Intraday trading is a popular strategy involving buying and selling financial instruments on the same day. Intraday traders aim to profit from short-term price movements in the market. While intraday trading can be lucrative, traders must also know their tax liabilities.
Taxes are a headache for all those who file them, especially people who have to calculate taxes for high-volume-low-value financial flows eg: intraday traders.
Taxes on intraday trading are determined based on the classification of the trading activity as business income or capital gains. Intraday traders need to understand the intraday trading taxation implications and comply with tax laws to avoid penalties and legal issues.
Types of business income from Intraday Trading
Business income from intraday trading can be classified into speculative business income and non-speculative business income. While the tax liability on both these incomes is effectively the same, the separation between speculative and non-speculative determines your ability to offset your losses in the market. But let’s first define these two incomes.
1) Speculative income:
Profits from intraday trading of equity shares are classified as speculative income. It is so because those investing in a stock for less than a day are presumably not investing in the company but are only keen on speculating its price volatility to turn a profit.
2) Non-speculative income:
On the other hand, profits made from intraday or overnight trading of Futures and Options are considered non-speculative income by definition. It is so because certain F&O contracts still have a delivery clause whereby the underlying shares/commodities exchange hands between traders on the expiry of contracts. At the same time, all income from even longer F&O trades shall be considered non-speculative income if it forms a substantial part of your total income or it’s a business activity for you.
Tax Implications of Intraday Trading
Traders should be aware of income tax on intraday trading. The profits from intraday trading are treated as either business income or capital gains, depending on the frequency and nature of the trades. Suppose the trading activity is considered a business. In that case, the profits are taxed as per the slab rates applicable to businesses, and the trader can claim deductions for expenses incurred in carrying out the business. However, if the trading activity is considered capital gains, the profits are taxed at a lower rate, and the trader can claim exemptions and deductions for long-term capital gains.
Intraday traders must maintain detailed records of their trades, including each transaction’s date, time, and price, to accurately calculate their tax liabilities. Failure to comply with tax laws can result in penalties and legal issues.
How to Calculate Taxes on Intraday Trading Profits?
The income taxes on intraday trading profits are governed by the Income Tax Act 1961. Here’s how to calculate taxes on intraday trading profits:
● Determine your net profit or loss: Your profit or loss from intraday trading is calculated by subtracting the total expenses incurred during the trading, including brokerage fees and other transaction costs, from the total income generated.
● Classify your income: The income earned from intraday trading is classified as business income and is taxable.
● Calculate taxable income: After determining the net profit or loss, calculate the taxable income. It is calculated by adding the net intraday profit to other income you earn during the financial year.
● Apply the tax rate: The tax rate applied to your taxable income will depend on your income bracket.
● Pay advance tax: If your total tax on intraday trading liability for the financial year exceeds Rs. 10,000, you must pay advance tax in installments during the financial year.
Whether Tax Audit Is Applicable For Intraday Trading?
1) If your Intraday Trading Turnover is up to ₹2 Crore
- Tax Audit shall not be applicable if you have made profits of at least 6% of Trading Turnover.
- If you have incurred a loss or your profit is less than 6% of Trading Turnover: Tax Audit applies if your total income is more than ₹2.5 lakhs (basic exemption limit).
2) If your Intraday Trading Turnover is more than ₹2 Cr and up to ₹10 Cr
- If you have made profits of at least 6% of Trading Turnover:
- Tax audit is applicable if you do not choose the Presumptive Taxation Scheme under Section 44AD.
- A tax audit is not applicable if you opt for Presumptive Taxation Scheme under Sec 44AD.
- Tax audit is applicable if you have incurred a loss or your profit is less than 6% of the Trading Turnover.
3) Trading Turnover is more than ₹10 Cr
Irrespective of the profit or loss, a tax audit is applicable if you have a turnover of more than ₹10 crores (Only if over 95% of transactions are digital. Trading is 100% digital).
How are intraday losses treated?
- If you have suffered losses in intraday trading, you can carry forward the losses for the next four financial years. It will help you reduce your taxable income in future years. However, you must file the income tax return before the due date to enjoy carrying forward losses. Intraday Trading Tax Audit Under section 44AB of the Income Tax Act, 1961, intraday trading tax audit for traders is mandatory if:– Presumptive business income turnover (profit/loss) is more than Rs. 2 crores in a financial year.
- Normal business income turnover ( profit/loss) exceeds Rs. 1 crore in a financial year
- Note that turnover means the total of absolute profits minus losses made on daily transactions when it comes to intraday trading. Who performs tax audits for intraday trading? Suppose an intraday trader is subject to a tax audit for intraday trading. In that case, the trader needs to hire the services of a professional chartered accountant to carry out a range of services, including:– Preparation of financial statements such as P/L and balance sheets.
– Auditing of the book of accounts
– Preparing and filing the tax audit report on Form 3CD
– Preparing, filing, and submitting ITR
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