How Gains from Intraday Trading Are Taxed?

Intraday trading has become quite popular in India over the last few years. With the advent of discount brokers and easy access to trading platforms, more individuals are taking to intraday trading to try and earn extra income. However, many new intraday traders have questions about the taxation of profits earned from intraday trades. This article addresses all queries related to income tax on intraday trading in India.

What is intraday trading?

Intraday trading refers to the buying and selling of stocks within the same trading day without carrying forward any open positions to the next day. Intraday traders aim to benefit from small price movements in stocks and close out positions by the end of the day.

The key aspects of intraday trading are:

• Traders enter and exit positions within the same trading session. No open positions are carried forward.
• Traders aim to benefit from volatile price movements in stocks over the short term. 
• Smaller profits (or losses) are made per trade, accumulating over multiple daily trades.
• It requires constant monitoring of stock prices and news flow through the trading session.

The profits earned from intraday trades are treated differently from long-term investing for taxation purposes, so traders must understand how their gains are taxed.

Intraday trading gains are classified as business income

The first thing any intraday trader must know is that the income generated from intraday trading is considered illness income, not capital gains. This is an important distinction for taxation purposes.

Investment income from stocks over a 1+ year holding period is categorised as capital gains and has a preferential tax treatment. Short-term capital gains up to 1 year attract a flat 15% tax if Securities Transaction Tax (STT) is paid on the transaction.

On the other hand, gains from intraday trades are considered business income. This income gets added to your taxable income slab and is taxed as per the applicable Income Tax rates.

So if you had a salaried income of, say, Rs. 8 lakhs, plus Rs. 1 lakh as intraday profits, your total taxable income is Rs. 9 lakhs for that financial year. Income tax would be calculated basis of the tax slab rates applicable to Rs. 9 lakhs income.

Tax rates on intraday trading income

• For income up to Rs. 2.5 lakhs – 0% tax
• For income Rs. 2.5 lakhs to Rs. 5 lakhs – 5% tax 
• For Rs. 5 lakhs to Rs. 10 lakhs – 20% tax
• Above Rs. 10 lakhs – 30% tax

Additionally, a 4% cess is added to your base tax liability.

Senior citizens enjoy special rates, while a rebate under Section 87A may reduce tax liability for incomes below Rs. 5 lakhs. Surcharges may also apply to incomes above Rs. 50 lakhs.

So, based on your taxable income slabs, your intraday profits would also attract tax at the same rates as your regular income.

For example, if your total annual income, including intraday gains, is Rs. 7.2 lakhs, as it falls in the 20% tax slab, your intraday profit is also taxed at 20% plus cess.

This method of categorising intraday gains under business income and adding to total taxable income provides a much simpler tax treatment than a separate capital gains tax calculation.

Set off of intraday losses & carry forward provisions

Another question new traders have is regarding adjusting losses against gains. 

Any losses incurred from intraday trading during the financial year can be set off against other income (except salary income) for that same year. So, if you have incurred losses of, say, Rs. 30,000 from intraday trades, it can be adjusted when calculating your final taxable income. 

For example, if you had:

– Salary Income – Rs. 8 lakhs 

– Intraday Profits – Rs. 1 lakh

– Intraday Losses – Rs. 30,000

Your final taxable income would be Rs. 8 lakhs salary + Rs. 1 lakh profit – Rs. 30,000 loss = Rs. 8.7 lakhs.

It is optional that loss adjustments should be made from the same head of income. As intraday losses are categorised as business income, they can be set off against other heads like capital gains, income from business/profession or other sources – except salary, which business income losses cannot offset as per tax rules.

Any loss beyond the maximum set-off permissible against other heads of income can be adjusted against business income over the next 8 assessment years.

How to save tax on intraday trading gains?

Here are some tips that can help reduce your overall tax incidence on intraday trading income:

1. Adjust losses from other heads – Set off intraday profits with losses from any other taxable source like house property loss, capital loss, etc., as per set-off rules. Minimise net taxable income.

