Tax on Intraday Trading - Tax Filing Tips for Day Traders

Intraday trading is one of the fastest-growing segments in stock markets and has consistently attracted more retail participation. However, one of the biggest hurdles average traders face is the taxation treatment of intraday gains or losses. Are you among them, too? This blog provides insight into intraday taxation and will help you navigate its complexities. 

Understanding Taxation on Intraday Trading

Intraday trading is buying and selling stocks or other securities on the same day. Income generated from intraday transactions involving trading stocks without taking delivery is categorised as speculative income. 

Tax on intraday trading profits is added to the total income and calculated according to the individual slab rates. Intraday traders are required to maintain detailed records of all transactions and file them as part of their income tax return under the heading ‘Profits and Gains from Business or Profession’. 

As intraday gains are considered speculative gains, intraday losses are considered speculative business losses and can be set off only against speculative business gains. If these losses are not fully utilised, they can be carried forward for four subsequent assessment years to be set off against future speculative gains.  

Tax on Stock Market Profits/Losses - Navigating the Complexity

Tax on stock market profits, especially intraday trading, can be quite complex given its many nuances and aspects, such as audit requirements, advance tax to be paid, and more. Here is a comprehensive insight into the complexities of tax on stock market profits/losses in intraday trading. 

Tax Filing 

Intraday trading income must be reported under the head "Income from Business and Profession" in the income tax return. To support their claims, traders must maintain comprehensive records of all transactions, including contract notes, broker statements, and bank statements. The tax filing deadline is typically July 31st for individuals not requiring an audit and September 30th for those needing an audit.

Audit Requirements 

As per the provisions of Income Tax 1961, intraday traders need to comply with a mandatory audit if their gross turnover exceeds Rs. 1 crore (or Rs. 2 crore if opting for the presumptive taxation scheme under Section 44AD). The turnover for intraday profits is calculated by adding the absolute value of profit and loss from all speculative transactions. The audit report must be filed along with the income tax return, providing a detailed account of all transactions and financial statements.

Advance Tax payment

Intraday traders must pay advance tax if their total tax liability exceeds Rs. 10,000 in a financial year. Advance tax payments are made in four instalments, namely, 15% by June 15th, 45% by September 15th, 75% by December 15th, and 100% by March 15th. Failure to pay advance tax can result in interest penalties under Sections 234B and 234C of the Income Tax Act. 

Set-Off and Carry Forward of Losses 

Speculative losses from intraday trading can only be set off against speculative gains. However, if these losses cannot be fully utilised in the same financial year, they can be carried forward for up to 4 years, provided traders have duly filed their tax returns declaring such losses. 

However, losses from non-speculative activities like F&O trades and delivery-based equity trades can be offset against any other income except salary income within the same financial year. This includes income from capital gains, interest, rent, and so forth, and can be carried forward for up to 8 years if not fully utilised in the current year only when the IT return is filed on time. 

Key Considerations for Tax Filing as a Day Trader

Some key points to be remembered while considering share trading taxation are highlighted below.

• Correct classification of intraday trading income

• Maintaining detailed records for accurate tax filing and audit purposes

• Availing tax deductions for expenses related to intraday trading (brokerage charges and transaction costs)

• Selecting the correct ITR to file all gains and losses from intraday trading duly. Since intraday income is classified as Speculative Business Income, ITR 3 should be filed.

• Understanding the audit thresholds, deadlines, advance tax payments, penalties on non-compliance and related rules like set-off and carry forward of losses

• Reviewing the application of STT and its impact on net trading profits. 

Utilizing an Intraday Income Tax Calculator

An intraday income tax calculator is an online tool available on many portals that can simplify the process of calculating taxes on intraday trading profits. It considers various factors such as turnover, profit/loss, applicable tax rates, deductions, and other tax-related parameters to provide an estimate of the tax payable. 

Some of the benefits of using the intraday income tax calculator include,

• Enhanced Accuracy:  An intraday income tax calculator ensures accurate calculation of tax liability based on intraday trading profits, thereby minimising errors in tax estimation.

• Efficiency in determining tax liability: It streamlines the tax calculation process, making it easier for traders to assess their tax obligations and make informed financial decisions.

• Time-Saving: An intraday income tax calculator reduces the time and effort required for manual tax calculations, allowing traders to focus more on trading activities.

• Compliance: It helps ensure thorough compliance with tax regulations by providing an organised and structured approach to tax calculation.

• Tax planning: Intraday income tax calculators provide transparency in tax calculations and facilitate efficient tax planning. This allows traders to understand the impact of intraday trading activities on their overall tax liabilities.

Intraday Trading Tax Calculation: A Step-by-Step Guide

A step-by-step guide on intraday trading tax calculation is explained hereunder.

• Identifying income types and income classification 

Income for intraday traders is taxed under ‘Profits and Gains from Business or Profession’ as speculative business income or non-speculative business income in contrast to investors who hold stocks for the long term, and the income from selling shares is taxed as capital gains. Intraday income is taxed at the traders' applicable slab rates. 

• Calculation of net profit/loss

The calculation of net profit or loss from intraday trading involves first calculating the total turnover. It is calculated in the absolute value of profits and losses from all intraday transactions throughout the financial year. The business income from this turnover is derived after deducting all eligible expenses, such as brokerage charges, transaction fees, and other expenses directly incurred for trading purposes.

• Calculating net taxable income

After determining the net profit or loss from intraday trading, the next step is to calculate the taxable income after determining all the applicable deductions per the Income Tax Act 1961 provisions. 

• Applying the appropriate tax rate 

Finally, the net tax liability is calculated by applying the applicable slab rates to the net taxable income. Intraday traders can use the applicable slab rates under the old regime or the new regime, as the case may be. 

Tax Planning Tips for Day Traders: Maximizing Deductions

Day traders can maximise deductions and optimise tax planning by implementing key strategies. Some of the key tips include,

• Keeping detailed records of all intraday trading transactions

• Claiming deductible expenses like depreciation, brokerage charges, transaction fees, etc. 

• Utilising deductions under Chapter VIA 

• Maintaining separate accounts for business and personal expenses

• Optimising capital gains tax by holding long-term investments to qualify for lower tax rates.

Conclusion

Intraday trading is fast-paced trading that attracts millions of traders due to its profit potential. However, given the complexities of intraday taxation in our tax laws, many traders exit the market prematurely or simply prefer to stay away. Understanding intraday taxation can not only help in the smooth filing of intraday taxes but can also help in minimising tax liability through strategic trading strategies.