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While profits are not a guarantee, new traders and investors are primarily focused on one thing—making profits. So, they dedicate themselves to learning new trading strategies and improving their ability to pick the best stocks. However, by doing so, they tend to ignore other important aspects of trading, like the taxation structure. In India, almost all sorts of income are taxed and intraday trading income is no different. Moreover, it is also vital to know that the norms regarding the tax on intraday profit differ from those for investments. Additionally, knowing how taxation can affect one’s trading income and understanding intraday taxation norms is essential if one wants to flourish as a day trader.
Table of Contents
Tax on Intraday Profits
As mentioned before, the intraday profit tax treatment is very different from the taxation norms of short term or long term investments. So, to learn how intraday profit is taxed, let’s first look at how it differs from other stock market taxable income. Profits from investments, whether long term or short term, are subject to the capital gains tax.
On the other hand, intraday trading profits qualify as speculative income. This is because intraday traders profit from price volatility by speculating that price fluctuations will work in their favour. So, speculative income includes intraday profits across all asset classes—equities, derivatives, and commodities. Do not confuse speculative income with non-speculative business income, which includes delivery-based equity trades, derivative (futures and options) trades, and commodity trades.
Delivery traders can label their trades as capital gains and subject them to taxes on capital gains. Or else, they can label it as non-speculative income, and it will be taxed as per the taxation norms applied to business income. In other words, they have a choice regarding taxation in the case of delivery trades.
However, profits on intraday trades, which is speculative income, will always be considered business income, as there are no separate taxation laws for speculative income. This said, both speculative and non-speculative income will add up to one’s overall income, which consists of salary, other business income, rental income, etc. Since it adds up to one’s regular income, to understand the intraday profit tax treatment, one must be familiar with the income tax slabs.
Illustration of Intraday Trading Tax
Consider a 35-year-old individual with a regular salaried job and an annual salary of ₹5 lakh. At the same time, they made a profit of ₹1 lakh through intraday trading in that financial year. If you remember, the tax on intraday profit is considered speculative, which, in turn, qualifies as business income. So, in this given scenario, the intraday profit of ₹1 lakh is added to the annual salary of ₹5 lakh. So, in total, the individual’s total income is ₹6 lakh.
Total Tax Liability = Income Tax + Capital Gains Tax
As a result, ₹6 lakh is subject to income tax, while capital gains tax is zero in this case because the individual is not booked and profits from their investments are not taxed.
Conclusion
Intraday trading income is treated as business income if it’s the individual’s only income source but is less than ₹3 lakh The individual wouldn’t pay tax on the intraday profits they yield. Likewise, if the trader incurs a loss, that financial year can only be offset by speculative business revenues. In other words, the losses incurred by an intraday trader cannot deduct the profits generated through other means. The set-off is only permitted against speculative business incomes.