Income tax rules on intraday trading – Income head, ITR form and due date
Understanding the tax implications of intraday trading is essential for traders to navigate their tax obligations effectively. In terms of income classification, profits from intraday trading fall under the umbrella of 'Profits and Gains from Business and Profession' according to Indian tax regulations. This categorisation is due to the speculative nature of intraday trading, where traders engage in buying and selling securities within the same trading day without intending to hold onto them for the long term.
For tax filing purposes, intraday traders must utilise the appropriate ITR form. Since intraday trading generates business income, individuals should file using ITR-3 and prepare the necessary financial statements. It is crucial to ascertain the correct ITR form to ensure compliance with tax regulations and avoid potential penalties.
Regarding the due date for filing taxes on intraday trading income, there are specific deadlines to adhere to:
- 31st July: Applicable if tax audit is not required.
- 31st October: Applicable if tax audit is required.
Whether tax audit is applicable for intraday trading?
Determining whether a tax audit is necessary for intraday trading hinges on various factors, chiefly the turnover generated from trading activities.
For traders with a turnover of up to Rs. 2 crore, opting for presumptive taxation, a tax audit is not mandatory if profits amount to at least 6% of the trading turnover. However, if losses are incurred or profits fall below this threshold, a tax audit is necessary if the total income exceeds Rs. 2.5 lakh (basic exemption limit).
For traders with turnovers exceeding Rs. 2 crore up to Rs. 10 crore, who choose not to avail of the Presumptive Taxation Scheme under Section 44AD, a tax audit is mandatory if profits are at least 6% of the trading turnover.
In cases where the turnover exceeds Rs. 10 crore, irrespective of profit or loss, a tax audit becomes obligatory. This is particularly true if over 95% of transactions are conducted digitally, which is common in today's predominantly digital trading landscape.
What is turnover for intraday trading?
Understanding turnover is crucial for intraday traders to accurately assess their tax liabilities. In the context of intraday trading, turnover refers to the absolute amounts of profits and losses generated from trading activities.
Turnover can be calculated using either the scrip-wise method or the trade-wise method. The former involves tallying profits and losses for each individual security traded, while the latter considers the overall profit or loss across all trades conducted.
Example of trading turnover
Consider Ektha, who engages in intraday trading by purchasing 100 shares of ITC at Rs. 75 and selling them later in the day at Rs. 80. The following day, she buys 200 shares of Paytm at Rs. 500, selling them at Rs. 460 by day's end.
- Profit from 1st trade: (80 - 75) * 100 = 500
- Loss from 2nd trade: (460 - 500) * 200 = -8,000
- Absolute turnover: 500 + (-8,000) = - 7,500
In this example, Ektha's absolute turnover amounts to -7,500, representing the total value of profits and losses incurred from her intraday trading activities.
How are capital assets and trading assets taxed?
A share can be seen as a 'Capital Asset' or a 'Trading Asset or Stock-in-Trade,' depending on whether you're an investor or a trader.
Investors are those who hold onto stocks or other securities for a long time, hoping they'll increase in value or provide dividends. When they sell shares, the money they make is called 'capital gains.' These gains are divided into 'long-term' and 'short-term'. Different assets have different holding period for calculation of short term/long term period.
Traders, on the other hand, are people who buy and sell stocks or securities often to make quick profits from price changes. The money they make from trading is considered a type of business income. They must file taxes as profits and gains from business or profession. Their profits are taxed based on their income level, which could be as high as 30%.
In simple terms, investors pay taxes on their profits from selling shares, while traders pay taxes on the money they make from trading.
Tax calculation for intraday trading
Determining the tax implications of intraday trading gains involves understanding how income tax is computed based on prevailing slab rates. The Income Tax Act outlines different slab rates for various income levels, subject to adjustments with the applicable surcharge rate plus a 4% cess.
