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If you are planning to start intraday trading, then you need to ensure that you understand the tax treatment of the trades 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.

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 the tax laws vary for each of them.

1. Capital Assets

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

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“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?

In the past, there has been a lot of uncertainty regarding treating shares purchased via intraday trades as capital assets or trading assets. The Central Board of Direct Taxes (CBDT) had issued several circulars and instructions offering guidelines for the same. However, there was ambiguity regarding proving the intention of the stock purchase (for investment or trading) since the facts of each investor were different. Hence, the CBDT released a circular bringing clarity in classifying the same. According to the circular:

Irrespective of the period of holding the shares, the assessee can opt to treat share purchases as capital assets or trading assets. Hence, income from these investments will be treated as either capital gains or business income. Also, for listed shares held for more than 12 months, if the assessee decides to treat the income from it as Capital Gains, then the Assessing Officer will permit it. However, the assessee will not be allowed to change this stand and take a different approach in subsequent years.

Hence, before you start intraday trading, it is important to decide if you want to classify yourself as an investor and has capital assets or a trader who has trading assets. As a broad guideline, in most cases, the classification is done as follows:

  • If the investor purchases and sells shares with the intention of earning a profit, then the nature of the transaction is a trade and the asset is a trading asset.
  • If the investor purchases shares to earn regular income like dividends, etc., then the nature of the transaction is an investment and the asset is a capital asset.

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

Section 43 – sub-section 5 of the Income Tax Act, 1961 defines a speculative transaction as ‘a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.’ While there are some exceptions to this rule, intraday transactions are speculative in nature and hence, the income from these trades is called speculative business income.

Non-Speculative Business Income

In simple terms, 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

Summing up the concepts explained above, income from intraday equity trades is considered to be speculative business income. Additionally, if you are executing intraday trades in commodities and currencies, then the income from such trades is called non-speculative business income. Therefore, income from intraday trades is considered to be ‘business income’ and not ‘capital gain’.

Taxation of business income is different from capital gains. There is no fixed tax rate for this income. Bothe 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 tax slab rate. Here is a quick look at the tax slabs rates for FY 2020-21:

Individuals up to the age of 60 years
Income slabsTax Rates
0 – Rs.2.5 lakhNIL
Rs.2.5 lakh – Rs.5 lakh5% of the amount by which income exceeds Rs.2.5 lakh
Rs.5 lakh – Rs.10 lakhRs.12,500 + 20% of the amount by which income exceeds Rs.5 lakh
Rs.10 lakh and aboveRs.112,500 + 30% of the amount by which income exceeds Rs.10 lakh

 

Individual Senior Citizens between the age of 60 and 80 years
Income slabsTax Rates
0 – Rs.3 lakhNIL
Rs.3 lakh – Rs.5 lakh5% of the amount by which income exceeds Rs.3 lakh
Rs.5 lakh – Rs.10 lakhRs.10,000 + 20% of the amount by which income exceeds Rs.5 lakh
Rs.10 lakh and aboveRs.110,000 + 30% of the amount by which income exceeds Rs.10 lakh

 

Individual Super Senior Citizens above the age of 80 years
Income slabsTax Rates
0 – Rs.5 lakhNIL
Rs.5 lakh – Rs.10 lakh20% of the amount by which income exceeds Rs.5 lakh
Rs.10 lakh and aboveRs.100,000 + 30% of the amount by which income exceeds Rs.10 lakh

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 slabsTax Rates
0 – Rs.2.5 lakh0
Rs.2.5 lakh – Rs.5 lakh5% = Rs.12,500
Rs.5 lakh – Rs.10 lakh20% = Rs.1 lakh
Rs.10 lakh and above30% = Rs.1.5 lakh
Total150,000 + 100,000 + 12,500 = Rs.262,500

Therefore, the total tax liability of the trader is:

Total tax liability = Income Tax + Capital Gains Tax = Rs.262500 + Rs.15000 = Rs.277500.

What if you book a loss in a financial year?

When you trade, there is a possibility of booking losses too. 

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.

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 slabsTax Rates
0 – Rs.2.5 lakh0
Rs.2.5 lakh – Rs.5 lakh5% = Rs.12,500
Rs.5 lakh – Rs.10 lakh20% = Rs.1 lakh
Rs.10 lakh and above30% = Rs.2.7 lakh
Total270,000 + 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 slabsTax Rates
0 – Rs.2.5 lakh0
Rs.2.5 lakh – Rs.5 lakh5% = Rs.12,500
Rs.5 lakh – Rs.10 lakh20% = Rs.1 lakh
Rs.10 lakh and above30% = Rs.2.7 lakh
Total270,000 + 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.

