How Gains from Intraday Trading Are Taxed

Gains from intraday trading are taxed under speculative business income and are calculated based on the profits earned within the same trading day. Taxes apply to all types of income in India, including intraday trading profits. Unlike long-term investments, where shares are held for extended periods, intraday trading involves buying and selling shares within the same day. The tax on intraday trading profit falls under the investor's income tax slab, with short-term capital gains tax applied if the securities transaction tax is relevant. Intraday trading is treated as business income, subject to the same income tax rates as salaries.

Understanding Capital Assets and Trading Assets

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

Capital assets are securities or physical assets owned by either individuals or businesses, and common examples include real estate, stocks, bonds, and equipment. Assets of this nature are generally purchased for long-term investment and income. For tax purposes, when these capital assets are sold, any gain or loss on them is viewed as a capital gain or loss, which may be liable for taxation. 

On the other hand, trading assets are assets held for selling them in the shortest possible time for returns. These include stocks, bonds, and commodities that often get purchased and sold within a very short time of their purchase. Profits or losses from trading assets are treated as business income and thus subject to taxation as such. The purpose is where the difference lies: capital assets for useful for long-term investments, while trading assets aim at short-term gains.

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

Intraday transactions are categorized as speculative in nature. The income from intraday trades is called speculative business income. In India, the income tax on intraday trading profit is categorized under speculative business income.

Non-Speculative

Business Income
Delivery-based equity trades, commodity trades (both delivery and futures/options), equity futures and options, and currency trades (both delivery and futures/options) income from these transactions falls under Non-Speculative Business Income

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

Intraday Trading Tax Regulations

Income Head: 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.

Income Tax on Intraday Trading Profit in India

If you have made any gains through intraday trading, your income is regarded as business income rather than a capital gain, as 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.

Old income tax rate bracket

New income tax rate bracket (After Budget 2023)

Example 1

Let us understand with an example. Suppose you are a 35-year-old intraday trader with income details as mentioned below:

• Annual Salary = ₹10 lakh
• Income from intraday equity trading for the year = ₹2 lakh [speculative business income]
• Profits from trading in futures and options = ₹2 lakh [non-speculative business income]
• Capital Gains on listed shares = ₹1 lakh
• Interest from bank deposits (annual) = ₹1 lakh

The tax liability will be calculated as follows:

Assuming capital gains were held for short term. The income will be taxed at 15%, making the tax liability ₹15,000.

Total income 10,00,000 (salary) + 200,000 (intraday equity trading income) + 200,000 (F&O trading income) + 100,000 (interest on deposits) = ₹15,00,000

Hence, you have to pay an income tax of ₹15 lakh. Assuming you opt for the old tax regime, the tax computation will be as follows:

Total tax liability = income tax + capital gains tax = ₹2,62,500 + 15,000 = ₹ 2,77,500.

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 ₹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 depends 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 categorized 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. 

Advance Tax For Intraday Trading
You are liable for advance tax if your estimated tax payable is more than ₹10,000 for the year.

Didn’t opt for presumptive taxation
As an intraday trader, if you don’t opt for presumptive taxation, you must pay advance tax in the following four instalments:

 Opt for presumptive taxation
As an intraday trader, if you opt for presumptive taxation, you must pay advance tax in only one single installment, i.e. by 15^th March.