Intraday Trading Taxes: Understanding Taxation on Gains

In this article, we will discuss

• Decoding Intraday Trading
• Classifying Gains and Losses from Intraday Trading
• Calculating Day Trading Earnings
• Taxation of Intraday Trade Earnings
• Day Trading Gains and Tax Audit Requirements
• Set-off and Carry Forward of Losses
• Regulations for Income Tax Return (ITR) Filing
• Conclusion

The financial securities market in India is no longer the domain of long-term investors alone. Where equity stocks were once primarily considered to be long-term investments, they are now also increasingly preferred by intraday traders who want to capitalise on short-term price fluctuations in volatile stocks.

If you too practise intraday trading, you need to know how the gains and losses from these trades are taxed in India. This will help you better understand how to plan your trades to optimise your intraday trading taxes. In this article, we take a closer look at how intraday trading is taxed in India and how you can adhere to the relevant tax regulations involved.

Decoding Intraday Trading

Also known as day trading, this strategy involves initiating and closing a trading position within the same trading day in the stock market. You can open a long position or a short position. However, irrespective of the type of trade involved, the position should be closed by the end of the day. This means you do not actually take delivery of the shares involved in the trade.

So, the shares in this case are not considered to be capital assets. Since there is no delivery of shares involved, intraday trading taxation is slightly different from the taxation of gains or losses from regular trades — which span more than one trading day. For traders eager to leverage such intraday price movements in the equity market, it is crucial to understand how the profits from these trades are taxed in the country.

Classifying Gains and Losses from Intraday Trading

As already established, gains and losses from intraday trading are not considered capital gains and losses. Instead, they are classified as business income, which can be of two types, as outlined below:

• Speculative Business Income

Speculative business income is essentially income that is not considered realised until it is earned. Intraday-based trading in the equity segment is categorised as speculative business income because any trader who engages in this practice does not aim to invest in the company. Rather, their primary objective is to speculate on the prices and make the most of any favourable intraday market movements.

• Non-Speculative Business Income

Day trading is also possible in the derivatives segment of the market — in the Margin Intraday Square Off (MIS) category. Gains and losses from such trades are not considered to be speculative. This is because the general assumption is that options and futures are used primarily to hedge other trading positions rather than to trade speculatively. Furthermore, some F&O contracts even have a delivery clause.

Calculating Day Trading Earnings

In a regular business setup, gains and losses are set off against one another to arrive at the net profit. However, in the case of day trading returns (or losses), the method of computing the turnover for the purpose of intraday trading taxation is different.

The absolute results of the trade are taken into account — irrespective of whether they are profits or losses. For instance, consider the following day trades you make in a given period:

• Trade 1: A gain of Rs. 5,000

• Trade 2: A loss of Rs. 1,000

• Trade 3: A loss of Rs. 2,000

• Trade 4: A gain of Rs. 7,000

• Trade 5: A gain of Rs. 800

You may assume that the net gains from the above trades — i.e. Rs. 9,800 — will be considered the turnover. However, for the purpose of determining the intraday trading taxes, the absolute values of each trade’s outcomes will be considered, leading to a total day trading turnover of Rs. 15,800.

Taxation of Intraday Trade Earnings

Day trading gains from the equity segment are classified as speculative business income and those from the F&O segment are considered non-speculative business income. As with any other income under this head, you can choose to report it as normal business income or presumptive business income under section 44AD of the Income Tax Act, 1961. Here are the key details of both these types of intraday trading taxation:

• Normal Business Income

If you declare your day trading turnover as regular business income, you can deduct related business expenses like brokerage fees, internet charges, electricity costs and fees paid to advisors or consultants. The remaining turnover is then taxed as ‘profits and gains of business or profession.’ This means it is added to your total income and taxed as per the slab rate that applies to you. Additionally, you will also have to maintain books of accounts as per the current tax laws if you choose this taxation method.

• Presumptive Business Income

If your total day trading turnover during the financial year is Rs. 2 crore or lower, you can opt for the presumptive taxation scheme u/s 44AD instead. In this case, you need not declare the actual turnover as the business income. Instead, you can declare 6% of the total turnover as your income under this head. Choosing this tax scheme means that you cannot deduct any additional business-related expenses from your turnover. The income declared is, as usual, added to your total taxable income and the relevant slab rate is applied thereon.

Day Trading Gains and Tax Audit Requirements

If you report business income during any financial year, you may be wondering if a tax audit is necessary. The Income Tax Act has certain specific guidelines to determine which taxpayers need to be subject to a tax audit u/s 44AB. Check out the details below.

• If You Opt for Presumptive Business Income Taxation

If you choose presumptive taxation u/s 44AD and you declare income that is less than 6% of your total turnover, a tax audit will be applicable. Keep in mind that this is only true if the total income exceeds the basic exemption limit of Rs. 2.5 lakhs.

• If You Opt for Normal Business Income Taxation

In this case, a tax audit will be necessary in the following cases:

• If your trading turnover exceeds Rs. 10 crore
• If you incur business losses but the total income excluding these losses is over the basic exemption threshold (for example, if you are a salaried person with day trading losses)

Whichever tax scheme you opt for, if tax audit u/s 44AB is applicable to you, you need to ensure that you comply with the following regulations:

• Maintenance of books of accounts as per the Income Tax Act
• Auditing of said books of accounts
• Filing the appropriate Income Tax Return (ITR) within the relevant due date

Set-off and Carry Forward of Losses

Any day trading losses you incur during the financial year can be set off against eligible business income/profits during the same year. In case any losses remain, they can be carried forward and set off against specified profits as per the prevailing tax laws. The rules for set-off and carry forward of day trading losses are as follows:

• Speculative business losses (i.e. day trading losses in the equity segment) can be carried forward for 4 assessment years. You can, however, only set them off against speculative business gains.
• Non-speculative business losses (i.e. day trading losses in the F&O segment) can be carried forward for 8 assessment years. You can set them off against both speculative and non-speculative income (other than salary).

In addition to the above guidelines, you must also note that if you opt for presumptive taxation, you cannot carry forward your losses. Also, set-off and carry-forward of losses are only allowed if you file your ITR as required.

Regulations for Income Tax Return (ITR) Filing

The choice of ITR depends on whether you choose to report presumptive business income or normal business income. If you opt for the former, you need to choose ITR-4. However, if you do not opt for the presumptive taxation scheme, you need to file ITR-3. The due date for filing the tax return applicable is July 31 of the relevant assessment year, provided you are not subject to a tax audit. If you are, the due date is October 31.

Conclusion

This sums up how day trading in the equity segment and the F&O segment are taxed in India. If you have carried out any day trades in this segment during the financial year, ensure that you report the gains from such trades accurately, under the right head of income. Intraday losses, however, can be set off against eligible profits during the same year. Any pending losses can be carried forward as per the provisions of the Income Tax Act.

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