Intraday Trading Taxation: Key Insights for Smart Investors

For the last few months 28-year-old mechanical engineer Karan Sharma had been hearing his friends talk endlessly about their trading experiences. After hearing their success stories, he was excited and decided to give it a shot. 

He started from scratch, reading about the stock market, what are the key factors that affect it, intraday trading basics, its benefits, and what is algo trading. He was glad he took the time to learn.

During his research, he came across something he hadn’t thought of before, intraday trading taxation. It was a wake-up call and made him realize how important it is to understand all the details, not just the profits.

Many like Karan jump into trading, inspired by success stories. However, skipping the homework can often lead to oversights. If you are a beginner in trading or are planning to begin the journey soon, it is crucial to know all about intraday trading taxation. Read on to know it all. 

Understanding Intraday Trading Taxation

Trading includes buying and selling of securities within a trading day. As the goal here is profiting, the income from gains made is taxable, whether you are an investor or a trader. However, investors can enjoy lower tax rates and as a trader, you can reduce your taxable income by claiming business expenses. 

An investor invests in stocks/ securities to hold them for a long term. The aim here is to earn returns in the form of capital appreciation and dividends. Depending on how long these shares are held, the income generated can be called short-term or long-term capital gains. 

Traders, on the other hand, indulge in frequent buying and selling of stocks/ securities. They aim to make a profit from the short-term price movement that takes place in the market. 

This income goes in the category “Profits and gains from business or profession”. The tax liability for traders can be as high as 30%, based on the income slab they fall in. 

Take a look at the tax slabs as per the old and the new regime. 

So, as a trader, it is essential to know your business income. Typically it can be divided into 2 categories:

1. Speculative Income

Intraday trading profits in India are classified as speculative business income and taxed accordingly. These short-term trades focus on price speculation rather than company investment, highlighting their speculative nature under tax laws.

2. Non-Speculative Income

Non-speculative transactions include delivery-based equity trades, futures, options, and commodity or currency trades. Income from these is classified as non-speculative business income, as they don’t involve pure speculation. 

Key Insights for Smart Investors

• Under Section 44AD, a tax audit isn’t mandatory for intraday traders with a turnover up to ₹2 crore (₹3 crore for 95% digital transactions) if profits are at least 6%. Below 6%, it’s required only when total income exceeds ₹2.5 lakh.

• Under Section 44AB, for turnovers ranging from ₹2 crore (₹3 crore for digital transactions) to ₹10 crore, a tax audit is waived if profits reach at least 6% for non-cash or 8% for cash transactions. However, failing to meet these profit levels requires a tax audit, regardless of whether you earn a profit or incur a loss.

• For intraday trading turnover exceeding ₹10 crore, a tax audit is mandatory, regardless of profit or loss. This typically applies when over 95% of transactions are digital, common among intraday traders.

Over To You 

When considering intraday trading taxation, it is important that you classify your income correctly. Make sure that you maintain proper records and file your taxes accurately. Select the right ITR form to fill the gains and the losses you make from intraday trading.