Intraday trading, a dynamic world of stock trading where shares are bought and sold within a single trading day, offers the promise of quick profits. However, the tax implications of intraday trading require careful consideration, especially in the context of India’s tax regulations.
Calculating Income Tax on Intraday Trading
Income tax on intraday trading follows these key steps:
1. Identify Your Income Head: Intraday trading income is categorized as business income, not capital gains. This is because it’s regarded as a speculative business activity. Therefore, your intraday trading earnings fall under the “Profits and gains from business or profession” category.
2. Determine Your Turnover: Turnover in intraday trading is calculated as the absolute profit, which is the sum of positive and negative differences from all transactions.
For an instance, if you purchase 100 shares of ABC Ltd at Rs. 100 per share and sell them at Rs. 105 per share, your profit is Rs. 500. If you purchase 200 shares of XYZ Ltd at Rs. 50 per share and sell them at Rs. 45 per share, your loss is Rs. 1000. Your absolute profit is Rs. 500 + Rs. 1000 = Rs. 1500.
3. Tax Audit Eligibility: Tax audits are mandatory for intraday trading if your turnover exceeds Rs. 2 crore or if you’ve incurred a loss, and your total income surpasses the basic exemption limit (Rs. 2.5 lakh for individuals below 60 years of age). A tax audit involves a chartered accountant verifying your books of accounts, financial statements, and tax returns. They will issue a tax audit report (Form 3CD) and submit it to the income tax department alongside your income tax return.
4. Choose Your Tax Regime: The income tax for profits earned from intraday trading depends on the chosen tax regime:
- Old Tax Regime: Under this regime, you can claim deductions under section 80C to 80U, if eligible, to reduce your taxable income. Profits are taxed according to your applicable slab rate, ranging from 5%- 30%, depending on your income level. Additionally, surcharges and cess may apply.
- New Tax Regime: In this regime, you can’t claim deductions under section 80C to 80U, but you can enjoy lower tax rates, ranging from 5% to 25%, depending on your income level. As with the old regime, surcharges and cess may apply. Choose the regime that aligns better with your income profile and tax liability.
5. Filing Your Income Tax Return: Intraday traders must use ITR-3, designed for individuals and HUFs with the income from profits and gains of business or profession. Report your intraday trading income under the “Speculative Business Income” category in Schedule BP of ITR-3. You must also disclose your turnover, expenses, profit or loss, and other intraday trading details in Schedule BTR (Business Transaction Report). Remember to file your income tax return online through the income tax department’s e-filing portal.
The due date for filing the income tax return for intraday trading is as follows:
- July 31st of the following year (if tax audit is not applicable).
- September 30th of the following year (if tax audit is applicable).
Benefits and Drawbacks of Intraday Trading from a Tax Perspective
Here are some key benefits and drawbacks of intraday trading from a tax perspective:
- Loss Setoff: You can offset your losses against other speculative or non-speculative business income (subject to certain conditions) in the same year or carry them forward for up to four years.
- Expense Deductions: Deduct expenses related to intraday trading, such as brokerage fees, transaction charges, internet charges, under section 37(1) of the Income Tax Act.
- STT Exemption: Avoid paying securities transaction tax (STT), which is levied on delivery-based transactions.
- Higher Tax Rates: Intraday trading profits are subject to higher taxes based on your slab rate, as opposed to the lower rates applicable to capital gains.
- Record Keeping: Maintaining accurate books of accounts and transaction records can be time-consuming.
- Tax Audit: If applicable, undergoing a tax audit can increase your compliance costs and the risk of scrutiny.
Things to Keep in Mind For Intraday Trading
To succeed in intraday trading and optimize your tax liability, keep these things in mind:
- Daily Transaction Tracking: Keep a daily record of your transactions and profits or losses, maintaining a separate ledger for intraday trading.
- Reputed Brokerage: Choose a reliable and reputable broker or zero brokerage online platform that offers accurate and timely reports of your transactions and tax implications.
- Professional Guidance: Consult a chartered accountant or tax advisor who can provide expert guidance on best practices, regulations, and tax-saving options for intraday trading.
- Stay Informed: Keep yourself updated with the latest stock market news and trends along with the income tax regulations to make informed trading decisions.
Yes, intraday trading is subject to taxation. It is considered a speculative business activity, and the profits are treated as business income. These profits are added to your total income and taxed based on your income tax slab rate.
There is no specific exemption limit for intraday income. However, if your total income, including intraday earnings, doesn’t exceed the basic exemption limit of Rs. 2.5 lakh (for individuals below 60 years of age), you won’t have to pay tax.
In income tax, intraday trading is considered a speculative business activity. It involves trading without intending to take delivery of shares solely to profit from short-term price movements. The income from intraday trading is classified as speculative business income and is taxed at your applicable slab rate.
Intraday profit is calculated by subtracting all trading-related expenses, such as brokerage fees, transaction charges, stamp duty, GST, from the gross profit earned through the same-day sale and purchase of shares. The net profit is then added to your other sources of income and taxed according to your slab rate.
Intraday traders may be subject to tax audits if their turnover exceeds specified limits, emphasizing the importance of accurate record-keeping.
Intraday traders can explore tax-saving options like investing in tax-saving instruments or availing deductions under Section 80C of the Income Tax Act.
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.