Income Tax on Intraday Trading: A Comprehensive Guide

Intraday trading is a popular way to earn profits by buying and selling stocks on the same day. However, when it comes to taxes, this type of trading has different rules compared to other forms of investment. 

In this guide, we explain Income Tax on Intraday Trading, helping you understand the income tax basics, applicable rules, tax slabs, loss treatment, audit requirements, and more.

Understanding Intraday Trading and Capital Assets

Intraday trading refers to the practice of buying and selling stocks within the same trading day. The goal is to profit from price movements during the day. Since no shares are carried forward to the next day, no delivery is involved. This activity is usually considered speculative in nature because it is based on short-term price fluctuations rather than a long-term investment.

Understanding this form of trading is essential to grasp the broader income tax concepts, as intraday gains are treated differently from capital gains. Traders must be aware that profits are taxed as speculative business income, which requires separate reporting and compliance.

Defining Capital Assets and Trading Assets

In income tax terms, capital assets refer to property held as an investment, like shares or real estate. On the other hand, trading assets are those used to generate business income, such as stocks bought for intraday trading.

Since intraday trading does not involve delivery of shares, it falls under the “speculative business income” category under the Income Tax Act.

Difference between Capital Assets and Trading Assets (Speculative)

Holding Period

• Capital Assets: Held for the long-term or short-term based on investment duration.
• Trading Assets: Held for intraday purposes only (same-day transactions).

Nature

• Capital Assets: Treated as investments.
• Trading Assets: Considered part of business activity.

Tax Head

• Capital Assets: Taxed under “Capital Gains”.
• Trading Assets: Taxed under “Business Income”.

Delivery

• Capital Assets: Delivery of shares is involved.
• Trading Assets: No delivery, as transactions are squared off the same day.

Taxation

• Capital Assets: Subject to Capital Gains Tax.
• Trading Assets: Taxed as per slab rates under Income Tax on Intraday Trading rules.

Tax Implications of Intraday Trading

Income Tax Slabs and Applicable Rates

Intraday trading income is treated as speculative business income. Therefore, it is not taxed under capital gains, but as business income under “Income from Business or Profession”.

The tax on this income is calculated based on your applicable income tax slab under either the old or new regime.

Here’s a basic idea of the income tax for intraday traders under slab rates:

• Old Regime (with deductions): 5%, 20%, or 30% based on total income
  
• New Regime (without major deductions): Lower slab rates but fewer exemptions
  

Tax Calculation for Intraday Profits

To calculate income tax on intraday trading, you need to compute your total speculative profits, add them to your other income (like salary, interest, rental income), and apply the relevant tax slab.

Example Calculation under Old Tax Regime

Let’s assume:

• Salary income: ₹6,00,000
  
• Intraday profit: ₹1,00,000
  
• Total income: ₹7,00,000
  

Under the old regime, after claiming deductions like Section 80C (₹1.5 lakh), the net taxable income becomes ₹5,50,000. You will be taxed as per the old slab rates.

Example Calculation under New Tax Regime

If the same taxpayer opts for the new regime, deductions are not allowed, so total taxable income will be ₹7,00,000. However, the slab rates are lower:

• 5% on ₹3,00,000
  
• 10% on ₹2,00,000
  
• 15% on ₹2,00,000
  

Hence, tax is calculated accordingly.

Tax Treatment of Intraday Losses

Just as profits from intraday trading are taxed, losses must also be accounted for. However, since this is treated as speculative income, the loss treatment is a bit different.

Setting off losses against other income sources

It is important to note that speculative losses can only be set off against speculative gains. So, you cannot use an intraday loss to reduce your tax burden on salary or capital gains.

For example, if you have:

• Intraday loss: ₹50,000
  
• Salary income: ₹6,00,000
  

You cannot deduct the ₹50,000 loss from your salary income for tax purposes.

Carry forward of losses

If you cannot set off the entire speculative loss in the current year, you are allowed to carry forward such losses for 4 years. They can be adjusted only against future speculative profits.

To do this, you must file your ITR before the due date under the correct income head.

