Have income from shares? Identifying yourself as a trader or investor is the first step in filing your income tax return. Investors benefit from lower tax rates on capital gains, while traders have the advantage of claiming business expenses that reduce their income.
It is essential to understand the tax implications of your investment strategy to optimise your returns and minimise your tax liability. Here's a rundown of how profits from shares are taxed.
Understanding Capital Assets and Trading Assets
A share can be called a ‘Capital Asset’ or ‘Trading Asset or Stock-in-Trade’ depending on whether you are identified as an investor or trader.
Investors are those who invest in stocks or other securities for thelong term with the intention of holding them for a considerable period. They aim toearn returns through capital appreciation(income on sale of shares) and dividends. The income generated from the sale of shares is taxed as ‘capital gains’. It is further classified as long-term and short-term capital gains based on how long the shares are held.
Traders are those who buy and sell stocks or other securitiesfrequently with the intention of making aprofit through short-term price movement. Their income from trading is treated as business income, and they are required to file their returns under the head "Profits and gains from business or profession." Their profits are taxed as per the applicable slab rates, which can go up to 30% depending on their income level.
In short, investors are taxed on their capital gains, while traders are taxed on their business income.
Based on this classification, your income will be divided into the following types:
Capital Assets
- Long Term Capital Gain (LTCG) or Loss
- Short Term Capital Gain (STCG) or Loss
Trading Assets
- Speculative Business Income:Intraday transactions are speculative in nature, and hence, the income from these trades is called speculative business income. Income tax on intraday trading profit in India falls under this category.
- Non-Speculative Business Income:All share transactions that are not speculative in nature fall under the category of non-speculative transactions. These include delivery-based equity trades, equity futures and options, commodity trades (both delivery and futures/options), and currency trades (both delivery and futures/options). Hence, the income from these transactions is called non-speculative business income.
A detailed explanation of this is availablehere.
What Is Intraday Trading?
Shares bought and sold (long trades) or sold and bought (short trades) within asingle trading day is known as intraday trading. The trader’s purpose in intraday trading is not to own the equity shares, but they want to take advantage of the short-term price movements and make profits the very same day. These profits are taxable. There is no separate speculative income tax rate in India as it is taxed according to your income tax slab
Income Tax Rules On Intraday Trading – Income Head, ITR Form And Due Date
Income Head:Profits and Gains from Business and Profession. Yourincome from intra-day trading will be considered asspeculative business income. It is considered speculative because you are trading without intending to take the delivery (ownership) of the contract.
ITR Form for intraday trading:Since intraday trading is a business income, you must fileITR-3 and prepare financial statements. Explorewhich ITR to file.
ITR due date for intraday trading income:
- 31st July - if Tax Audit is not applicable
- 31st October - if Tax Audit is applicable
Whether Tax Audit Is ApplicableFor Intraday Trading?
If your Intraday Trading Turnover is up to ₹2 Crore (if you opt for presumptive taxation)
- If you have made profits of at least 6% of Trading Turnover: Tax Audit shall not be applicable.
- If you have incurred a loss or your profit is lesser than 6% of Trading Turnover: Tax Audit is applicable if your total income is more than ₹2.5 lakhs (basic exemption limit).
If your Intraday Trading Turnover is more than ₹2 Cr and up to ₹10 Cr (if you opt to pay tax normally)
- If you have made profits of at least 6% of Trading Turnover:
- If you do not choose the Presumptive Taxation Scheme underSection 44AD, then tax audit is applicable.
If your Trading Turnover is more than ₹10 Cr
Irrespective of the profit or loss, a tax audit is applicable if you have a turnover of more than ₹10 crores (Only if over 95% of transactions are digital. Trading is 100% digital).
What Is Turnover For Intraday Trading?
Turnover for Intraday Trading = Absolute amounts of Profit/Losses
Absolute turnover means the sum total of positive and negative differences (the loss amount will not be deducted but added to the profit amount). Trading Turnover can be calculated either as a scrip-wise or a trade-wise method.
Example of trading turnover
Ektha buys 100 shares of ITC at ₹75. She sells them at the end of the day at ₹80. On the next day, she buys 200 shares of Paytm at ₹500, which she sells at ₹460 at the end of the day.
