Types of business incomeBusiness 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.
Things to rememberWhile 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
- – 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