Site icon Kuvera

How Are Gains from Intraday Trading Taxed

Asefa Hafeez
tax-on-intraday-trading

What is Intraday Trading?

 

Intraday trading requires one to square off positions on the same day. In other words, it refers to the buying and selling of shares within a day. In intraday trading, the trader’s purpose is not to retain the equity for a long duration based on the stock’s future growth. They, however, observe price fluctuations and try to make gains the very same day. These gains are subject to intraday trading tax.

 

 

An Example of Intraday Trading

 

If at 9:30 a.m, a trader buys stock XYZ for INR 250 and then he sells it for INR 252 at 1 p.m, the sale and purchase happen within one trading session. Hence, it’s considered intraday trading.

 

Many amateur intraday traders have doubts regarding the taxation rules that will apply on their gains.  If you are a newbie  and have recently created an intraday trading account, you will have to comprehend the taxation procedure and its implications before anything else.

 

What are the different types of equity gains? Investor v/s Trader

 

Equity gains can be classified as either a ‘capital asset’ or a ‘stock in trade’. When purchasing a particular stock, the trader or investor must specify whether they wish to purchase intraday or retain the shares for more than a day.

 

According to Section 2 of Income Tax Act, a capital asset is any property that does not have stock in trade. Stock acquired for the mere purpose of daily trade is known as ‘stock in trade.’ However, when the same trade happens in commodities, futures, and options, it is taxed as a non-speculative business income.

 

There is no stock delivery in intraday trading as only profits and losses are exchanged. Profits  in trading shares are recognized as capital gains only when the funds remain in the equity for more than a day. 

 

Because the trader wants to profit from stock price fluctuations, the earnings from intraday trading are classified as speculative business income. 

 

The taxation rules are different for capital assets and stock in trade. As a result, how investments are taxed depends on your motive. Do you want to be an investor or a trader? What sets an investor apart from a trader is that the former owns capital assets and the latter owns trading assets. Trading assets are securities that a person buys and sells on a daily basis.  

 

When you are an investor, you must hold security for more than a day. You  have the option of keeping stocks on hold for months or years. The goal here is to wait for profits from market fluctuations over a more extended period.

 

As a day trader, you do not own a stock for long term and are effectively profiting or losing money based on price swings. As a result, this becomes a part of your annual income. 

 

There is always uncertainty surrounding the tax on intraday trading. The CBDT has released a series of circulars for bringing uniformity to the reporting and taxability of day trade profits. 

 

Related to Tax:   Current Income Tax Slab Rates India

 

What is a Long Term Capital Gain?

 

Long term capital gains are a sort of tax charged by the government of India if a trader owns an investment for an incredibly long time. For example, if a trader seeks a long-term investment and parks it for one year or more, any profit from the investment is subject to long-term capital gain tax.

 

Long-term capital gains are excluded from taxation under Section 10 of the Income Tax Act when it comes to stock investments. Profits are tax-free in such conditions. However, terms and conditions do apply.  If your stock investments exceed Rs. 1 lakh in a fiscal year, you would be liable for 10% taxes.

 

What is a Short Term Capital Gain?

 

In short term capital gains, an investor keeps the stocks they bought for less than one year. The investment duration in short-term capital gains can be held for longer than a day but is shorter than a year. 

 

Short Capital Gains are generally taxed at a rate of 15%. Surcharges and cess when included increases this tax rate as well.  If you are below 60 years, the tax exemption limit is upto an annual income of INR 2.5 lakhs. If you are between 60 years to 80 years, then the exemption is upto an annual income of INR 3 Lakh.

 

Are capital losses carried forward in capital gains?

 

Long term capital losses can only be set off against long-term capital gains, whereas short term capital losses can be set off either from long term or short term capital gains. Additionally, short term capital losses can be carried forward for 8 years from the fiscal year of their occurrence. 

 

What are the Income Tax Requirements for Traders with Speculative Business Income?

 

The income tax code does not define speculative Income, but it does define speculative transactions.  As a result, revenue obtained through speculative transactions is referred to as speculative income.

 

 

Additionally, this Income is taxed at slab rates under the Income Tax Act.

 

What are the Income Tax Requirements for Traders with Non-Speculative Business Income?

 

If a trader has extensive trading engagements in delivery-based equity and mutual funds, then their earnings fall under non-speculative business income . As a result, this revenue consists of equity F&O, commodity (intraday and F&O), and currency trading (Intraday and F&O). The scope of speculative transactions doesn’t include intraday commodity and currency trading.

