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How Gains from Intraday Trading are Taxed?

10 January 2022

If you are planning to start intraday trading, then you need to ensure that you understand the income tax on intraday trading profit in 2021 to make informed decisions. While most investments have simple taxation norms, tax on intraday trades involves various aspects. Today, we will offer a detailed guide to help you understand tax on intraday trades and also to know that intraday trading taxable under which head.

Understanding Capital Assets and Trading Assets

A share can be held either as a capital asset or a trading asset (stock-in-trade). Understanding the difference between the two is important since taxation laws differ for both of them.

1. Capital Assets

For the purpose of taxation, let’s look at how the tax laws define capital assets:

“As per Section 2 – Subsection 14 of the Income Tax Act, 1961, a capital asset includes property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions.”

2. Trading Assets or Stocks-in-Trade

These are stocks held by a day trader with the purpose of selling them. 

How to define them?

Gains earned from intraday trading are treated as business income. It is added to your salary and taxed according to the income tax slab you fall in. So if you’re wondering that intraday trading taxable under which head, the answer is business income.

Gains earned from long term investing are treated differently. Your shares are then considered as capital assets.

Based on the classification, your income will be divided into the following types:

  1. Capital Assets
    1. Long Term Capital Gain (LTCG) and Loss
    2. Short Term Capital Gain (STCG) and Loss
  2. Trading Assets
    1. Speculative Business Income
    2. Non-Speculative Business Income

Since we are talking about taxation for intraday trades, let’s look at income from trading assets in detail, i.e. speculative and non-speculative business income. 

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 comes under this category. There is no separate speculative income tax rate in India as it is taxed according to your income tax slab.

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.

Tax Rules on Intraday Trades

Both speculative and non-speculative business incomes are added to your overall income including salary, other business income, interest on deposits, income from rentals, etc. and taxed according to the applicable. 

Read more on Groww: Income Tax Slabs.

Let’s look at an example to understand the tax liability better.

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, the tax 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=1,000,000 salary+200,000 intraday equity trading income+200,000 F&O trading income+100,000 interest on deposits=Rs.1,500,000 

Hence, the trader has to pay income tax on Rs.15 lakh. Based on the tax slabs mentioned above, the tax computation will be as follows:

Individuals up to the age of 60 years
Income slabs Tax Rates
0 – Rs.2.5 lakh 0
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 150,000 + 100,000 + 12,500 = Rs.262,500

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.

There is no speculative income tax rate in India as the gains are added to your total income.

What if you book a loss in a financial year?

These were the rules for income tax on intraday trading profit 2021 but what if you book a loss?

Losses arising from speculative transactions are called speculative losses. These losses can be carried forward for a period of up to four consecutive financial years. Also, they can be set-off only against speculative business income made during that period.

Hence there is no income tax on intraday trading loss. Most traders set it off against their intraday gains.

On the other hand, losses arising from non-speculative transactions (non-speculative losses) can be carried forward for a period of up to eight consecutive financial years. You can set-off non-speculative losses against any other business income except salary in the same year.

Here is an example to understand this.

Example 2

A 30-year-old individual has the following financials:

  • Income from catering business = Rs.20 lakh
  • Rental income = Rs.1.2 lakh
  • Non-speculative business loss = Rs.2.2 lakh

Non-speculative business losses can be used to set-off gains in the same year. Therefore, the tax liability of the trader will be:

Taxable income = 2,000,000 + 120,000 – 220,000 = Rs.19 lakh

The tax computation will be as follows:

Individuals up to the age of 60 years
Income slabs Tax Rates
0 – Rs.2.5 lakh 0
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.2.7 lakh
Total 270,000 + 100,000 + 12,500 = Rs.382,500

Let’s look at another example that summarizes all the points explained until now.

Example 3

A 30-year-old individual has the following financials:

  • Salary = Rs.10 lakh
  • Income from a part-time business = Rs.5 lakh
  • Interest on bank deposits = Rs.1 lakh
  • Income from intraday equity trading = Rs.5 lakh
  • Non-speculative business loss = Rs.2 lakh

In this case, the trader has a non-speculative business loss. You can deduct a non-speculative business loss from speculative business income. The tax computation will be as follows.

Calculate taxable speculative business income

Taxable speculative business income = Speculative business income – Non-Speculative business loss 

Taxable speculative business income = 500,000 – 200,000 = Rs.3 lakh

Calculate taxable income

Taxable income = Salary + other business income + speculative business income (less non-speculative business loss) + interest on bank deposits

Taxable income = 1,000,000 (salary) + 500,000 (other business income) + 100,000 (interest on bank deposits)] + 300,000 (speculative business income minus the non-speculative business loss) = Rs.19 lakh

Therefore, the tax computation will be as follows:

Individuals up to the age of 60 years
Income slabs Tax Rates
0 – Rs.2.5 lakh 0
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.2.7 lakh
Total 270,000 + 100,000 + 12,500 = Rs.382,500

It is important to note that if the trader had a speculative business loss, then the set-off would be permitted only against speculative business income.

Read more on Groww: Tax Loss Harvesting 

Hope this was helpful!

Happy Investing!

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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