2. Tax loss harvesting – Strategically book losses to offset intraday gains within the same year. 

3. Use tax-saving investments – Invest under Section 80C instruments like PPF, ELSS funds, etc., up to Rs. 1.5 lakhs to reduce taxable income.

4. Claim Section 80D deduction – Health insurance premium qualifies for deduction under 80D. Opt for maximum cover to claim higher deductions.

5. Use expense deductions – Deduct legitimate business expenses like internet charges, accounting fees, computer depreciation, etc., under Section 37 from your intraday profits before they are taxed. Maintain proper documentation.

6. Avoid very high turnover – Having a very high intraday turnover, like over Rs. 5 crores, may take you to a higher 30% flat tax rate. Moderate turnover between Rs. 1-2 crores allows for normal slab rates.

Using such tax planning measures can reduce tax incidence on your intraday trading income. Consulting a tax expert can also guide saving tax through appropriate structuring.

Capital assets vs trading assets

In India, the tax treatment of assets hinges on their classification as either capital assets or trading assets.

• Capital assets encompass properties like land, buildings, and shares held for long-term investment. Profits from their sale are subject to capital gains tax. The tax rate depends on the holding period:
  
  • Short-term capital gains (STCG): If the asset is held for less than 24 months (for listed securities), gains are taxed at 15%.
    
  • Long-term capital gains (LTCG): If held for more than 24 months, gains exceeding ₹1 lakh are taxed at 10% without indexation benefits.
    
• Trading assets, such as shares held for frequent trading, are considered part of a business. Profits from their sale are treated as business income and taxed according to the individual’s income tax slab rate, which can range from 5% to 30%, depending on total income.
  

How are intraday trading taxes calculated?

Intraday trading involves buying and selling stocks within the same trading day. In India, profits from such activities are classified as speculative business income.

• Taxation: These profits are added to your total income and taxed according to your applicable income tax slab rate. For instance, if your total income falls under the ₹5 lakh slab, the tax rate is 5%.
  
• Set-off of losses: Losses from intraday trading can only be set off against other speculative business income, not against income from other sources like salary or capital gains.
  
• Filing requirements: Traders must maintain detailed records of all transactions and report them accurately in their Income Tax Return (ITR), typically under ITR-3 or ITR-4, depending on the nature of their income.
  

Intraday tax rules in the new regime

Under the New Tax Regime, introduced in Budget 2020 and revised in subsequent budgets, taxpayers have the option to pay taxes at reduced rates without claiming exemptions and deductions.

• Tax slabs: The new regime offers lower tax rates across various income brackets. For example, income up to ₹4 lakh is taxed at 0%, ₹4 lakh to ₹8 lakh at 5%, and so on, with a maximum rate of 30% for income above ₹24 lakh.
  
• Impact on intraday trading: Since intraday trading profits are considered business income, they are taxed according to the individual’s total income. Opting for the new regime means traders cannot claim deductions like those under Section 80C (e.g., for PPF or ELSS investments), but they benefit from the reduced tax rates.
  

Taxing intraday trading gains under the old regime

The Old Tax Regime allows taxpayers to claim various exemptions and deductions, potentially reducing taxable income.

• Tax slabs: Under this regime, income up to ₹2.5 lakh is tax-free, ₹2.5 lakh to ₹5 lakh is taxed at 5%, and the rates increase with higher income brackets, reaching up to 30% for income above ₹10 lakh.
  
• Intraday trading profits: As these are classified as speculative business income, they are added to the total income and taxed according to the applicable slab rate.
  
• Deductions: Traders can claim deductions under sections like 80C (for investments in PPF, EPF, etc.), 80D (for insurance premiums), and others, which can reduce taxable income.
  

Decision-making: Traders need to assess their eligibility for deductions and compare the tax liability under both regimes to choose the most beneficial option.

Conclusion

Intraday trading income is taxed differently than long-term investments. It is categorised as speculative business income and gets added to your total taxable income. The tax is calculated at normal rates. Losses can be set off against other income or carried forward for future adjustment.