 

 

Furthermore, according to the Income Tax Act, this Income is taxed at slab rates.

 

What does the Income Tax Act say about Intraday Trading?

 

Intraday trading tax is as per the standard income slab rates since they fall under business income. Whereas, capital gains have a lower tax rate. The taxpayer can declare their trading profit as presumptive business income under section 44AD of the income tax act. It means that intraday trading gains are considered regular business income.

 

According to Section 43 (5) of the Income Tax Act of 1961, “Your trading asset has the potential to provide both speculative and non-speculative company revenue. A speculative transaction is periodically or finally resolved other than by the actual delivery or transfer of the commodity.” 

 

In layman terms, intraday trading revenue is either speculative gain or loss, and is taxed under, ‘income from business or profession’. Income tax on intraday trading profit in India is subject to general tax slab rates after adding these gains to your annual income. 

 

With this, we can conclude that intraday trading and capital gains don’t have the same taxation rules. 

 

Furthermore, speculative losses can only be adjusted against profits from other speculative businesses, whereas your gains from speculative income can offset non-speculative losses. Speculative losses can also be passed on for 4 years if gains from previous years are inadequate to cover the losses. To carry forward losses to ensuing years, the trader must declare the year when the lossed transpired in the ITR form.

 

How is Business Income and Capital Gains Identified by the Income Tax Department?

 

One of the easiest methods to file capital gains is to include them in your income statement. However, there are circumstances where you cannot report your profits/losses from share trading on your income tax statements. 

 

It occurs when traders hold the majority of their stocks as a stock in trade. In these circumstances, the earnings or losses from stock trading can be recognized as business income, and the returns produced on it must be reported accordingly.

 

The income tax department has defined specific characteristics to distinguish between conventional capital gains and capital gains as business income, which are outlined below:

 

 

 

Case Studies: How Intraday Trade Tax is Calculated?

 

Let’s assume you have a yearly income of INR 15 lakhs and a profit of INR 5 lakh from intraday trading. In this case, your total taxable income becomes INR. 20 lakhs. This is taxed as per the applicable tax slab rate. 

 

You purchase 50,000 shares of XYZ company today at Rs. 150 per share and sell all 50,000 shares during market close for Rs. 175. The gain of (50000 X 175- 50000 X 150) INR 12,50,000 is then applied to your income and taxed as the applicable income tax slab.

 

 You cannot deduct any loss from your long-term or short-term capital gains according to income tax regulations. It can only be offset against day trading profits.

 

Scenario 1: Income Tax on Intraday Trading Profit

 

Speculative and non-speculative business incomes are added to your overall income, including salary, other business income, interest on deposits, Income from rentals, and taxes. 

 

Let’s understand the tax to be paid in the case of profits with an example – 

Here are the annual earnings of Shyam, a 35-year-old intraday trader:

 

Given these incomes, the income tax on intraday trading will be calculated as follows:

 

 

Which is INR 1000000 + INR 200000 + INR 200000 + INR 100000 = INR 15 Lakhs

 

Hence, Shyam has to pay income tax on INR 15 Lakhs. Based on the income tax slab below, the tax computation will be as follows:

 

Income Tax Slab (Applicable for All Individuals & HUF up to 60 years)
INR 0.0 – INR 2.5 lakh NIL
INR 2.5 lakh – INR 5.00 lakh 5% = INR 12500
INR 5.00 lakh- INR 10 lakh 20% = INR 100000
INR 10.00 lakhs and above 30%= INR 150000
Total Tax Computation 150000+100000+12500= INR 262000

 

Therefore, the total tax liability of the trader, including income tax on intraday trading profit: 

 

Total tax liability= Total income tax + Capital Gains Tax= 262000+ 15000 = INR 262500. From this, you can understand that there is no separate tax rate for intraday trading or speculative income taxes. Any gain is added to your annual income.  

 

Scenario 2: Tax rate for intraday trading in case of non-speculative loss

 

Ram, a 32-year-old day trader, has declared the following financial statements.

 

 

Ram has incurred a non-speculative loss which can be deducted from the gain of INR 4 lakh he has made from intraday trading.

 

Hence, the taxable speculative income will be: Speculative Income – Non-speculative business loss= INR 3 Lakh

 

 

And the Total taxable Income will be: Annual Salary + speculative business income + interest on bank deposits = INR 1500000 + INR 300000 + INR 100000 = INR 19 Lakhs

 

Hence, the tax computation will be as follows:

 

Income Tax Slab (Applicable for All Individuals & HUF up to 60 years)
INR 0.0 – INR 2.5 lakh NIL
INR 2.5 lakh – INR 5.00 lakh 5% = INR 12500
INR 5.00 lakh- INR 10 lakh 20% = INR 100000
INR 10.00 lakhs and above 30%= INR 270000
Total Tax Computation 150000+270000+12500= INR 382500

 

 Had Ram suffered a loss in the speculative income (i.e. loss in intrading), he could have adjusted  the loss only against speculative income and not gains from other income. 

