How are Gains from Intraday Trading Taxed for ITR
Intraday trading is a popular form of trading, where traders buy and sell securities on the same day, with the aim of making quick profits. However, like all other forms of income in India, intraday trading profits are also subject to taxation. In this article, we will take a detailed look at how gains from intraday trading are taxed.
What is Intraday Trading?
Intraday trading is a type of trading where traders buy and sell securities (stocks, commodities, currencies, etc.) on the same day, with the aim of making quick profits. Intraday trading is different from delivery-based trading, where the securities are held for a longer period (usually more than one day).
In intraday trading, traders can make profits by taking advantage of the price movements of securities within a single trading day. They can buy low and sell high, or sell high and buy low, depending on the price movements of the securities. However, intraday trading also involves a high level of risk, as the price movements of securities can be unpredictable.
Taxation of Intraday Trading in India
In India, intraday trading is treated as a speculative business, and the income from intraday trading is taxed as speculative income. Speculative income is income that is earned from speculative business activities, such as intraday trading, where the income is not derived from any capital asset.
The tax on intraday trading in India is designed differently from the tax on delivery-based trading. In delivery-based trading, the income is classified as either long-term capital gains (LTCG) or short-term capital gains (STCG), depending on the holding period of the securities. However, in intraday trading, the income is classified as speculative income. While there are several other facets to it, this is how gains from intraday trading are taxed.
Tax Rate on Intraday Trading
The tax rate on intraday trading in India is the same as the tax rate on non-speculative business income. The tax rate on non-speculative business income is based on the income tax slab that the individual falls under. The tax rates for the financial year 2022-23 are as follows:
For individuals with income up to Rs. 2.5 lakh - No tax
For individuals with income between Rs. 2.5 lakh and Rs. 5 lakh - 5%
For individuals with income between Rs. 5 lakh and Rs. 7.5 lakh - 10%
For individuals with income between Rs. 7.5 lakh and Rs. 10 lakh - 15%
For individuals with income between Rs. 10 lakh and Rs. 12.5 lakh - 20%
For individuals with income between Rs. 12.5 lakh and Rs. 15 lakh - 25%
For individuals with income above Rs. 15 lakh - 30%
However, if the individual has any speculative losses from intraday trading, they can only set off these losses against any other speculative income. They cannot set off these losses against any other income, such as capital gains or non-speculative business income.
Set-Off and Carry Forward of Losses
The losses arising from intraday trading, being speculative, are allowed to be set off only against profits from any other speculative business. For example, if an individual has a speculative loss from intraday trading and a speculative profit from futures trading, they can set off the loss against the profit from futures trading.
However, the loss cannot be set off against any other income, such as capital gains or non-speculative business income. Moreover, the losses from intraday trading can only be carried forward for four years and can only be set off against future speculative business income.
It is essential to keep track of the expenses incurred while carrying out intraday trading. Expenses such as internet charges, telephone charges, broker's commissions, and Demat account charges can be deducted from the income generated from intraday trading to reduce the tax liability. However, securities transaction tax (STT) cannot be claimed as a deduction in short-term or long-term capital gains. But, if it is shown as business income, STT can be charged as an expense in the profit and loss (P&L) account.
Apart from the taxes, intraday trading also involves charges such as brokerage fees, which depend on the type of broker. A full-service broker, who provides research and market insights, usually charges between 0.03% to 0.05% of the transaction value as brokerage, along with a minimum fee of around Rs. 30 per transaction on intraday trades. On the other hand, a discount broker charges a flat fee per transaction.
Intraday traders must also keep in mind the concept of average price. Since traders do not buy all stocks at once, the average price of the stock must be calculated by considering the different quantities bought at different prices. The weighted average price of the stock is used for tax purposes, and the FIFO method (First in First Out) is used to calculate the profit or loss.
Despite the challenges associated with intraday trading, it is still an attractive option for traders who want to make quick profits. However, traders must keep in mind that intraday trading is not suitable for everyone, and one must have a thorough understanding of the market and its dynamics. Novice traders must start with small amounts and gradually increase the investment as they gain experience and knowledge.
Taxation of Commodity Trading
If the commodity is held for less than 36 months, the gains will be classified as short-term capital gains, and if it is held for more than 36 months, it will be classified as long-term capital gains. The tax rates for short-term and long-term capital gains are the same as those for equity trading.
Commodity trading also involves the payment of commodity transaction tax (CTT). CTT is a tax that is levied on the purchase and sale of commodities traded on recognised commodity exchanges. The tax rate for CTT is 0.01% of the total value of the transaction. In the commodity market, this is how gains from intraday trading are taxed.
Taxation of Derivatives Trading
Derivatives trading involves the trading of financial instruments that derive their value from an underlying asset. Some examples of derivatives include futures, options, and swaps. Derivatives trading can be done in both the equity and commodity markets.
The tax implications of derivatives trading can be complex and depend on the type of derivative being traded. For example, futures and options trading are treated differently under the tax laws.
Futures trading is considered as a non-speculative business income, and the gains from it are taxed according to the individual's tax slab rate. However, if the futures trading is done for hedging purposes, the gains may be treated as capital gains.
Options trading, on the other hand, is treated as a speculative business income, and the gains from it are taxed as such. However, if the options trading is done for hedging purposes, the gains may be treated as non-speculative business income.
In conclusion, intraday trading can be a lucrative option for those looking to invest in the stock market. However, it is important to understand the tax implications of such trading to avoid any complications or penalties from the tax authorities.
The gains from intraday trading are treated as business income and are taxed at the individual's applicable tax slab rate. The individual is also required to pay a surcharge and cess, as applicable.
It is crucial to maintain proper records of all transactions and keep track of the profits and losses incurred from intraday trading. This will help in accurate computation of tax liability and avoid any discrepancies with the tax authorities.
Additionally, it is important to note that losses incurred from intraday trading can only be set off against profits from intraday trading. These losses cannot be set off against any other income, such as capital gains or non-speculative business income.
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.