Income Tax On Intraday Trading

In India, traders must clearly understand the income tax implications of intraday trading. Intraday trading involves buying and selling financial assets within the same day to capitalise on short-term price fluctuations. Given the rapid pace of this trading environment, traders must stay informed about their tax obligations. Failure to comply with tax regulations can result in fines or audits by tax authorities. This blog will explore the income tax on intraday trading of shares, how to calculate it, and important dates to remember for filing income tax.

Identifying Capital Assets and Asset Trading

Depending on whether you consider yourself an investor or trader, a share may be referred to as a ‘Capital Asset,’ ‘Trading Asset,’ or ‘Stock-in-Trade.’

The term ‘investor’ refers to a person who makes long-term investments in stocks or other securities to hold them for an extended period of time. They seek returns through capital growth (revenue from selling shares) and dividends.

The income they generate by selling these shares can be called capital gains. Long-term and short-term capital gains are further divided into categories based on how long the shares are held.

Those who routinely buy and sell stocks or other securities to profit from short-term price movement are known as traders. Their trading revenue is regarded as business revenue, and they must file their taxes under the heading “Profits and gains from business or profession.”

Investors are subject to capital gains tax, whereas traders are subject to business income tax. So the first stage in submitting your income tax on intraday trading of shares is identifying yourself as a trader or investor. 

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Intraday Trading and Income Tax

Depending on the volume and type of trades, intraday trading profits are recognised as company income or capital gains. If the trading activity is regarded as a business, the earnings are taxed at the business-specific slab rates, and the trader is entitled to deduct business-related costs. However, suppose the trading activity is regarded as capital gains. In that case, the profits are taxed at a reduced rate, and the trader is eligible for long-term capital gains exemptions and deductions.

To properly determine their tax liabilities, intraday traders must keep thorough records of all of their trades, including the date, time, and price of each transaction. Failure to comply with income tax regulations may result in penalties and legal issues. Learn more about trading profit and loss accounts.

How are Capital Assets and Trading Assets Taxed?

Capital and trading assets are taxed differently based on how they are taken and used. 

Capital assets are mostly taken for long-term investment purposes and are subject to capital gains tax when sold for profit. Assets held for longer than one year are subject to long-term capital gains tax, typically lower than the tax rate for short-term capital gains. 

On the other hand, trading assets are taxed as business income, and the profits from trading are regarded as part of the trader's business income, subjecting them to income tax rates. This means that traders need to file their taxes under the "Profits and gains from business or profession. 

How to Calculate Income Tax on Intraday Trading Profit in India

The Income Tax Act of 1961 governs income taxes on profits from intraday trading. Here is how to figure taxes on gains from intraday trading:

• Calculate Net Profit or Loss
  You can calculate your net profit or loss by deducting the total revenue earned from the overall trading costs, such as brokerage fees and other transaction charges. This will give you your intraday trading profit or loss
• Calculate Taxable Income
  After figuring out whether you made a profit or a loss, calculate the taxable income. It is derived by combining other revenue you receive throughout the fiscal year with the net intraday profit.
• Include the Tax Rate
  Depending on your income category, the tax rate added to your taxable income will differ. 
• Pay Advance Tax
  You must pay advance tax in instalments throughout the fiscal year if your total tax due for intraday trading for the year exceeds Rs. 10,000.

Intraday Traders' Allowances and Deductions

Indian intraday traders can access deductions and allowances to help them pay less income tax. The following are various allowances and deductions for intraday trading taxes:

• Reductions for Capital Gains
  If intraday trading activity is considered investment income, the trader may be eligible for allowances and deductions for long-term capital gains.
• Reductions in Business Income
  The trader can deduct expenses such as brokerage fees if the intraday trading activity is considered a business.
• Investments that Reduce Taxes
  Intraday traders may invest in tax-saving vehicles like the Public Provident Fund (PPF), Equity-Linked Saving Scheme (ELSS), and National Pension System (NPS) to be eligible for Section 80C deductions. 

Dates to Remember for Intraday Traders to File Their Taxes

To avoid fines and legal repercussions, intraday traders in India must adhere to the tax reporting dates. Here are some crucial deadlines for filing taxes for Intraday Traders:

• The deadline for submitting income tax returns (ITRs) for people who are not obligated to participate in a tax audit is July 31.
• The deadline for filing ITRs for people who must undergo a tax audit, including intraday traders with a turnover above Rs. 1 crore, is 30th September.
• For those who must submit a transfer price report, the deadline to file ITRs is 31st December.

Conclusion
Before starting with intraday trading, it is important to understand both trading strategies and income tax regulations. Intraday trading can be profitable, and following intraday trading taxation is crucial. Intraday traders are advised to categorise their trading activity by deductions and exemptions to optimise their tax strategies. If you want to know more about income tax on intraday trading profit, you can use an Online Trading App that can enhance your trading experience and decision-making.