How Gains from Intraday Trading Are Taxed

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Gains from intraday trading are subject to intraday gains tax, which is calculated based on the profits earned within the same trading day. Taxes are due on each and every income in India. Therefore, you must also pay income tax on your intraday trading gains. Investments for a long time and regular equities taxes are two separate things from intraday trading tax. A security is held by an investor for at least one day. You can keep equities for weeks, months, or even years if you really want. Gains must be made by using the share's fluctuation. Tax on intraday trading, which falls under speculative business income, is based on the investor's applicable income tax slab, and short-term capital gain tax intraday trading which applies if securities transaction tax is relevant to the trades.

An intraday trader, on the other hand, does not keep the stock for an extended period of time. The deal is finished the same day, it experiences a gain or loss due to share price changes.  Income tax on intraday trading profit in India is classified as business income and is thus subject to the same income tax rates as salaries. 

Understanding Capital Assets and Trading Assets

Shares can be categorised as either capital or trading assets (stock-in-trade), and comprehending this difference is crucial because taxation laws treat them differently.

Capital Assets

Intraday gains tax is a consideration for traders as it pertains to the tax levied on the profits generated from trading financial assets  Regarding taxation, capital assets are defined by Section 2, Subsection 14 of the Income Tax Act, 1961. They encompass various types of property held by an individual, irrespective of their connection to business or profession, but exclude stock-in-trade and certain personal assets, subject to exceptions.

Trading Assets or Stocks-in-Trade

These represent stocks held by day traders to sell them.

Defining Them:

Tax on intraday trading is significant as profits from intraday trading are regarded as business income and are taxed according to the applicable income tax slab. It's essential to be aware of the short-term capital gain tax implications, as this tax is applied to the gains made from quick buy and sell transactions within the same trading day."Consequently, intraday trading falls under the purview of business income taxation.

Conversely, gains from long-term investments classify shares as capital assets.

Based on this classification, your income falls into the following categories:

Capital Assets:

  • Long Term Capital Gain (LTCG) and Loss
  • Short Term Capital Gain (STCG) and Loss

Trading Assets:

  • Speculative Business Income
  • Non-Speculative Business Income

Given the focus on taxation for intraday trades, let's delve into income from trading assets, specifically speculative and non-speculative business income.

 

Speculative Business Income 

The tax on intraday trading involves specific considerations. Intraday trading profit is categorised as speculative business income, and it is taxed as per your applicable income tax slab making the income derived from such trades fall into speculative business income. In India, income tax on profits from intraday trading is categorised as speculative business income. It's important to note that there is no distinct tax rate for speculative income; instead, it is taxed according to the individual's applicable income tax slab.

Non-Speculative Business Income

Non-speculative transactions encompass all share transactions that lack speculative elements. This category encompasses delivery-based equity trades, equity futures, options, commodity trades (both delivery and futures/options), and currency trades (both delivery and futures/options). Consequently, the income derived from these transactions is classified as non-speculative business income.

Investment for the long-term and capital gains tax

It's important to calculate the short-term capital gain tax accurately when assessing the overall profitability of your intraday trading strategies. Investment transactions lead to long-term or short-term capital gains based on the holding period. Long-term (over a year) capital gains on equity shares or equity-oriented funds exceeding Rs 1 lakh are taxed at 10%, while short-term gains (with securities transaction tax) are taxed at 15%.

Short-term capital gain tax on intraday trading is typically imposed on the profits earned from buying and selling financial assets within the same trading day. Distinguishing between an investor and a trader hinges on whether assets are trading or capital assets. Capital assets generate revenue over a year while trading assets are bought and sold for profit.

Intraday trading is considered speculative under Section 43(5) of the Income Tax Act, with profits categorised as speculative business income. Delivery-based trades, including commodities, currencies, futures, stocks and options, fall under non-speculative business income, which includes hedging arrangements to protect against market fluctuations.

Income Tax on Intraday Trading Profit in India

If you have made any money through intraday trading, your income is regarded as business income rather than a capital gain, as was previously stated. This implies that the profits are added to your entire income, which also includes your wage and other sources of income like interest from investments and other sources, which will be taxed at the applicable slab rate.