Turnover Calculation for Intraday Trading

Calculating turnover is important for determining whether a tax audit is needed. For intraday trading, turnover is calculated differently than regular businesses.

Detailed steps and examples

For speculative transactions (like intraday trades), turnover is the absolute sum of profit and loss.

Example:

• Profit on trade 1: ₹5,000
  
• Loss on trade 2: ₹3,000
  
• Profit on trade 3: ₹2,000
  

Turnover = ₹5,000 + ₹3,000 + ₹2,000 = ₹10,000

Note: Do not consider only net profit. You must add all profits and losses in absolute terms.

This turnover figure will help you decide if you fall under audit rules.

Record Keeping and Documentation

• Essential Documents for Tax Filing

When filing ITR for intraday trading income tax, you must keep proper documentation ready, including:

• Contract notes from the broker
  
• Trade-wise profit/loss statement
  
• Broker ledger
  
• Bank account statement
  
• Income proof like salary slips (if applicable)
  

Maintaining Accurate Trading Records

Maintaining clear and accurate records is essential for reporting Income Tax on Intraday Trading. Many brokers offer tools to download trade summaries. Keep a digital or physical record of every trade, along with notes on the transaction type (intraday/delivery) for clarity during tax filing.

Tax Audit Requirements for Intraday Traders

As per Section 44AB of the Income Tax Act, if your turnover exceeds ₹10 crore (for transactions done digitally) or ₹1 crore (for those involving cash), you need a tax audit.

For speculative income, if the net profit is less than 6% of turnover and total income exceeds the basic exemption limit (₹2.5 lakh), a tax audit is mandatory.

Understanding Presumptive Taxation (Section 44AD)

Section 44AD offers simplified taxation for small businesses. However, speculative businesses are specifically excluded from presumptive taxation under Section 44AD.

So, intraday traders cannot opt for presumptive taxation. Instead, they must maintain proper books of accounts and file ITR-3.

Conclusion

Intraday trading income is classified as speculative and taxed under the head “Business or Profession.” It is subject to income tax based on applicable slab rates under both the old and new tax regimes. 

Losses from intraday trading can only be set off against other speculative gains and may be carried forward for up to four years. 

Turnover for audit purposes is calculated using the absolute sum of profits and losses. 

In conclusion, accurate record keeping and correct ITR filing, typically through ITR-3, are essential for compliance. Engaging professional investment advisor services is advisable to navigate tax complexities, avoid audit issues, and gain a better understanding of what is income tax, enabling traders to make informed financial decisions.

FAQs

How much tax is levied on intraday trading profits in India?

Intraday profits are treated as speculative business income and taxed according to your applicable income tax slab, ranging from 5% to 30% based on total income.

What if I incur losses in intraday trading?

Losses from intraday trading can only be set off against other speculative gains and carried forward for four years, provided the ITR is filed on time.

Is a tax audit mandatory for intraday trading income?

A tax audit becomes mandatory if the turnover from intraday trading exceeds ₹10 crore in the case of digital transactions or ₹1 crore for cash transactions. Additionally, if the declared profit is less than 6% of the turnover and the total income exceeds ₹2.5 lakh, a tax audit is required under the Income Tax Act.

Can I claim intraday losses against other income sources?</h3>

No. As per income tax rules, intraday losses can only be set off against speculative profits, not against salary or capital gains.

How do I file my ITR with intraday trading income?

You must file ITR-3 as this form is applicable to individuals having income from business or profession. Declare intraday income under the speculative business section.

What documents are required for tax filing related to intraday trading?

To file your income tax return for intraday trading, you will need several key documents, including a trade-wise report, contract notes, broker ledger, and bank statements. Additionally, keep your PAN card and salary proofs (if applicable) ready to ensure accurate reporting and smooth verification during the tax filing process.

Can I e-verify my ITR if I have intraday trading income?

Yes. Filing and e-verification of ITR with intraday income is allowed through Aadhaar OTP, bank account verification, or net banking.

Can I do intraday trading while employed?

Yes, salaried individuals can do intraday trading. However, the income from intraday trading must be declared under business income, and proper taxes must be paid.

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