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.

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.