How Profits from Intraday Trading Are Taxed?How Profits from Intraday Trading Are Taxed?

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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 in India 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 your trading income and understanding intraday taxation norms is essential if you want to flourish as a day trader.

Tax on intraday Profits

As mentioned before, the intraday profit tax treatment is very different compared to 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. Your profits from your 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.

You can label your delivery trades as capital gains and subject them to taxes on capital gains. Or else, you can label it as non-speculative income, and it will be taxed as per the taxation norms applied to business income. In other words, you 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. That said, both speculative and non-speculative income will add up to your overall income, which consists of your salary, other business income, rental income, etc. Since it adds up to your regular income, to understand the intraday profit tax treatment, you must be familiar with the income tax slabs. First, let’s look at the income tax rates as per the old tax regime, and then we’ll move to the rates of the new income tax regime. As of 2022, you can choose to proceed with either one of the two regimes.

Old Income Tax Regime Slab Rates for Individuals

As per the official income tax website, the tax slabs according to the old tax regime are portrayed in the table shown below. These tax slabs are applicable to all individuals performing intraday trades who are under the age of 60.

Old Income Tax Regime Slab Rates
Income Tax SlabIncome Tax Rate
Up to Rs. 2,50,000Nil
Rs. 2,50,001 – Rs. 5,00,0005% above Rs. 2,50,000
Rs. 5,00,001 – Rs. 10,00,000Rs. 12,500 + 20% above Rs. 5,00,000
Above Rs. 10,00,000Rs. 1,12,500 + 30% above Rs. 10,00,000

New Income Tax Regime Slab Rates for Individuals

Similar to the old tax regime, the new tax regime slabs are also applicable to all individuals performing intraday trades who are under the age of 60. This tax regime has more slabs that are shown in the table below, as portrayed on the official income tax website.

Slab Rates in the New Income Tax Regime
Income Tax SlabIncome Tax Rate
Up to Rs. 2,50,000Nil
Rs. 2,50,001 – Rs. 5,00,0005% above Rs. 2,50,000
Rs. 5,00,001 – Rs. 7,50,000Rs. 12,500 + 10% above Rs. 5,00,000
Rs. 7,50,001 – Rs. 10,00,000Rs. 37,500 + 15% above Rs. 7,50,000
Rs. 10,00,001 – Rs. 12,50,000Rs. 75,000 + 20% above Rs. 10,00,000
Rs. 12,50,001 – Rs. 15,00,000Rs. 1,25,000 + 25% above Rs. 12,50,000
Above Rs. 15,00,000Rs. 1,87,500 + 30% above Rs. 15,00,000

Illustration of Intraday Trading Tax

Now that you are aware under what scheme intraday profits are taxed and are familiar with the tax slabs, the following illustration will help further improve your understanding of the imposition of tax on intraday profits.

Consider a 35-year-old individual with a regular salaried job and an annual salary of Rs. 5 lakhs. At the same time, they made a profit of Rs. 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 Rs. 1 lakh is added to the annual salary of Rs. 5 lakhs. So, in total, the individual’s total income is Rs. 6 lakhs.

Total Tax Liability = Income Tax + Capital Gains Tax

As a result, Rs. 6 lakhs 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.Suppose the individual decides to file their taxes under the new tax regime (you can go with the old tax regime if that benefits your case). Then, referring to the table on the New Income Tax Regime slab rates, we get the following.

Income tax = Rs. 12,500 + 10% above Rs. 5,00,000 = Rs. 12,500 + Rs. 10,000 = Rs. 22,500.

The individual’s total liability, in this case, would be the same as their income tax as they are not subjected to capital gains tax.

Conclusion

As intraday trading income is treated as business income if it’s the individual’s only income source but is less than Rs. 2.5 lakhs, 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.

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