Income tax on Profit/ Loss from Intraday share trading

Income tax on Profit/ Loss from Intraday share trading

Trading in the share market has increased a lot and not only persons who are engaged in hardcore share trading, other persons also invest funds in the share market. Every income in India is liable to Income tax. Similarly, profit or loss earned from share trading is also liable to income tax.

Shares in the stock market can be either traded on an intraday basis or otherwise. In case of intraday trading, shares are required to be squared off on the same day either at loss or at profit. Otherwise, shares can be held for any period of time ranging from few days till many years. 

This article will guide you on manner of computation of Income tax on profit or loss earned from intra day trading:

1. Meaning of Intra-day trading

  • Intra-day trading means buying and selling the stock on the same day before the market closes.
  • A trader may make a buy or sell position at the beginning of day and square of the transaction by the end of day by making an opposite position. In case, buyers don’t square off the transaction till the end of day, this position itself got squared off by the stockbroker.

2. Intraday profit/ Loss is taxed under head capital gain or Business Income

  • Very common question arises in mind of trader is whether profit or loss from intraday share trading is taxed as Capital gain or business income.
  • For this purpose, we need to check the nature of income taxed under both heads.

a. Income under head capital gain

  • As per Section 2(14) of Income Tax Act, 1961, “Capital Asset” includes any kind of property held by the assessee, whether the same is connected with his business or not. However, capital asset does not include Stock-in-trade, consumable stores, raw material held for the purpose of business or profession.
  • Stock in trade are the assets which are purchases for purpose of resale on a regular basis. If an asset if purchase for the purpose of holding it for long term then same can’t be classify as stock in trade.

b. Income under head Profit from Business or Profession (PGBP)

  • Income from carrying out regular business activity are taxed under the PGBP head. Profit or loss arising from trading in stock-in-trade is taxable under head business income.

c. Classification of shares intraday traded as capital asset or stock-in-trade 

  • In case of intraday trading, shares are bought for the purpose of resale only. There is no intention of holding the asset for a longer period. Rather the same is required to be squared off the very same day.
  • Therefore, shares bought under the intraday category are classified as business income.
  • If any shares bought other than under intraday category, same shall be considered as capital asset if such shares are bought for the purpose of investment. Such shares shall always be considered as capital asset despite of the fact that they are squared on the very same day because intention of buying was investment only.

3. Taxability as speculative business or non-speculative business income

  • As per Section 43(5) of Income Tax Act, 1961, “speculative transaction” means a transaction for the purchase or sale of any commodity, including stocks and shares which is settled otherwise than by the actual delivery or transfer of the commodity or scripts.
  • In case of intra day trading, shares traded into are never transferred to the demat account of the holder. At the end of day, net position amount is transferred to or deducted from assessee’s funds.
  • Therefore, profit or loss from Intraday trading is considered as Income from Speculative Business.

4. Manner of Computation of Profit from Trading Activity

  • Income under business is computing after deducting all expenses from revenue proceeds. In case of intraday trading, taxable income is Net Profit/Loss reduced by all ancillary expenses incurred such as Commission, Security Transaction tax etc.
  • Example,
  1. 500 shares of Wipro bought @ 380= INR 1,90,000
  2. 500 shares sold @ 390= INR 1,95,000
  3. Broker Commission: 950
  4. Security Transaction Tax: INR 45
  5. Net Taxable Income: INR 4,005

5. Applicability of Tax Audit

  • As per Section 44AB of Income Tax Act, assessee is required to get his Tax audit done if gross receipts during the previous year exceeds INR 1 Crores.
  • However, Such threshold hold limit shall increased upto INR 10 Crores, if following conditions are satisfied:
    • aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year in cash does not exceed 5% of aggregate receipts; and
    • aggregate of all payments made including amount incurred for expenditure, in cash, does not exceed 5% of the said payment,
  • In case of intra-day trading, since no transaction is made in cash, therefore, threshold limit of INR 10 Crores shall apply.
  • However, if gross receipts of the assessee does not exceeds INR 2 Crores then he may opt for Section-44AD-”Presumptive Taxation” and pay income tax on profits computed on presumptive basis, not less than 6% of gross receipts. In this case, assessee is not liable for tax audits.
  • Following the different scenarios and applicability of tax audit:
Gross ReceiptProfitsApplicability of Tax Audit
Upto INR 2 Crores(Opted for Presumptive Taxation)More than 6% of Gross receipts Not Applicable
Loss or Less than 6% of Gross receipts and total income is more than INR 2.50 Lacs (Basic Exemption Limited)Applicable
More than INR 2 Crores upto INR 10 CroresCarrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when the presumptive tax scheme was optedApplicable, If income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for
More than 10 CroresApplicable irrespective of profit amount.

6. Computation of Gross Receipts in Intraday trading

  • In case of intraday trading, the quantum of turnover if quite high as the trader is required to buy shares in specified lots.
  • In case of intraday trading, Net position made in a day is considered for the computation of gross receipts. Both Profit and Loss are considered for the computation of Gross receipts.
  • E.g., 
    • IntraDay Profit: INR 1.50 Crores
    • IntraDay Loss: INR 0.70 Crores
    • Gross receipt to check the applicability of tax audit: INR 2.20 Crores (1.50 Crores+ 0.70 Crores)

7. Income tax rates applicable on income from Intraday trading

  • Profit or Income from intraday trading is added to other incomes of the assessee and income tax is payable as per normal slab rates applicable to the assessee. Such income is not chargeable to any special rate of taxes.

8. Set off and Carry Forward of Loss For Intraday Trading

  • Loss from speculative business can be carried forward for next 4 years subject to filing of Income Tax return by the due date.
  • Therefore, Loss incurred from Intraday trading can be carried forward to the next 4 years only if return is filed by the due date.
  • Further, Speculative Business Loss can be offset only against Speculative Business income. Therefore, intraday losses can be set off against speculative income only.
  • However, if the assessee opted for a new tax regime, they cannot carry forward these losses or adjust them against business incomes.

DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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