Trading has become a common mode to generate short-term returns through buying and selling of stocks on the same trading day. While many traders focus on strategies, charts, and timing, taxation comes into the picture, which is another area they seem to neglect. Understanding the way taxation on intraday trading works in India is important because tax directly affects net gain.
What Is Considered as Intraday Trading?
Intraday trading refers to all purchases and sales of securities made on the same day before the market closure. No delivery of shares takes place, meaning that the trader does not hold the shares in a demat account overnight. Profits or losses are determined by the price movements during a trading session.
Since no delivery is involved, the tax treatment of intraday trades is very different compared to delivery-based investing. Delivery transactions qualifying as capital gains are treated as speculative business income for intraday trades.
Intraday Trading Taxation in India
1. Classification of Income
Speculative Business Income: Intraday trading is treated as speculative because trades are settled without actual delivery of securities.
2. Tax Rate Applicable
Profits from intraday trading are added to the trader’s total income and taxed as per the applicable income tax slab.
For example, if a trader falls under the 20% income tax slab, the intraday trading income will be taxed at 20% as well.
There is no separate concessional rate for intraday profits, unlike capital gains.
3. Deduction of Expenses
Since intraday trading, in India, is treated as business income, traders can deduct the expenses made in the course of trading. Examples are:Deductions may include,
Internet expenses
Research tools and subscriptions
Brokerage fees
Depreciation on computers and devices primarily used for trading
It is essential to keep proper records of such expenditures for tax compliance and reducing taxable income.
4. Reporting of Losses
Losses from intraday trading are known as speculative losses.
Such losses can only be set off against speculative income, not against any other heads, such as salary or rental income.
If not set off against speculative profits in the same financial year, such losses can be carried forward for not more than four assessment years.
Advance Tax and Intraday Trading
Traders can be liable for the advance tax if intraday trading yields a sizable income.
The advance tax provision applies only if the total tax liability for the year exceeds ₹10,000.
The advance tax is then paid in four installments (June, September, December, and March).
Forgetting to pay any of these will invoke interest under sections 234B and 234C.
As far as active traders are concerned, the other important compliance is making a computation of estimated profits and paying advance tax accordingly.
Books of Account and Audit
Since intraday trading is regarded as a business, a trader is expected to maintain Books of account if at any point in time, his turnover or income exceeds the prescribed limits.
Turnover Calculation: For intraday trading, turnover is calculated as gross total of profit and losses, that is absolute, rather than net.
Audit Requirement: A tax audit would need to be conducted under section 44AB of the Income Tax Act if turnover exceeds the limit or profits do not exceed the limit.
It is advisable to consult a tax professional if there is a high volume of trades as compliance becomes rather tough.
Important Role of Demat and Trading Account
While none of the intraday trades would involve delivery of shares into a Demat account, it would still be imperative for any such transactions to be carried out through a trading account linked to a Demat account. The Demat account itself acts as a gateway allowing seamless trading across exchanges.
User-friendly platform, low transaction charges, reliable speed of execution, etc., are factors affecting a trader’s choice of the best Demat account for intraday activities. The Demat account, though shares are not held overnight, is part of the overall infrastructure prescribed by the market regulation.
Compliance for Intraday Traders
Keep Accurate Records: Keep details of individual trades, brokerage bills, and proof for expenses.
Track Turnover Properly: Turnover should be considered absolutely in profit and loss, not just net.
File Income Tax Returns on Time: Declare speculative income as either business or profession.
Pay the Advance Tax if Required: Use care to avoid penalties attracting interest.
Consider Professional Help: Compliance can be achieved by tax consultants if turnover or profits are large.
Key Findings
Intraday trading is treated as speculative business income, not capital gains.
Profits get taxed at the applicable income tax slab rate.
Deduction of expenses incurred for the trading.
Losses incurred may be carried forward against future speculative profits.
Demat account and trading account setup is helpful although shares are not delivered.
Conclusion
Intraday trading taxation in India may appear complicated, but rules actually take a simple turn once understood. The first part is recognizing it as speculative business income.
