesses: Non-speculative transactions are any share transactions that are not considered to be speculative. These comprise commodity trades (both delivery and futures/options), currency trades (both delivery and futures/options), delivery-based equity trades, and equity futures and options. Therefore, the money received from these deals is referred to as non-speculative company revenue.
What Is Intraday Trading?
Intraday trading involves the buying and selling of shares (long trades) or the selling and buying of shares (short trades) during a single trading day. The objective of an intraday trader is to earn on the same day by taking benefit of short-term price swings instead of owning equity shares. These gains are subject to taxes. In India, speculative income is taxed based on your income tax band rather than having a distinct rate.
Intraday Trading Turnover
Intraday Trading Turnover = Absolute Profit/Loss Amounts
The sum of both positive and negative differences is defined as absolute turnover (the profit amount is included in the loss amount rather than being deducted). Trading Turnover can be obtained using a trade-wise or scrip-wise strategy.
Illustration:
ABC shares are purchased by X for Rs. 75. Finally, she sells them at Rs. 80 per share. The following day, she purchases 200 LMN shares at Rs. 500 a share, which she ultimately sells for Rs. 460.
Return on First Trade = (80-75) * 100 = Rs. 500
Loss from Second Trade= (460-500) * 200= Rs. -8000
Absolute turnover= Rs. 8500
Tax Rules Applicable on Intraday Trading in India
The following are particular income tax laws and guidelines that intraday traders should be aware of:
Income Head: Earnings and Gains from Employment and Profession. Your intraday trading gains will be considered as speculative business profits. The reason it is deemed speculative is that you are trading without planning to accept ownership or delivery of the contract. Trading intraday is subject to short-term capital gains tax. As a result, any profits from intraday trading are taxable at the appropriate rates and are considered as short-term capital gains. Keep in mind that short-term capital gains are taxed as part of the individual's taxable income.
ITR Form for intraday trading: As intraday trading is considered a business income, financial documents, and an ITR-3 filing are required. The proper forms must be used by intraday traders to file their income tax returns. Reporting capital gains, overall trading income, and other pertinent information falls under this category. Make sure you comply with tax regulations by reporting intraday trading income accurately.
ITR due date for intraday trading income:
July 31st- if there is no Tax Audit.
October 31st- if there is a tax audit.
Applicability of Tax Audit on Intraday Trading Income
If your intraday trading turnover (assuming you choose presumed taxes) reaches ₹2 crore:
If you have profited from trading turnover by at least 6%: A Tax Audit will not be relevant.
If your gain or loss is less than 6% of trading turnover: If your total income is more than the basic exemption level of ₹2.5 lakhs, you may be subject to a tax audit.
In case you want to pay taxes as usual, and your intraday trading turnover exceeds ₹2 Cr and reaches ₹10 Cr:
If you have profited from trading turnover by at least 6%: Tax audits are applicable if you choose not to use Section 44AD's Presumptive Taxation Scheme.
Note: As long as the receipts are received digitally, the maximum has been raised from ₹2 Cr to ₹ 3 Cr.
Tax Calculation For Intraday Trading in India
Step 1: Compute Total Turnover: This is a crucial step in determining if tax audit provisions are applicable. It involves adding up all positive and negative variations from intraday transactions.
Step 2: Calculate Speculative Business Income: To compute speculative business income, deduct trading-related expenses from the entire turnover, such as broking charges and transaction costs.
Step 3: Set Off Against Speculative Income: Net intraday trading earnings are not allowable to be deducted from other sources of income, but they can be set off against other speculative incomes.
Step 4: Carry Forward Losses: Net losses can be deducted from future tax obligations in a subsequent year by carrying them forward for a period of four years and offsetting them against speculative earnings.
Illustrations:
Income tax is computed using the slab rates for profits from intraday trading. The following table displays the slab rates for various income brackets. These rates will be enhanced by the applicable surcharge rate + 4% cess.
Slab rates for Old Tax Regime | |
Up to ₹ 2,50,000 | Nil |
₹ 2,50,001 - ₹ 5,00,000 | 5% |
₹ 5,00,001 - ₹ 10,00,000 | 20% |
Above ₹ 10,00,000 | 30% |
Slab rates for New Tax Regime (After Budget 2023) | |
up to ₹3,00,000 | Nil |
₹3,00,001- ₹6,00,000 | 5% |
₹6,00,001- ₹9,00,000 | 10% |
₹9,00,001- ₹12,00,000 | 15% |
₹12,00,001- ₹15,00,000 | 20% |
₹15,00,001 and above | 30% |
A 30-year-old intraday trader earns from various sources. The details are as follows:
Salary per year = Rs. 10 lakh
The annual income from intraday equity trading or income from speculative business= Rs. 2 lakh
Gains from futures and options trading (revenue from non-speculative business)= Rs. 2 lakh
Capital gains on listed shares= Rs. 1 lakh
Annual interest rate on bank savings= Rs. 1 lakh
Depending on how long or short a period of time the capital assets were held, capital gains will be taxed differently. Assume that the capital gains were only temporary. Thus, a 15% tax will be applied to the income. Therefore, there will be a Rs. 15,000 tax obligation. All other income heads, such as salaries, interest on bank deposits, and revenue from speculative and non-speculative businesses, will be added to determine the total taxable income. As a result, the entire revenue will be:
Total Income = Salary of Rs. 10,00,000 + Income from Intraday Equity Trading of Rs. 200,000 + Income from F&O Trading of Rs. 200,000 + Interest on Deposits of Rs. 100,000 = Rs. 15,00,000.
