Tax Treatment & Applicability of Audit for Intraday Trading in India

Indians are shedding the traditional misconception that share trading is all about speculation and gambling. Many have now realized that intraday trading is similar to any other profession and should be treated as such.

 With the rise in online trading avenues as well as investor awareness, a larger number of people are now channeling their investments into the financial markets.

With this, stock traders in India have been grown expeditiously.

1. What Is Intraday Trading?

• Intraday Trading refers to a single day trading in a stock market
• Traders earn money by buying or selling stocks and derivatives on the same day from price fluctuations at a given point of time during the operation of the stock market.
• Every intraday trade needs to be closed by the end of the day even if the desired price has not been achieved.
• The trader does not take the actual delivery of shares.
• Intraday trading is not an Investment but more of business-like activity. Hence income from Intraday is considered as Business Income.

2. Income Head

“Profits & Gains from Business or Profession” (section 43(5) of the Income Tax Act)

Profit from Intraday Trading will be considered as Speculation Gain

Loss from Intraday Trading will be considered as Speculation Loss

3. Types of business income from Intraday Trading

1. Speculative income– (Intraday “Equity” Trading):

Profits made from intraday trading of equity shares are classified as speculative income.

This is so because those investing in a stock for less than a day are presumably not investing in the company but only keen on speculating its price volatility to turn a profit.

2. Non-speculative income- (Intraday “F&O” trades):

Profits made from intraday or overnight trading of Futures and Options are considered to be non-speculative income.

This is so because certain F&O contracts still have a delivery clause whereby the underlying shares/commodities exchange hands between traders on the expiry of contracts.

4. Calculation of Income Tax on Intraday Trading

Business income from intraday trading must be clubbed with your income from all other sources to arrive at a total income. This is the income from which you pay tax on intraday trading profits in India.

For instance, if you made Rs 1,00,000 from intraday equity trading,

Rs 50,000 from intraday F&O trades and

Rs 10,00,000 from your salary,

then your total income liability is Rs 11,50,000.

The income tax payable by you will be dependent upon your tax slab and applicable deductions

5. Intraday gain & Loss ITR form

Intraday Trader has to file his Income Tax return using FORM ITR-3

6. Tax Treatment for Intraday Trading

Taxpayers (traders) have the option under Income tax to declare the trading profit as per

Presumptive Business Income u/s 44AD

or

as a Normal Business provision.

i. In the case of PRESUMPTIVE BUSINESS:

• Declare minimum of 6% of turnover as profit from Intraday, even if the trader has loss in actual.
• The trader is not required to maintain books of accounts under this scheme.
• Traders having turnover up to 2 crores in a year can opt for the Presumptive Business option.
• No further deduction for expenses is allowed under Presumptive Business.
• Tax will be calculated as per the Slab rate on Total Taxable Income.
• Cannot carry forward losses if you treat your income under presumptive business income.

ii. In the case of NORMAL BUSINESS:

• The trader can claim deductions for expenses such as Office rent, Telephone Expense, Electricity, Internet Charges, etc, and income so derived after considering these expenses will be the taxable income.
• Tax will be calculated as per the Slab rate on Total Taxable Income
• The trader will require to maintain books of Accounts under this system.
• In this method, total taxable income is equal to total turnover minus expenses.

Now that we know that intraday trading is largely classified as business income.

7. Calculating Turnover for Intraday Trading As Per Income Tax

Turnover in the case of Intraday Trading is Absolute Turnover,

Absolute Turnover is the Sum total of absolute profits minus losses made on daily transactions.

Let us see an example for calculating turnover for Intraday as per Income Tax Provision:

Mr.X buys 1000 shares of ABC Ltd at Rs.100. He sells the shares at the end of the day at Rs.110.

Profit = Rs.10 * 1000 shares = Rs. 10,000/-

On the next day, he buys 200 shares of PQR Ltd at Rs.300. At the end of the day, he sells the shares at Rs.280.

Loss = Rs. 20 * 200 shares = Rs. 4,000/-

Absolute Turnover = Rs. 10,000+ Rs. 4,000 =Rs.14,000/-

8. Applicability of Tax Audit for Intraday Trading

Tax audit on Intraday Trading under section 44AD will be applicable in the following scenario: 

i. In the case of PRESUMPTIVE BUSINESS:

If profit from Intraday Trading is declared less than 6%

AND

Total Income exceeds Basic Exemption Limit

When these 2 conditions are satisfied, Tax Audit will be applicable

ii. In the case of NORMAL BUSINESS:

In the case where turnover for the year exceeds 2 crores (for AY 2020-21) and the threshold limit is Rs.5 crores for AY 2021-22.

Or

Taxpayer has incurred loss from Intraday, but ‘total income’ other than the loss is greater than Rs. 250,000. E.g.: If you are a salaried person and have intraday losses, tax audit will most likely be applicable.

In such a cases Tax Audit is required.

If the taxpayer decides not to claim and carry forward the trading loss, he can avoid the hassle of tax audit

9. Who performs tax audits for intraday trading?

The trader needs to hire the services of a professional chartered accountant to carry a range of services, including:

– Preparation of financial statements such as P/L and balance sheet

– Auditing of book of accounts

– Preparing and filing of tax audit report on Form 3CD

– Preparing, filing and submission of ITR

10. Carry Forward of Intraday Trading Losses

• Loss under Intraday Trading can be claimed if Tax Audit u/s 44AD is performed by a professional Chartered Accountant. The loss can be carried forward and set off against future profits to reduce the income tax liability.
• Speculative Loss can be carried forward for 4 years. It can be set-off against Speculative Business Income only
• Non-Speculative Loss can be carried forward for 8 years. It can be set-off against both Speculative Business Income and Non-Speculative Business Income. So, losses on F&O trading can be set off against income other than salary i.e., interest income from bank, rental income or capital gains but only in the same year.
• However, to enjoy carry forward of losses, you need to file the income tax return before the due date.
• Setting off of losses implies that your total tax liability decreases by the amount you are able to set off from your total income. This doesn’t mean that you don’t have to pay taxes on capital gains if you have made some profits in long-term equity since those are still charged at a fixed rate.