Income Tax On Intraday Trading – How Profits From Intraday Trading Are Taxed?

Intraday trading, also known as day trading, involves buying and selling stocks within the same trading day. While it can be lucrative, it’s crucial to understand the tax implications of the profits earned from intraday trading in India. This article delves into the intricacies of income tax on intraday trading and how these profits are taxed.

Intraday trading refers to the purchase and sale of securities within a single trading day.

Traders aim to capitalize on the short-term price movements of stocks to earn profits. Unlike long-term investments, intraday trading involves holding positions for a brief period, often just minutes or hours.

The profits earned from intraday trading are classified under the head “Income from Business and Profession”rather than “Capital Gains.”

This is because intraday trading is seen as a speculative activity, where the intention is to earn quick profits rather than holding stocks for long-term appreciation.

Capital Assets vs. Trading Assets

A share can be called a ‘Capital Asset’ or ‘Trading Asset or Stock-in-Trade’ depending on whether you are identified as an investor or trader.

1. • Investors: These individuals hold stocks or securities for the long term, aiming for capital appreciation and dividends. Their income from selling shares is taxed as “capital gains.”
   • Traders: Frequent buyers and sellers who profit from short-term price movements. Their trading income is treated as business income and falls under the “Profits and gains from business or profession” category. Tax rates vary based on income.

1. Types of Income:
   • Capital Assets:
     • Long-Term Capital Gain (LTCG):   Applies when shares are held for an extended period.
     • Short-Term Capital Gain (STCG):  Relevant for shares held for a shorter duration.
   • Trading Assets:
     • Speculative Business Income: Intraday transactions fall here. Tax on intraday trading profit in India is considered speculative business income.
     • Non-Speculative Business Income: Includes delivery-based equity trades, futures/options, commodities, and currency trades.
2. Intraday Trading:
   • Intraday trading involves buying and selling shares within a single trading day.
   • Profits from intraday trading are taxable as business income, based on your income tax slab.

 

Income Tax Rules for Intraday Trading

• • Income Head: Report your intraday trading profits under “Profits and Gains from Business and Profession.” Your income from intra-day trading will be considered as speculative business income. It is considered speculative because you are trading without intending to take the delivery (ownership) of the contract.
  • ITR Form: File ITR-3 and prepare financial statements for intraday trading.
  • Due Dates:
    • July 31 (if no Tax Audit is applicable)
    • October 31 (if Tax Audit is applicable)

 

Whether Tax Audit Is Applicable For Intraday Trading? 

In India, the applicability of a tax audit for intraday trading depends on certain conditions. Let’s break it down:

1. Business Income from Intraday Trading:
   • Intraday trading refers to buying and selling stocks or derivatives within the same trading day.
   • Income from intraday trading is considered as business income, not investment income.
2. Types of Business Income from Intraday Trading:
   • Speculative Income: Profits from intraday trading of equity shares fall under this category. Traders speculate on price volatility for short-term gains.
   • Non-Speculative Income: Profits from intraday or overnight trading of Futures and Options (F&O) are considered non-speculative income.
3. Tax Audit Applicability:
   • Presumptive Business:
     • If profit from intraday trading is declared less than 6% of turnover.
     • Total income exceeds the basic exemption limit.
     • In such cases, tax audit is required.
   • Normal Business:
     • If the turnover from intraday trading exceeds INR 10 crore, tax audit is mandatorily applicable.

 

Tax Audit Non Applicability:

If your Intraday Trading Turnover is up to ₹2 Crore (if you opt for presumptive taxation)

• If you have made profits of at least 6% of Trading Turnover: Tax Audit shall not be applicable.

If your Intraday Trading Turnover is more than ₹2 Cr and up to ₹10 Cr (if you opt to pay tax normally)

• If you have made profits of at least 6% of Trading Turnover:
  • If you do not choose the Presumptive Taxation Scheme under Section 44AD, then tax audit is applicable.

Note: The limit has increased from ₹2 Cr to ₹ 3 Cr provided the receipts are received in the digital mode.

 

How is turnover for intraday trading determined?

Turnover in intraday trading indeed reflects the total value of buy and sell transactions during a specific period.

Turnover represents the total monetary value of all your intraday trades (both buying and selling) within a specific period, typically a financial year. It is calculated by summing up the absolute values of the buying and selling amounts for each trade.

 

Carry Forward Loss For Intraday Traders

• Carrying Forward Losses:
  • Time Limit: Speculative business losses can be carried forward for up to 4 assessment years.
  • Filing Deadline: To carry forward these losses, you must file your income tax return by the due date, which is 31st July if an audit is not required and 31st October if an audit is required.
  • Offsetting: These losses can only be set off against speculative business income in subsequent years.
• New Tax Regime:
  • No Carry Forward: If you opt for the new tax regime introduced under Section 115BAC of the Income Tax Act, you cannot carry forward speculative business losses.
  • No Adjustment: Losses cannot be adjusted against any other business income under the new tax regime.

 

Frequently Asked Questions