Tax Loss Harvesting

While we have written a detailed blog on Tax Loss Harvesting that you can read for more details, here is something about this concept that you need to know while trying to understand the tax rules around intraday trades.

At the end of the financial year, you might have some unrealized gains and losses. While you pay tax on the realized gains, the unrealized losses are carried forward to the next financial year. In other words, while your portfolio might indicate lower profits, you might end up paying high taxes due to losses that have not yet been booked. This can eat away into your realized gains.

Many traders reduce their tax liability by booking the unrealized loss and immediately taking the same position in the stock. While this is not possible in an intraday trade, if you place delivery orders too, then this can be a great way to increase the non-speculative loss component and reduce your tax liability.

For example, if you have booked profits of Rs.10 lakh via intraday equity trades in a financial year and have unrealized losses in delivery-based trades of Rs.3 lakh, then by booking the loss, you can reduce your tax liability to Rs.7 lakh.

Deducting business expenses

When you declare a business income, the tax rules allow you to show all expenses incurred to earn that income as costs and deduct them from your taxable income. Also, if you book a loss, then you can carry forward these expenses too as losses. Here are some expenses that can be included as business expenses:

  • Trading-related charges – brokerage, exchange-levied charges, etc.
  • Internet costs (if you place online orders)
  • Phone bill (if you call your broker for trades)
  • Depreciation of your computer or any other electronic used for trading
  • Rent paid if you use a space to execute the trades
  • Salary or consultation fees paid to someone to help you trade
  • Costs associated with advisory services
  • Costs for books or magazine subscriptions to keep you informed, etc.

1. Are BTST Trades speculative or non-speculative?

One of the fundamental ways of defining a speculative transaction in equity is determining if there is a delivery of shares associated with the trade or not. In intraday trades, there is no delivery and hence they are considered to be speculative. However, In Buy Today Sell Tomorrow (BTST) trades or Sell Today Buy Tomorrow (STBT) trades, the tax rules are a little grey.

Since in these trades, delivery is the net outcome despite the trader taking a short-term delivery risk, most people classify them as non-speculative business transactions. 

2. Do I need to pay Advance Tax on intraday trades?

According to the Income Tax laws, Advance Tax is mandatory for business income. This tax has to be paid as follows:

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

Tax is paid on income. So, what are these the percentages of? 15% of what? 

This is the percentage of the tax that you are likely to pay in the financial year. So, you have to estimate the profits that you might earn in the FY, calculate tax, and pay Advance tax accordingly. However, when it comes to intraday trading, the problem is estimating how the rest of the year will be.

While this might seem difficult, it is mandatory to pay advance tax on the said dates. Most traders follow a simple method. They calculate their gains on June 15th, September 15th, and December 15th and pay taxes on them. At the end of the year, if they have paid more tax, then they claim a refund. This way, they ensure that they comply with the tax rules and avoid paying a penalty of 12% annualized for the period for which the advance tax was not paid.

3. Use the right ITR Form

There are various Income Tax Return (ITR) Forms available to suit different types of taxpayers. We recommend employing the services of a tax professional. However, if you want to file returns yourself, ensure that you choose the right ITR Form. The options available for individuals are as follows:

ITR 1

This is the most common type of ITR form used by individuals. It is for people with income from salary, rent from one house, and/or interest. However, if you have capital gains or business income, then this form is not applicable.

ITR 2

This is used by individuals and HUFs (non-business) to file returns for income from salary, rent from one house, interest, and/or capital gains. Hence, this is for people who opt for investment as a classification of their equity trades.

ITR 3 (erstwhile ITR 4)

This is used by individuals and HUFs (non-business) to file returns for income from salary, rent from one house, interest, capital gains, and/or business income. Hence, this is the ITR form that can be used by intraday traders. This form also allows you to file returns if you trade and invest in shares and have capital gains as well as business income.

ITR 4 (erstwhile ITR 4S)

This is similar to ITR 3 but can be used only if you use Sections 44AD and 44AE for computing business income. Remember, you cannot use this form to declare capital gains or carry forward losses.

Summing Up 

While this article aims to cover most aspects of intraday taxation, you can consider it as a starting point and further consult a tax expert for guidance as per your case.

Hope this was helpful!

Happy 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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