- Profit from 1st Trade = (80-75) * 100 = ₹ 500
- Loss from 2nd Trade = (460-500) * 200 = ₹ -8,000
- Absolute Turnover = 500+8,000 = ₹ 8,500
Tax Calculation For Intraday Trading
Income Tax on intraday trading income is calculated at the slab rates. The slab rates for different income levels are shown below. These rates will be increased by the applicable surcharge rate + 4% cess.
Old tax regime:
| Old tax regime slab rates | |
| Up to ₹ 2,50,000 | Nil |
| ₹ 2,50,001 - ₹ 5,00,000 | 5% |
| ₹ 5,00,001 - ₹ 10,00,000 | 20% |
| Above ₹ 10,00,000 | 30% |
New tax regime:
| Existing new tax regime slab rates (After Budget 2023) | |
| up to ₹3,00,000 | Nil |
| ₹3,00,001- ₹6,00,000 | 5% |
| ₹6,00,001- ₹9,00,000 | 10% |
| ₹9,00,001- ₹12,00,000 | 15% |
| ₹12,00,001- ₹15,00,000 | 20% |
| ₹15,00,001 and above | 30% |
Example 1
Here are the income details of a 30-year-old intraday trader:
- Annual Salary = Rs.10 lakh
- Income from intraday equity trading for the year = Rs.2 lakh [speculative business income]
- Profits from trading in futures and options = Rs.2 lakh [non-speculative business income]
- Capital Gains = Rs.1 lakh
- Interest from bank deposits (annual) = Rs.1 lakh
Given these incomes, the tax liability will be calculated as follows:
Capital gains will be taxed based on the period for which the capital assets were held (long-term or short-term). Let’s say that the capital gains were short-term. Hence, the income will be taxed at 15%. Hence, thetax liability will be Rs.15000.
Total taxable income will be computed by adding all other income heads like salary, speculative business income, non-speculative business income, and interest from bank deposits. Therefore, the total income will be:
Total Income=10,00,000(salary)+200,000(intraday equity trading income)+200,000(F&O trading income)+100,000(interest on deposits)=Rs.15.00,000
Hence, the trader has to pay an income tax on Rs.15 lakh. The tax computation will be as follows, assuming the assessee opts for the old tax regime:
Income Slab | Tax rates |
0 – Rs.2.5 lakh | |
Rs.2.5 lakh – Rs.5 lakh | 5% = Rs.12,500 |
Rs.5 lakh – Rs.10 lakh | 20% = Rs.1 lakh |
Rs.10 lakh and above | 30% = Rs.1.5 lakh |
Total | 2,62,500 |
Therefore, the total tax liability of the trader, including income tax on intraday trading profit:
Total tax liability = Income Tax + Capital Gains Tax = Rs.262500 + Rs.15000 = Rs.277500.
Cess is to be added to the above tax liability.
Advance Tax For Intraday Trading
If your estimated tax payable for the year is more than ₹10,000, you will have to pay advance tax on the specified dates.
Advance Tax for Intraday Traders who do not opt for Presumptive Taxation under Section 44AD
If Intraday Traders do not opt for Presumptive Taxation, they must pay Advance Tax in the following four instalments:
| Advance Tax | Due Date |
| 15% of Total Tax Liability | By 15th June |
| 45% of Total Tax Liability | By 15th September |
| 75% of Total Tax Liability | By 15th December |
| 100% of Total Tax Liability | By 15th March |
Advance Tax for Intraday Traders who opt for Presumptive Taxation
If Intraday Traders opt for Presumptive Taxation, they must pay Advance Tax in only one single instalment, i.e. by 15th March.
Carry Forward Loss For Intraday Traders
Loss suffered from Intraday Trading is known as Speculative Business Loss. It can be carried forward to the next 4 years only if you file the return within 31st July (if audit is not applicable) or 31st October (if audit is applicable). Speculative Business Loss can be offset only against Speculative Business income.
However, if the Intraday Trader opts for the new tax regime, they cannot carry forward these losses or adjust them against business incomes.
