A frequently asked question by newbie intraday traders is about taxation of any gains they may have had in intraday trading. Intraday trading involves squaring off positions on the same day — intraday. If you have taken up intraday trading recently and have only just opened an intraday trading account, it is important to understand intraday trading tax and its implications.
Before that, it also helps to understand that intraday trading and long-term investing are not the same. When you are an investor, you hold a security for a minimum of one day. You can continue to hold stocks over the long-term, extending into months and years. The aim here is to make use of a share’s volatility over a longer period and make future gains.
On the other hand, when you have an intraday trading account and you are a day trader, you don’t hold a stock over the long-term and you are essentially making a gain or loss from share price fluctuations. This is therefore categorised under business income. It is therefore taxed as salary according to the income tax slab rates.
Long-term investments and capital gains tax
When a person is investing, the transaction leads to long-term or short-term capital gains, depending on the period for which the security is held. So, if an investor holds a stock for over a year, it is long-term and anything under is short-term. Long-term capital gains of over Rs 1 lakh on the sale of equity shares or units of equity-oriented funds are taxed at 10 per cent, while short term capital gains tax when securities transaction tax is applicable is at 15 per cent.
An important aspect that distinguishes an investor from a trader is whether the asset in question is a capital asset or a trading asset. Capital assets generate an income over the course of a year or more. Trading assets are securities that an individual buys and sells with the objective of making gains.
If your income has been generated from intraday trading, you will have to pay an intraday trading tax as follows:
Your trading asset can generate either a speculative or a non-speculative business income. According to Sec 43 (5) of the Income Tax Act, 1961, a speculative transaction is one that is “periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips”. By this definition, intraday trading is categorised as speculative and gains from it is speculative business income.
Non-speculative business income is when gains are from delivery-based trades. These may be futures and options, commodities or currency. Hedging contracts with respect to stocks and shares are considered non-speculative, as a hedging contract is entered into to protect against loss in holdings as a result of fluctuation in prices.
Intraday trading tax
If you have generated any gains from your intraday trading, your income is considered business income and not a capital gain, as mentioned earlier. This means that the gains are added to your overall income that includes your salary, other income such as gains from deposits etc and taxed as per the slab rate. For FY 2021-2022.
Budget 2020 gave tax payers the option to choose between old income tax slabs and the new tax rates from FY 2020-21.
Old income tax slab
- For the slab of up to Rs 2.5 lakh, tax is nil
- For the slab between 2.5 and 5 lakh, tax is 5 per cent
- For the Rs 5 to 10 lakh bracket, taxation is at 20 per cent
- Above Rs 10 lakh, taxation is at 30 per cent.
For senior citizens, taxation is nil for an income slab of up to Rs 3 lakh. The rest of the slabs are unchanged.
New tax regime
As per the new tax regime, taxation is unchanged for the first two slabs.
- For the slab between Rs 5 lakh and 7.5 lakh, you will be taxed at 10 per cent, while the Rs 7.5 lakh to Rs 10 lakh slab will attract 15 per cent taxes.
- In the Rs 10-12.5 lakh slab taxation is at 20 per cent, while in the Rs 12.5 to 15 lakh bracket, taxation is 25 per cent.
- For the above Rs 15 lakh slab, tax is at 30 per cent.
This applies to senior citizens as well.
Illustration of your intraday trading tax liability
To give an example of the income you have generated under various heads, assume your salaried income is Rs 10 lakh, short-term capital gains from equity delivery (you held shares in your Demat account) is Rs 1 lakh, gains from intraday trading amounts to Rs 2 lakh, gains of Rs 2 lakh from your derivatives trading and bank deposit interest of Rs 1 lakh.
This means your total income will be Rs 15 lakh, without adding capital gains into the total income as it has a fixed rate of taxation. Your tax liability is Rs 2.625 lakh + STCG of Rs 15,000 (15 pc of Rs 1 lakh) which is equal to Rs 2.775 lakh.
What happens to speculative business loss?
Any loss from a speculative business can be offset only against profits from a speculative business. This is unlike any loss from other businesses where the loss can be set off against the profits of any business. Also, the loss from a speculative business can be carried forward to the next year can only be set off against the profit from said business in the year that comes after the carried forward year. As a tax payer, you can carry forward your loss from intraday trading of equity shares for over four assessment years after the year in which you incurred that loss.
Intraday trading income from equity trades is treated as speculative business income and is considered business income rather than capital gains. The business income from a speculative business is added to your overall income and taxed as per your tax slab rate. So, if you have an intraday trading account, it helps to keep track of your gains or losses to check your intraday trading tax liability.