Tax on intraday trading: Tax rate applied, tax form ITR-3 to file IT returns

Intraday trading is a business activity that comes under the Income Tax Act.

How gains from intraday trading are taxed

Intraday trading, as we saw in an earlier article, is a capital market strategy where shares are bought and sold within a single trading day, the aim being to profit from stock price fluctuations. But wherever there’s a profit, there has to be a tax, right? That’s indeed the case here, and this article will give you an overview of how gains from intraday trading are taxed.

Why intraday trading is not an investment?

First of all, you must realise that intraday trading is not investment; there is a critical difference between the two. In case of investment, one takes delivery of shares and holds them for at least a day. But in intraday trading, where positions are squared off before the trading day ends, there is no delivery. The idea is to offload the shares at an opportune moment during the stock’s price fluctuation to make a profit.

Of course, sometimes one may be forced to sell low to cut losses if the stock price begins plummeting, in which case the investor suffers a loss. So, intraday trading is something akin to a business activity where one aims to make profits but can end up with losses too.

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How gains from intraday trading are taxed?

This profit or loss from intraday trading is not considered as capital gains but as speculation income/loss, which comes under business income or loss under Section 43(5) of the Income Tax Act, 1961. Basically, intraday trading is considered speculative as it is not undertaken to earn profits in the long term.

There are specific tax rates for capital gains, but this is not so for income from speculation, which is added to all other income heads (salary, income from property, etc.) to arrive at the total taxable income to be paid as per the income tax slab rate the amount falls in. Non-speculative income will also be added in these calculations; such incomes (profits) accrue from intraday or overnight trading in futures and options (F&O).

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What expenses can an intraday trader claim in the income tax return?

This non-speculative business income can be offset against business expenses incurred in the form of agent’s fees, internet charges, telephone bills, broker’s commission, demat account charges etc. The deductions for brokerage and securities transaction tax (STT) – a direct tax that is levied on every purchase and sale of a listed security – can be claimed while filing one’s income tax return (ITR).

Speculative losses cannot be set off against incomes such as salary, businesses, rents from real estate property, or any other income; it is allowed only for income from intraday trading. The loss can be carried forward to the next four years so as to set it off against future speculative income. However, if any loss is to be carried forward, it has to be disclosed in the trader’s ITR.

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Which tax form is required to show gains and losses from intraday trading?

Salaried people who have earned profits or incurred losses from intraday trading are required to file their returns in ITR form number three (ITR-3). For the purpose of calculating the net gains or losses, they are advised to deduct STT paid on their transactions, as well as other expenses that have been mentioned earlier. Tax audit is applicable if the turnover is more than Rs 1 crore in case of individuals.

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