Taxes Against Intraday Trading Gains

Intraday traders often ask about the taxation of gains earned in intraday trading. Intraday trading is the act of squaring positions on the same day. It is crucial to fully understand intraday trade tax and the implications if you are new to intraday trading.

It is important to realize that long-term investing and intraday trading are different. An investor holds a security for at most one day. Stocks can be held for a long time, sometimes even months or years. This is a way to take advantage of volatility and future gains.

If you have an intraday trade account, and you are day trading, you do not hold stock for the long-term. You are making a profit or loss due to share price fluctuations. This is classified under business income. According to the income tax slab rates, it is taxed as a salary.

Capital gains and long-term investments

A person investing in securities can result in either long-term or short term capital gains depending on how long the security has been held. If an investor has held a stock for more than a year, the transaction is considered long-term. Anything less is considered short-term. The long-term capital gains exceeding Rs 1 lakh from the sale of equity shares and units of equity-oriented funds is taxed at 10%, while short-term capital gains tax (if securities transaction tax applies) is at 15%.

It is important to distinguish between an investor and a trader by determining whether the asset is a capital or trading asset. Capital assets can generate income for a period of one year or more. A trading asset is a securities an individual purchases and sells in order to make gains.

You will be required to pay an intraday tax if your income was generated by intraday trade.

A trading asset can either generate speculative income or non-speculative business revenue. A speculative transaction, according to Sec 43 (5), is one that is "periodically, ultimately settled other than by the actual delivery, transfer, or receipt of the commodity, scrips" Intraday trading is considered speculative. The resulting income is called speculative business revenue.

When gains are made from delivery-based trades, it is considered non-speculative business income. These could be options, commodity or currency. Stock and share hedging contracts are not considered speculative. This is because the contract protects against losses due to fluctuations in prices.

Intraday Trading Tax

Intraday trading gains are considered capital gains if they result in any income. The gains are added to your income, which includes your salary and other income like gains from deposits. They are then taxed according to the slab rate. For FY 2021-2022.

Budget 2020 offered tax payers the opportunity to choose between the old income tax slabs or the new rates starting in FY 2020-21.

Old Income Tax Slab

• Tax is not payable on slabs exceeding Rs 2.5 lakh.
• Taxes are 5% for slabs between 2.5 lakh and 5 lakh
• Taxation for the Rs 5-10 lakh bracket is 20%
• Taxation for incomes above Rs 10 lakh is 30%

Senior citizens are exempted from tax if they have an income of Rs 3 lakh or more. The remaining slabs remain the same.

New tax system

The new tax regime does not affect the taxation of the first two levels.

• You will pay 10% tax on the slabs between Rs 5 lakh & 7.5 lakh. The slabs between Rs 7.5 lakh & Rs 10 lakh will attract 15% taxes.
• The slab tax rate for the Rs 10-12.5 crore bracket is 20%, and the bracket for the Rs 12.5-15 lakh bracket is 25%.
• Taxes are at 30% for slabs above Rs 15 lakh.

This is also true for senior citizens.

Illustration of your intraday trade tax liability

Let's say that you earn Rs 10 lakh in salaried income, and Rs 2 lakh in short-term capital gains (if you held shares in your Demat) from equity delivery. You also make Rs 2 lakh through intraday trading, Rs 2 lakh from your derivatives trading, and Rs 1 lakh as bank deposit interest.

Your total income will now be Rs 15 lakh. Capital gains are not included as this fixed rate taxation does not apply to capital gains. Your tax liability is Rs. 2.625 lakh plus STCG of Rs 15,000. This is equivalent to Rs. 2.775 million.

What happens if speculative businesses lose?

Profits from speculative businesses can only be used to offset any loss in a speculative venture. This is different from any loss suffered by other businesses, where the loss cannot be offset against any profits. The loss from speculative businesses cannot be carried forward to the following year. However, it can only be used against the profits from the business in the year after the carried forward year. Tax payers can carry forward losses from intraday trading in equity shares up to four years after the year you suffered them.

Conclusion

Intraday trading income earned from equity trades can be considered speculative income. It is not capital gains but business income. Your tax slab rate will apply to the business income earned from speculative businesses.An intraday trade account is a great idea. It allows you to keep track of your gains and losses, so that you can determine your intraday trading tax liability.