Introduction 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. Let us overcome this juggernaut of taxation together.
Types of business income
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.
- Speculative income: Profits made from intraday trading of equity shares are classified as speculative income. This is so because those investing in a stock for less than a day are presumably not investing in the company but only keen on speculating its price volatility to turn a profit.
- Non-speculative income: On the other hand, profits made from intraday or overnight trading of Futures and Options are considered to be non-speculative income by definition. This 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.
Income gained from intraday stock trading is regarded as speculative business income. According to section 43(5) of the Income Tax Act, profits gained from intraday trading are added to taxable business income as taxed according to total income slab. However, taxpayers (traders) have the option to consider the speculative business income under two different heads, which again has different tax implications: Presumptive Business Income u/s 44 AD Presumptive business income from intraday trading is taxed at 6% of the turnover up to a limit of Rs. 2 crore, whether it’s a profit or loss. You cannot carry forward losses if you treat your income under presumptive business income. To file an income tax return for this type of income, you need to submit Form ITR-3. Normal Business Income Under normal business income the trader is taxed as per individual tax slab. In this method, total taxable income is equal to total turnover minus expenses. You can claim deductions for expenses such as office rent, depreciation of computer systems, brokerage charges, internet costs, phone expenses, books, consultation fees, etc. Now that we know that intraday trading is largely classified as business income – equity or derivatives, we should keep in mind that business income doesn’t have a fixed rate of taxation. This is unlike capital gains that are taxed at a fixed rate and applicable when a stock is held for a longer period of time. Hence, business income from intraday trading must be clubbed with your income from all other sources to arrive at a total income. This is the income from which you pay tax on intraday trading profits in India. For instance, if you made Rs 1,00,000 from intraday equity trading, Rs 50,000 from intraday F&O trades and Rs 10,00,000 from your salary, then your total income liability is Rs 11,50,000. The income tax payable by you will be dependent upon your tax slab and applicable deductions.
Things to remember
While the calculation of profits seems pretty straightforward for intraday profits, there are important things to keep in mind while calculating income tax on intraday trading profits. These deal with setting off losses and ensuring that you are not paying more tax than you are liable to and include:
- Business losses of speculative nature (intraday equity trading) can be carried forward into the next 4 years and can be set off only against speculative gains made in that duration.
- Meanwhile, non-speculative losses (intraday F&O trades) can be set off against income other than salary in the same year. So, losses on F&O trading can be set off against interest income from bank, rental income or capital gains but only in the same year.
- Setting off of losses implies that your total tax liability decreases by the amount you are able to set off from your total income. This doesn’t mean that you don’t have to pay taxes on capital gains if you have made some profits in long-term equity since those are still charged at a fixed rate.
How are intraday losses treated?
If you have suffered losses in intraday trading, you can carry forward the losses for the next 4 financial years. It will help you reduce your taxable income in future years. However, to enjoy carry forward of losses, you need to file the income tax return before the due date. 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 crore in a financial year
- – Normal business income turnover ( profit/loss) exceeds Rs. 1 crore in a financial year
Note that when it comes to intraday trading, turnover means the sum total of absolute profits minus losses made on daily transactions.
Who performs tax audits for intraday trading?
If an intraday trader is subject to tax audit for intraday trading, the trader needs to hire the services of a professional chartered accountant to carry a range of services, including:
- – Preparation of financial statements such as P/L and balance sheet
- – Auditing of book of accounts
- – Preparing and filing of tax audit report on Form 3CD
- – Preparing, filing and submission of ITR
Conclusion
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FAQs
Is audit required for intraday trading?
A tax audit for intraday trading is compulsory in case your normal business turnover exceeds Rs. 1 crore in any financial year. This limit changes to Rs. 2 crores under the presumptive income method if you declare at least 6% of the turnover as profits.
Do we have to pay tax on intraday trading?
Yes, you need to pay taxes on your income earned from intraday trading. These gains are treated as your speculative business income and are taxed as per the tax slab that you fall in based on your total declared income.
How to show intraday day trading in ITR?
Your income from intraday trading is reflected under the business head of the ITR. This is because gains from intraday trading are considered speculative in nature. Your intraday trade gains will be taxed according to your income tax slab.
Is audit compulsory for intraday trading?
An audit for intraday trading is compulsory only when your trading turnover exceeds Rs. 2 crores in a financial year or if your declared income is less than 6% of your turnover under a presumptive income regime.
Is a tax audit required for loss in intraday trading?
Yes, a tax audit is required even if you have incurred a loss on intraday trading if it amounts to less than 6% of the trading turnover and your total income exceeds the basic exemption limit in a financial year.
