Income Tax on Intraday Trading

Intraday trading has become an attractive opportunity for many in India, as it allows traders to profit from short-term price movements in the stock market. However, while the potential for profits is high, so are the tax implications associated with it. Understanding how income tax applies to intraday trading is crucial for every trader to avoid penalties and ensure compliance with the Income Tax Act, 1961. 

Classification of Income from Intraday Trading
Income from intraday trading is considered speculative business income under the Income Tax Act. This classification means that the profits and losses generated from intraday trading are treated differently from long-term capital gains. Instead of being taxed under the capital gains tax structure, intraday trading falls under business income, which is subject to tax based on the trader's total income.

There are two primary categories of income in intraday trading:

• Speculative Business Income: This refers to profits from buying and selling shares within the same trading day, which is classified as speculative in nature. Traders are not investing in the companies long-term but are speculating on short-term price movements.
• Non-Speculative Business Income: Profits from trading in futures and options (F&O) contracts are classified as non-speculative. Though these trades occur over short periods, they are distinct from intraday trading under tax law.

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Taxation on Intraday Trading Profits

Since intraday trading falls under the category of speculative business income, the profits made from such trades are added to your total income and taxed according to your applicable tax slab. This is different from capital gains, where the tax rate is fixed.
In India, income tax follows a progressive structure, where the tax rate increases with the amount of income. For the financial year 2024-25, the tax slabs for individuals under 60 years are as follows:

• Up to ₹3 lakh: Nil
• ₹3 lakh to ₹7 lakh: 5%
• ₹7 lakh to ₹10 lakh: 10%
• ₹10 lakh to ₹12 lakh: 15%
• ₹12 lakh to ₹15 lakh: 20%
• Above ₹15 lakh: 30%

Therefore, if you make ₹1,00,000 from intraday trading and have additional income of ₹10,00,000 from other sources (such as a salary), your total taxable income will be ₹11,00,000, and tax will be calculated based on the applicable tax slab.

Treatment of Intraday Trading Losses
Losses from intraday trading are an important consideration when calculating your tax liability. If you incur losses, they cannot be set off against non-speculative income like salary or rental income. However, speculative business losses can be carried forward for the next four financial years. This means you can set off these losses against future speculative income, such as profits from future intraday trades.

On the other hand, non-speculative losses (from F&O trading) can be set off against other sources of income, such as interest or rental income, in the same financial year. This provides more flexibility in reducing your overall tax liability.

Presumptive Taxation Scheme under Section 44AD

For traders with lower turnover, the government offers a presumptive taxation scheme under Section 44AD of the Income Tax Act. If your turnover from intraday trading does not exceed ₹2 crore, you can opt for this scheme. Under it, 6% of your turnover is considered as income, regardless of whether you make a profit or loss. This simplifies the tax process, as you don’t need to calculate detailed expenses and profits.

However, if you choose this scheme, you cannot carry forward losses, and expenses like brokerage fees and internet costs cannot be deducted from your income. This scheme is ideal for small traders who wish to avoid complex accounting.

If you opt for the presumptive taxation scheme, you need to file your return using ITR-3, the form designated for business income.

Tax Audit for Intraday Traders

A tax audit is required for traders who exceed certain turnover thresholds. According to Section 44AB of the Income Tax Act, a tax audit is mandatory if:

Your presumptive business income turnover exceeds ₹2 crore, or
Your normal business income turnover exceeds ₹1 crore.

In such cases, you will need to hire a Chartered Accountant (CA) to conduct the audit, prepare your financial statements, and file the necessary tax audit report (Form 3CD). You will also need to file your Income Tax Return (ITR) in the required format.

Filing Your Income Tax Return

Filing your tax return is an essential step for every intraday trader. You need to ensure that all your trading income is properly reported. For traders, ITR-3 is the appropriate form to file if you have income from intraday trading, as it is specifically designed for individuals with business income.

It’s vital to maintain accurate records of all transactions, including the purchase and sale price of the stocks, as well as any brokerage and transaction costs incurred. This information will help you calculate your taxable income and support your tax filings.

Things to Keep in Mind

When dealing with taxes on intraday trading, there are a few key things every trader should remember:

• Maintain detailed records: Proper documentation of all trades, profits, and losses is essential for accurate tax filing.
• Carry forward losses: Speculative business losses can be carried forward for four years and set off against future profits from similar activities.
• Use the presumptive taxation scheme: If your turnover is under ₹2 crore, you may opt for the presumptive taxation scheme to simplify the filing process. But remember, you cannot carry forward losses under this scheme.
• Timely filing: Always file your returns on time to avoid penalties for late filing.

Conclusion

Intraday trading offers the potential for significant profits, but it also comes with specific tax obligations that traders must understand. By classifying your income correctly, managing losses effectively, and filing your returns on time, you can stay compliant with tax laws and avoid legal complications. If your trading activity is substantial, consulting a tax professional can help you optimise your tax strategy and ensure accurate filing. Ultimately, keeping track of your income and adhering to tax regulations will help you make the most of your intraday trading journey.