Income Tax on Intraday Trading: Everything You Need to Know

Many traders are drawn to the stock market, aiming for quick financial gains through intraday trading. While intraday trading offers lucrative opportunities, it also comes with tax obligations that traders must fulfil. Unlike long-term or short-term investments, profits from intraday trading are classified as business income under the Indian tax system, leading to different tax treatments.

This article discusses income tax on intraday trading, covering profit computation methods, key tax implications, and essential factors that every trader should consider to stay compliant and optimise their tax strategy.

Understanding Intraday Trading

People involved in intraday trading must understand tax regulations to prevent underlying problems and expenses. This involves minimising tax exposure and planning finances efficiently. Intraday trading implies investors purchase and sell their stock shares during a single trading day. Consequently, those involved in short-term trading primarily focus on intraday trading.

The tax benefit from capital gains is not available for intraday trading, as investors sell their stocks before holding them overnight. Instead, intraday trading falls under the category of business income, which has different tax rules than other forms of individual taxation.

Tax Treatment of Intraday Trading Gains

Profit from intraday trading falls within the category of speculative business income which the Income Tax Act 1961 specifies. This classification has significant implications for income tax on intraday trading, as it establishes taxation rules for business income rather than investment income. Here is how gains from intraday trading are taxed:

• Classification as Business Income

Profits from intraday trading fall under the speculative business income classification which takes precedence over capital gains classification. This classification arises from the settlement system of intraday trades, where ownership of shares does not change due to the single-day nature of the transactions.

• Taxation as Per Income Tax Slabs

Individuals who earn profits from intraday trading must report them under business income because profits get taxed through applicable slab rates for individual taxpayers. Moreover, traders need to comply with tax rates that shift based on their total income level under the progressive income tax rates running from 5% to 30%. 

• Impact on Tax Filings

Intraday traders are required to file tax returns under the “Business and Profession Income” category. Additionally, the stock market earnings reported as capital gains differ from the income traders must declare under the “Income from Business and Profession” category.

Calculating Tax on Intraday Trading Gains

The income tax on intraday trading involves accurately assessing turnover and applying the correct rates, along with methods for reimbursing losses.

• Tax Rates and Slabs for Intraday Trading

The profits from intraday trading are included in total taxable income, which the tax authority then uses to apply income tax rates according to personal income brackets. The tax slabs for individual taxpayers in India are as follows:

• Set-Off and Carry Forward of Intraday Trading Losses

Profits from intraday trading are considered speculative earnings. Traders can use these profits only to offset other similar speculative income. Additionally, any speculative losses can be used to offset speculative gains for up to four consecutive tax years. This is how profits from intraday trading are taxed.

• Advance Tax and TDS on Intraday Trading

You must pay advance taxes if your tax burden reaches above ₹10,000 during a particular financial year. The payment of advance tax occurs in four different instalments according to specified deadlines which are given below:

• 15% by June 15
• 45% by September 15
• 75% by December 15
• 100% by March 15

The Indian tax authority does not impose TDS (Tax Deducted at Source) charges for profits earned through intraday trading. 

Key Tax Considerations for Intraday Traders

Intraday traders must understand tax laws thoroughly to remain compliant and avoid financial penalties. Additionally, effective document organisation, accurate income reporting, and a clear understanding of tax audit obligations are essential for smooth tax compliance.

Intraday traders must declare their trading income correctly by reporting it under the “Income from Business and Profession” section of ITR-3. Furthermore, tax audit requirements apply if someone conducts intraday trading business beyond ₹10 crore in particular situations.

Also, professional tax help is necessary since intraday trading and income tax requirements may be difficult to understand.

Common Tax Mistakes Made by Intraday Traders

Understanding these common mistakes in intraday trading profits allows traders to manage their tax obligations more effectively. Following are some of the most common mistakes made by intraday traders when filing their income tax: 

• Intraday traders often make reporting mistakes that can lead to tax penalties and compliance violations. 
• Traders often make the mistake of not reporting their day trading gains under the regulations for business income. 
• The lack of on-time advance tax payment leads to extra interest charges according to Sections 234B and 234C.
• Trading losses of a speculative nature cannot offset regular non-speculative income, which is a common mistake among traders. 
• The failure to keep complete trading records will result in tax problems during reporting and eventual tax authority review.

Final Thoughts

Individuals involved in intraday trading must be aware of the tax implications of their earnings. This understanding is crucial for both compliance with tax regulations and optimised tax responsibilities. 

Income tax on intraday trading needs to be documented as business revenue through “Income from Business and Profession” on ITR-3. Business traders can avoid tax penalties by accurately maintaining their records, paying their advance taxes on time, and understanding the criteria that may trigger an audit. 

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