 

What is the Tax Deduction you can claim for Intraday Trade Gains?

When calculating the revenue or loss from stock trading, you can deduct certain expenditures under ‘business expenses’. This includes:

 

 

In the event of presumptive business:

 

A trader can claim a minimum of 6% of turnover as intraday profit, even if they suffer a loss. Under this system, the trader doesn’t have to keep accounting records. Traders with up to 2 cr

 

ores annual sales might choose the presumptive business option. Under presumptive business, no further deductions are permitted. The slab rate will be applied to the total taxable income. Losses cannot be carried forward if you classify your income as presumptive business income.

 

In the case of normal expenses:

 

The trader can deduct expenditures such as office rent, telephone expenses, electricity, and internet charges,  and the amount remaining after deducting these expenses is taxable. To reiterate, the total taxable income is equivalent to the total turnover minus miscellaneous costs.

 

Under this arrangement, the trader will be required to maintain a record of accounts. 

 

What are the ITR forms required for reporting intraday trading?

 

ITR-3 is used to record profits or losses from intraday stock trading. ITR-3 form is also used to file the income and losses of a firm. Even if your overall income is less than INR 50 lakh and all other qualifying conditions are met, ITR-1 and ITR-4 cannot be used if you have intraday speculative business income/losses.

 

Is an audit required for intraday trading?

 

Section 44AB of the Income Tax Act of 1961 requires traders to undergo an intraday trading tax audit if the gain is less than 6% and income is above the exemption ceiling.

 

Who performs tax audits for Intraday trading?

 

Suppose an intraday trader is subject to a tax audit for their turnover. In that case, the trader must enlist the services of a professional chartered accountant to carry out a variety of services, such as:

 

 

How to succeed in intraday trading?

 

One of the disadvantages of intraday trading over a capital gains investment is that brokerage fees rapidly pile up when you purchase and sell stocks many times every day. While brokerage costs are gradually diminishing, some platforms continue to levy regulatory fees, cesses, and surcharges on a few transactions. 

 

Margin, or debt, is used by traders to leverage their bets. This increases the possibility of significant gains while also increasing the danger of enormous losses for traders. To utilize margin, traders must pay interest and maybe extra costs.

 

Despite all these hidden charges, one has to outperform the markets. Successful day traders have access to various instruments to do so. Kuvera is one such investment trading platform where you can use expert tools for research, charting, and other tasks required for profitable trading.

 

Read More on Kuvdera: The Best Intraday Trading Strategies

 

FAQs

 

Turnover is defined as the sum of gains and losses in a fiscal year, i.e., absolute profit. 

 

For all forms of transactions, the requirements for determining the Tax Audit are the same.

– The trading turnover has surpassed the benchmark. If the profit is lower than 6% of turnover and total income exceeds the basic exemption level, then one needs to audit their turnover. 

 

The loss from intraday equities trading is classified as speculative business loss. This loss amount can be carried forward for 4 years and counterbalanced by future speculative profits. Except for speculative profits, it cannot be adjusted against any other income.

 

Intraday stocks usually fluctuate depending on market mood. Thus, the trade must be based on stock market movement if you want to profit on intraday. For example, if the market is bullish, buy and sell a few times to generate minuscule profits rather than waiting for a big move. Conversely, if the market is bearish, you can short sell and purchase at lower levels to benefit from 2-3 trades.

 

If you are a salaried individual who made intraday trading profits or losses in the fiscal year 2022-23, you must file your return in ITR form 3 for the assessment year (AY) 2023-24. You can subtract security transaction tax (STT) paid on your transactions when computing net losses or earnings from intraday trading. Other charges that you get due to trading online can also be deducted. ITR forms for 2022-23 require more information than ITR forms from previous fiscal years. Make sure that you include all of the necessary information.

 

Interested in how we think about the markets?

 

Read more: Zen And The Art Of Investing

Watch/hear on YouTube:

Start investing through a platform that brings goal planning and investing to your fingertips. Visit kuvera.in to discover Direct Plans and Fixed Deposits and start investing today.

#MutualFundSahiHai #KuveraSabseSahiHai!

Exit mobile version