The availability of online trading platforms and ease of trading with the help of technology has made share trading a popular activity amongst the taxpayers and now investors aren’t just limited to those who engage in long-term share trading.
Primarily there are three methods of trading in share market:
- Trading for Delivery.
- Derivative Trading; and
- Intraday Trading
In this article we are going to put light on what is intraday trading and Income tax audit applicability on Profit/Loss from Intraday share trading.
Meaning of Intraday Trading
Intraday share trading, also known as day trading, is a popular form of investment where traders buy and sell stocks within the same trading day. Unlike traditional investment strategies where investors hold stocks for a longer period, day traders aim to take advantage of short-term price movements to make quick profits. Profit in intraday trading is generated by buying stocks at a lower price and selling them at a higher price within the same day or even an intraday trader can short sell the shares on the assumption that price will go further down an make profit out of that fall.
Intraday Trading Example:
Suppose shares of Reliance are trading on a given date at Rs.2000 and as per an intraday trader he belief that due to certain good news the price will move up. Then that intraday trader will buy Reliance shares at Rs.2000 and in case the price reaches suppose 2100 then he will make a profit of Rs.100 per share. He can square off the transaction himself during the trading day or the stock exchange will square off at the end of the trading day. In case price of the Reliance shares falls lets suppose to 1800 then the intraday trader will incur a loss of Rs.200 per share.
In this article, we will explore the income tax implications on profit/loss from intraday share trading, including the calculation and reporting of income tax on intraday trading profits, as well as deductions and exemptions available for intraday trading losses.
Classification of shares intraday traded as capital asset or stock-in-trade :
In intraday trading, shares are bought for the sole purpose of reselling. There is no intention to hold the asset for a long time. Instead, the same thing has to be squared off on the same day.
Therefore, stocks purchased under the intraday category are classified as
Stock in Trade and income arises from their sale purchase will always be Business Income and according while filing income tax return, an intraday traders have to select ITR-3 form. If shares are purchased other than intraday category , they are considered capital assets if such shares are purchased for investment purposes or depending upon the nature of business of the assessee. Such shares are always considered capital assets, even if they are sold on the same day, since the intent of the purchase is purely an investment.
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 intraday trading, traded shares are never transferred to the holder’s demat account. Ultimately, the net position amount is transferred to or deducted from the taxpayer’s funds. Therefore, profits or losses from intraday trading are considered speculative income and taxed axxordingly.
Computation of Gross Receipts in Intraday trading
In intraday trading, the trading volume is quite high because traders need to buy a certain number of shares.
In intraday trading, one day’s net position is taken into account when calculating the total turnover.
Both profits and losses are taken into account when calculating gross income.
E.g.,
- IntraDay Profit: INR 1.OO Crores
- IntraDay Loss: INR 0.50 Crores
Gross receipt to check the applicability of tax audit: INR 1.50 Crores (1.00 Crores+ 0.50 Crores)
Applicability of Tax Audit
According to Section 44AB of the Income Tax Act, an assessee (individual or entity) is required to undergo a tax audit if their gross receipts during the previous year exceed INR 1 Crore. However, there is a provision that increases this threshold limit to INR 10 Crores under certain conditions.
The conditions are:
1. Aggregate of all amounts received, including sales, turnover, or gross receipts during the previous year in cash, should not exceed 5% of the total receipts.
2. The aggregate of all payments made, including expenditures, in cash, should not exceed 5% of the total payments.
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. In case of Intraday share trading Tax Audit will only be applicable if Total of intraday loss and profit is more than the above threshold of Rs.1 crore or Rs.10 crore as the case may be.
Set off and Carry Forward of Loss For Intraday Share Trading
Since Intraday trading is a speculative business where chances of losses are quite high and therefore in Income Tax Act a provision has been made to carried forward of Speculative losses up to four years if income tax returns are filed on time. Therefore, losses from intraday trading can only be carried forward to the next four years if they are returns is filed in a timely manner.
Furthermore, speculative trading losses can only be offset against speculative trading income. Therefore, intraday losses can only be offset by speculative gains of the future years in that four year period. Same cannot be adjusted against Non-Speculative Business Income.
Note: Once taxpayers select the new tax regime, they cannot carry forward or offset these losses against corporate income.
