How Gains from Intraday Trading are Taxed?

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  • 12 Jan 2023

Intraday trading entails purchasing and selling financial instruments within the same trading day. This form of trading aims to capitalize on short-term fluctuations in prices. Although intraday trading can be profitable, you must clearly understand its tax obligations. So, how’s the income from intraday trading taxed? Let’s find out.

When engaging in intraday trading, the income generated from such activities is categorized as speculative business income. This classification arises due to the nature of intraday trading, where you participate in transactions without the intention of taking delivery or ownership of the underlying securities or contracts.

Unlike traditional forms of trading, where investors hold securities for a longer duration, intraday traders capitalize on short-term price movements within a single trading day. They aim to exploit these price fluctuations for quick profits without actually acquiring ownership of the assets. As intraday trading is a business income, you must use ITR 3 and prepare financial statements accordingly.

Intraday trading taxation is calculated as per the tax slab you fall under. If you opt for the old tax regime and under 60 years, the slab and the subsequent tax you need to pay is as follows:

  • ₹ 2,50,000 - Nil
  • ₹ 2,50,001 to ₹5,00,000 - 5%
  • ₹5,00,001 to ₹10,00,000 - 20%
  • ₹10,00,000 - 30%

*An additional 4% health and educational cess is applicable on the tax amount On the other hand, if you choose the new tax regime, the applicable rates will be as follows:

Up to ? 3,00,000

Nil

?3,00,001 to ?6,00,000

5%

?6,00,001 to ?9,00,000

10%

?9,00,001 to ?12,00,000

15%

?12,00,001 to ?15,00,000

20%

Above ?15,00,000

30%

Income Applicable Tax Rates
Up to ? 3,00,000Nil
?3,00,001 to ?6,00,0005%
?6,00,001 to ?9,00,00010%
?9,00,001 to ?12,00,00015%
?12,00,001 to ?15,00,00020%
Above ?15,00,00030%

Let’s see the various scenarios under which Intraday trading tax audit is applicable:

If your intraday trading turnover is up to ₹2 crore

  • If you’ve made profits of a minimum 6% of trading turnover, then an audit is not applicable.
  • If you’ve incurred a loss or your profit is less than 6% of trading turnover, then a tax audit is applicable if your total income is more than ₹ 2.5 lakhs.
  • If your intraday trading turnover is more than ₹2 crore and upto ₹10 crore

Tax audit is applicable if you’ve made profits of at least 6% of trading turnover and have not chosen the presumptive taxation scheme under section 44AD. On the other hand, if you’ve chosen the presumptive taxation scheme, a tax audit is not applicable.

  • If you’ve incurred a loss or profit of less than 6% of your intraday trading turnover, a tax audit is applicable.
  • If your intraday trading turnover is more than ₹10 Crore

In this case, a tax audit is applicable irrespective of whether you’ve made a profit or loss.

When You Need to Pay Advance Intraday Trading Tax? You need to pay advance tax if the estimated tax payable for the year is more than ₹10,000.

Find out About Net Profit or Loss

To accurately assess your financial performance in intraday trading, it is crucial to determine the net profit or loss resulting from your trading activities. Calculating this figure involves deducting the total expenses incurred during trading, such as brokerage fees and other transaction costs, from the total income generated.

Compute Taxable Income

Once you have determined the net profit or loss from your intraday trading activities, the next step is to calculate the taxable income. This calculation combines the net intraday profit or loss with any other income you earn throughout the financial year.

To compute the taxable income, you must consider the net profit or loss from your intraday trading as part of your overall income. This includes income you can have from other sources such as salary, rental properties, interest, dividends, and any other earnings you may have.

Apply Appropriate Tax Rate

Once you have calculated your taxable income by combining your net intraday profit or loss with other sources of income, the next step is to apply the appropriate tax rate. The tax rate applicable to taxable income depends on the income bracket or tax slab in which you fall.

Maintain Detailed Record

Keeping detailed records is crucial for intraday traders. By maintaining comprehensive and meticulous documentation of their trades, including crucial details such as the date, time, price, and volume of each trade, traders can accurately calculate their profits and losses for tax purposes.

Make Good Use of Deductions and Exemptions

You can take advantage of various deductions and exemptions available under the tax laws to manage your income tax liabilities on intraday trading activities effectively. By understanding and utilizing these provisions, you can potentially reduce their tax burdens and optimize your overall financial position.

Avoid Frequent Short-term Trade

Steer clear of frequent short-term trades due to the higher tax implications and pay advance taxes on time to avoid interest and penalties. The lower rates can substantially impact the net returns generated from trading activities, allowing you to retain a larger portion of your profits.

In Conclusion

The taxation of gains from intraday trading can significantly impact your overall financial outcomes. Understanding the tax implications associated with short-term trades allows you to make informed decisions that align with your long-term financial goals. By avoiding frequent short-term trades and instead adopting a long-term investment approach, you can benefit from lower tax rates on capital gains, simplify your tax reporting obligations, and focus on optimizing your trading strategies.

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