Earlier income tax rate bracket
 

For 2.5 LakhNil
Between 2.5 and 5 Lakh5%
For Rs 5 to 10 Lakh 20%
Above 10 Lakh30%
For Senior CitizensNil

New income tax rate bracket {After Budget 2023}
 

For 3 LakhNil
Between 3 and 6 Lakh5%
For Rs 5 Lakh to 9 Lakh 10%
For Rs 9 Lakh to 12 Lakh15%
Rs 12 Lakh to Rs 15 Lakh20%
Above Rs 15 Lakh 30%

Does Intraday Trading Fall Under A Tax Audit?

1. If your intraday trading circulation reaches ₹2 Crore

  • If your earnings exceeded 6% of your trading turnover, a tax audit would not be necessary.
  • If you lost money or made less than 6% of your trading turnover in profit: If your total income exceeds the basic exemption level of 2.5 lakhs, you may be subject to a tax audit. 

2. If your intraday trading circulation exceeds  ₹2 crore and doesn't exceed  ₹10 crore

  • If you have earnings of at least 6% of your trading turnover, a tax audit is carried out if you neglect to choose the Presumptive Taxation Scheme under Section 44AD. 
  • Tax audit is not relevant if you choose the Presumptive Taxation Scheme under Section 44AD.
  • A tax audit is relevant if you had a loss or if your profit was less than 6% of your trading turnover. 

3. Trading Turnover Exceeds ₹10 Cr. 

A tax audit is relevant if you have a circulation of more than ₹10 crores, regardless of profit or loss (but only if more than 95% of transactions are digital). Trading is exclusively digital. 

How to Calculate Gains Tax? 

Intraday gains tax, a critical aspect of trading, can significantly impact your overall profits, as it is imposed on the gains. Income tax on intraday trading of shares is levied on the profits generated through intraday trading, and the taxation process varies depending on your overall income and the duration of holding these shares. Capital gains are categorised into Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG). 

The intraday trading formula to calculate gains tax is as follows:

Net Income = Total Income Generated - Total Expenses Incurred

Long-Term Capital Gains: If you buy 1000 shares at ₹100 each on November 19, 2022, and sell them for ₹300 on December 19, 2023, resulting in a profit of ₹200,000, you're exempt from tax on ₹100,000, while the remaining gains are subject to a 10% LTCG tax.

Short-Term Capital Gains: In the same scenario, if you sell the shares in August 2023 instead of December 2023, the profit is taxed at 15%, along with surcharges and cess as per the Income Tax Act.

Intraday Trading Tax Regulations

Income Head: Business and Professional Profits and Gains. Your intraday trading revenue will be viewed as speculative business revenue. Because you are trading without planning to take possession (ownership) of the contract, it is seen as speculative. 

You need to create financial statements and submit ITR-3 since intraday trading generates company revenue. 

ITR due date for profits from intraday trading: 

  • If a tax audit is not required, July 31
  • If a tax audit is required, the deadline is October 31.

 

Conclusion

Intraday trading and income tax implications, traders need to consider their profits made within the same trading day.  Many traders find success in intraday trading, which is purchasing and selling financial products during the same trading day. To be successful in such trading operations, you must understand the intraday tax laws and the consequences involved. Gains from intraday trading are normally taxable, considered short-term capital gains, and subject to the appropriate income tax rate for the person.

To guarantee compliance with tax requirements, traders must keep accurate records of their transactions and properly report their earnings and losses.

Frequently Asked Questions on How Gains from Intraday Trading Are Taxed

In the context of stock markets, speculative business income is defined as revenue from a speculative activity, specifically business income from intraday trading. Non-speculative business revenue includes trading in equity delivery and even F&O.

Gains from intraday trading are frequent and regarded as short-term capital gains for taxation. 

An asset you hold as a long-term investment for long-term price appreciation is referred to as a capital asset or investment asset. Stocks kept for trading, sometimes referred to as stock-in-trade, are trading assets that are typically used as trading margins.

The traders must submit an ITR if their intraday trading revenue exceeds the basic exemption threshold.

Day traders must pay taxes on the profits they make according to the prevailing slab rates.

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