Based on this calculation, the tax liability as per the Old Regime will be as follows:
Income Slab | Tax rates |
0 – Rs.2.5 lakh | 0 |
Rs.2.5 – Rs.5 lakh | 5% = Rs.12,500 |
Rs.5– Rs.10 lakh | 20% = Rs.1 lakh |
Rs.10 lakh and above | 30% = Rs.1.5 lakh |
Total | 2,62,500 |
Total tax liability = Income Tax + Capital Gains Tax = Rs.2,62,500 + Rs.15,000 = Rs.2,77,500.
Advance Tax for Intraday Trading
You will have to pay advance tax on the designated days if your estimated year tax liability exceeds ₹10,000.
Advance Tax under Section 44AD for Intraday Traders Who Do Not Select Presumptive Taxation
Intraday Traders are needed to pay Advance Tax in the following four installments if they decide not to make use of Presumptive Taxation:
Advance Tax | Due Date |
15% of total tax liability | By 15th June |
45% of total tax liability | By 15th September |
75% of total tax liability | By 15th December |
100% of total tax liability | By 15th March |
Intraday Traders Who Choose Presumptive Taxation May Pay Advance Tax
Intraday Traders who choose to use Presumptive Taxation are required to pay Advance Tax by March 15th in a single installment.
Carry Forward Loss For Intraday Traders
Speculative Business Loss is the term used to describe losses incurred in intraday trading. If you file the return before July 31st (if an audit is not applicable) or October 31st (if an audit is applicable), only then can it be carried forward to the following four years. Only Speculative Business Income may be used to cover Speculative Business Losses. The Intraday Trader will not be able to carry over or deduct these losses from business income if they choose to use the new tax regime.
Tax Treatment of Loss on Intraday Trading
The way in which losses are treated in relation to intraday trading tax is a crucial factor to take into account under Indian tax legislation. Any additional speculative income, such as gains from other speculative trades, can be deducted from intraday losses, which are regarded as speculative business losses. All other kinds of income, including wage or rental income, cannot be offset by these losses. In addition, losses that cannot be entirely written off in the current fiscal year may be carried forward and written off against any future speculative revenue for a period of four years. For intraday traders to support their claims during tax assessments, they must keep accurate records and documentation of their trading operations, including information about losses they have incurred. Inaccurate loss reporting and documentation can result in fines or income tax audits when tax authorities check the trader's financial records for compliance with tax regulations.
Conclusion
It is imperative for traders to comprehend and adhere to income tax legislation in order to avert significant legal and financial ramifications when engaging in intraday trading. One can assess turnover and determine speculative company income by keeping precise records of intraday transactions and consulting with tax experts. Additionally, establishing a Demat account can simplify the handling of securities and enable smooth trading. Maintaining awareness and making sure income tax laws are followed is essential for a profitable and long-lasting intraday trading experience.
FAQ
Q1. How is intraday trading income taxed in India?
In India, revenue from intraday trading is categorised as speculative business income and is subject to taxation based on your income tax slab rate.
Q2. What is considered intraday trading for tax purposes?
Intraday trading, which is defined as speculative transactions for tax purposes, is the act of buying and selling equities on the same day without waiting for delivery.
Q3. Is filing ITR for intraday trading mandatory?
It becomes necessary for traders to file an ITR if their intraday trading income surpasses the baseline exemption ceiling.
Q4. How can I calculate taxable income for intraday trading?
Subtract from your gross intraday trading gains all trading-related costs, including booking fees, transaction fees, and other applicable charges. It helps you to determine your taxable income from intraday trading. In order to compute your taxes, your net income is added to your other income sources.
Q5. Can I offset intraday trading losses against other income?
Losses from intraday trading can normally be offset against gains from the same type of trading, but not against income from other sources such as rent or wages. Certain losses, like company losses, can, nevertheless, be carried forward and used as a future offset against business income.
Q6. How should I report intraday gains and losses in my ITR?
Your ITR should list intraday gains and losses under business income. When reporting your intraday trading activity, utilise the proper ITR form (ITR-3 or ITR-4 are the most common forms used by those in business or the profession).
Q7. What documents should I maintain for reporting intraday gains and losses?
It is imperative that you uphold thorough documentation, encompassing trade summaries, transaction statements, broking statements, and financial statements that delineate your intraday trading undertakings. You can use these records as supporting material when you file your ITR.
Q8. How should I file my ITR if I earn from intraday trading income and other sources?
Report every type of income individually in the appropriate parts of the ITR form if you get money from intraday reading along with other sources. Make sure both forms of revenue are reported accurately, and keep the necessary records.
Q9. What are the implications of loss in intraday trading?
You can carry over a loss from intraday trading to subsequent years and deduct it from any gains made during those years. Make sure all paperwork is in order and that tax laws are followed.
Q10. What if you have an intraday loss and are not opting for presumptive taxation and the total income exceeds the basic exemption limit?
You need to have an audit of your books of accounts if you have an intraday loss, choose not to file for presumptive taxes, and your overall income is greater than the basic exemption limit.
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