Intraday trading involves buying and selling stocks within the same trading day. This investment strategy allows you to capitalise on short-term price movements. It demands quick decisions and a good understanding of market trends to seize profitable opportunities.

 

Understanding the rules of tax on intraday trading helps you avoid unexpected liabilities. This enables you to maximise your profits.

Understanding Intraday Trading: Why is it becoming popular

Over the past decade, there has been a significant rise in the number of individuals participating in intraday trading. Here are some of the reasons why:

  • Technological Advancement

The widespread use of smartphones has made accessing trading platforms more convenient. This increased accessibility has led to more retail investors actively managing their portfolios.

  • Educational Resources

The online courses and communities have empowered individuals to learn and develop trading skills.

  • Attraction of Quick Profits

The potential for high returns in a short period entices many new participants. Moreover, the adrenaline rush associated with intraday trading adds to its appeal.

Taxation on Intraday Trading Income

The Income Tax Department classifies income from intraday trading as speculative business income. This classification exists because you trade without intending to take delivery of the contracts.

 

Here are the major differences difference between speculative and non-speculative incomes:

  • Speculative Income

This arises from intraday transactions where stocks are traded without taking delivery. Profits from these trades are categorised as speculative business income.

  • Non-speculative Income

This includes profits you earn from futures and options (F&O), commodities, delivery-based equity trades, as well as currency trades. Non-speculative income is also classified as business income.

 

For taxation, both incomes are added to the overall income. It includes other sources like salary, bank interest, and rental income. Taxes are then determined based on the applicable income tax slab rather than at a fixed rate, as with capital gains from investing.

Income Tax Rates for Intraday Trading

The Income Tax Act specifies different slab rates for various income levels. It may be adjusted with the applicable surcharge rate and an additional 4% cess.

Tax Slabs (Old Regime)

Tax Rates (Old Regime)

Tax Slabs (New Regime)

Tax Rates (New Regime)

Up to ₹2,50,000

Nil

Up to ₹3,00,000

Nil

From ₹2,50,001 to ₹5,00,000

5%

From ₹3,00,001 to ₹6,00,000

5%

From ₹5,00,001 to ₹10,00,000

20%

From ₹6,00,001 to ₹9,00,000

10%

₹10,00,001 and above

30%

From ₹90,00,001 to ₹12,00,000

15%

From ₹12,00,001 to ₹15,00,000

20%

₹15,00,001 and above

30%

Here is how you can set off your intraday trading losses against profits:

Loss Type

Current Year Loss

Carried-Forward Loss

Carry Forward Duration

Non-Speculative business loss (F&O)

Any income except salary

Any business gain (both spec and non-spec)

8 years

Speculative Business Loss (Intraday)

Speculative business gain

Speculative business gain

4 years

Calculation of Trading Turnover for Intraday Trading

To determine your trading turnover, you will have to get the sum of the absolute values of all your trades. It includes profits and losses, as the turnover reflects the total money involved in the trades. Consider the following examples:

 

Example 1:

If you made a profit of ₹5,000 in one trade and a loss of ₹3,000 in another trade, the turnover would be:

  • Profit = ₹5,000

  • Loss = ₹3,000

  • Total Turnover = ₹5,000 + ₹3,000 = ₹8,000

 

Example 2:

If you made four trades, resulting in:

  • Trade 1: Profit of ₹2,000

  • Trade 2: Loss of ₹4,000

  • Trade 3: Profit of ₹3,000

  • Trade 4: Loss of ₹1,000

  • Total Turnover = ₹2,000 + ₹4,000 + ₹3,000 + ₹1,000 = ₹10,000

 

By following this method, you can accurately calculate your trading turnover. This value is crucial for tax reporting and assessing your trading strategy's effectiveness.

Deductions and Set-Off Rules for Intraday Trading

Understanding the tax implications of trading can significantly enhance your financial returns. Here are some key points to consider for optimising your tax liabilities:

  • Business Expenses: If considered a business, you can claim deductions for expenses like brokerage fees and Securities Transaction Tax (STT).

  • Capital Gains: If treated as investment income, exemptions for long-term capital gains apply, such as up to ₹1 Lakh under Section 80C of the Income Tax Act.

  • Carry Forward Losses: You can carry forward trading losses for up to eight years to offset future profits.

  • Tax-Saving Investments: Investing in instruments like PPF, NPS, and ELSS allows you to claim deductions under Section 80C of the Income Tax Act.

  • Set-off Rules: Incurred losses from your F&O trades can be set off against any other income (excluding salary) in the current year.

The Process to File Income Tax for Intraday Trading

Filing your tax return as a trader can be straightforward if you follow the right steps. Here’s a step-by-step guide to help you through the process:

  1. Visit the e-filing portal and select the assessment year and ITR form (ITR-3 for trading income)

  2. Choose the reason for filing, such as taxable income exceeding the basic exemption limit

  3. Select applicable schedules, adding necessary ones like schedule 112A for LTCG

  4. Fill in personal details and filing status under Part A–General Information

  5. Report income from F&O by completing the Balance Sheet, Trading Account, and P&L schedules

  6. Report intraday income as speculative business income in the P&L schedule

  7. Add short-term and long-term capital gains in the CG schedule, specifying the type

  8. Check for loss adjustments and carry-forwards under schedules CYLA and CFL

  9. Review all details, pay any tax dues, and proceed to verification before e-filing

Difference Between Intraday Trading and Delivery-Based Trading

Intraday trading and regular (delivery-based) trading are distinct strategies with unique characteristics. The table below outlines their key differences to help you choose the right approach for your trading goals:

Aspect

Intraday Trading

Regular Trading (Delivery-Based)

Definition

Buying and selling within the same day

Buying and holding for the long term

Objective

Capitalising on short-term price movements

Long-term growth or dividends

Tools

Technical analysis, charts, indicators

Fundamental analysis, company research, financial statements

Position Duration

Needs to be squared off before the market closes

Can hold shares beyond the same day

Ownership Change

No change in ownership

Ownership changes from seller to buyer

Settlement

Same-day settlement

Settlement within T+1 day after transaction

Risk and Reward

Higher risk due to market volatility

Less volatile, requires patience

Here are some other differences you need to consider:

  • Tax Rates: Intraday profits are taxed as speculative income, while delivery-based profits are capital gains, subject to different tax rates

  • Losses: Intraday losses offset other business income, whereas regular trading losses only offset capital gains

  • Deductions: You can claim broader deductions related to intraday trading activities, while you can get only limited deductibility for investment-related expenses

Frequently Asked Questions

How much intraday income is tax-free?

The basic exemption limit for tax-free income in India is up to ₹2.5 Lakhs as per the old regime and ₹3 Lakhs as per the new regime. Any profits from intraday trading above this limit are subject to income tax at applicable slab rates.

How much tax do I pay as a day trader?

Depending on your income, you may have to pay a tax rate of 0%-30%.

Is trading tax-free?

Intraday trading is tax-free up to an income of ₹2.5 Lakhs as per the old regime and ₹3 Lakhs as per the new regime.

How much tax is taken from day trading?

As per the intraday trading taxation rules, a tax rate of up to 30% is charged on day trading, depending on your income.

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