Old tax regime
Here are the tax rates under the old tax regime:
Income range
|
Tax rate
|
Up to Rs. 2,50,000
|
Nil
|
Rs. 2,50,001 - Rs. 5,00,000
|
5%
|
Rs. 5,00,001 - Rs. 10,00,000
|
20%
|
Above Rs. 10,00,000
|
30%
|
New tax regime (pre-Budget 2024)
The table below shows the applicable tax slabs and rates applicable before the announcements made in the Union Budget 2024:
Income range
|
Tax rate
|
Upto Rs. 3,00,000
|
Nil
|
From Rs. 3,00,001 to Rs. 6,00,000
|
5%
|
From 6,00,001 to Rs. 9,00,000
|
10%
|
From Rs. 9,00,001 to Rs. 12,00,000
|
15%
|
From Rs. 12,00,001 to Rs. 15,00,000
|
20%
|
Rs. 15,00,001 and above
|
30%
|
New tax regime (post-Budget 2024)
Here are the tax rates under the new tax regime:
Income range
|
Tax rate
|
Up to Rs. 3,00,000
|
Nil
|
Rs. 3,00,001 - Rs. 7,00,000
|
5%
|
Rs. 7,00,001 - Rs. 10,00,000
|
10%
|
Rs. 10,00,001 - Rs. 12,00,000
|
15%
|
Rs. 12,00,001 - Rs. 15,00,000
|
20%
|
Rs. 15,00,001 and above
|
30%
|
For a comparative view, please refer to the table below:
Tax slabs (Old regime)
|
Tax rates (Old regime)
|
Tax slabs (New regime)
|
Tax rates (New regime)
|
Up to Rs. 2,50,000
|
Nil
|
Up to Rs. 3,00,000
|
Nil
|
From Rs. 2,50,001 to Rs. 5,00,000
|
5%
|
From Rs. 3,00,001 to Rs. 7,00,000
|
5%
|
From Rs. 5,00,001 to Rs. 10,00,000
|
20%
|
From Rs. 7,00,001 to 10,00,000
|
10%
|
Rs. 10,00,001 and above
|
30%
|
From Rs. 10,00,001 to Rs. 12,00,000
|
15%
|
|
|
From Rs. 12,00,001 to Rs. 15,00,000
|
20%
|
|
|
Rs. 15,00,001 and above
|
30%
|
Example
Let's consider the fictional case of Rahul, a 35-year-old intraday trader:
Annual salary = Rs. 8 lakh
Income from intraday equity trading for the year = Rs. 2.5 lakh
Profits from trading in futures and options = Rs. 1.5 lakh
Capital gains = Rs. 80,000
Interest from bank deposits (annual) = Rs. 90,000
Assuming the capital gains are short-term and taxed at 20% (up from the earlier 10% in the Union Budget 2024), the capital gains tax liability amounts to Rs. 16,000
Total taxable income is computed by aggregating income from all sources: salary, speculative and non-speculative business income, and interest from bank deposits, resulting in a total income of Rs. 13,20,000.
Opting for the old tax regime, the tax computation is as follows
Income slab
|
Tax rates
|
0 – Rs. 2.5 lakh
|
0
|
Rs. 2.5 lakh – Rs. 5 lakh
|
5% = Rs. 12,500
|
Rs. 5 lakh – Rs. 8 lakh
|
20% = Rs. 60,000
|
Total
|
Rs. 72,500
|
Thus, the total tax liability for Rahul, inclusive of income tax on intraday trading profit, amounts to:
Total tax liability = Income tax + Capital gains tax = Rs. 72,500 + Rs. 12,000 = Rs. 84,500.
Additionally, cess is to be added to the above tax liability.
Conclusion
Intraday trading can be a profitable activity, but it is important to be aware of the tax implications. Intraday trading profits are taxed as business income, which means that they are taxed at the individual's marginal income tax rate. There is no separate tax rate for intraday trading profits. Traders must keep track of their trades and calculate their tax liabilities accurately to avoid any legal issues.
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