How are gains from intraday trading taxed?

Introduction

Every income in India is liable to taxes. So, you must pay income tax on intraday trading profits as well. The tax on intraday trading is different from the regular equity tax, and it is also different from long-term investing. An investor holds a security for at least one day. If you wish, you can hold stocks for a longer period, extending into months and years. The objective is to earn gains using the share’s volatility.

On the contrary, an intraday trader does not hold the stock for long. The trade is completed the same day after making a gain or loss from share price fluctuations. You can execute intraday trades seamlessly using stock trading app. The gains from intraday trading are put under business income and, therefore, taxed as salary as per the individual’s income tax slab rates.

Long-term investments and capital gains taxes

An investment can result in long-term capital gains and short-term capital gains. It depends on the security’s holding period. If you retain the stock for more than 12 months, you earn long-term capital gains, and anything under 12 months is short-term. The taxation on long-term capital gains is 10 per cent if the amount from the sale of equity shares or units of equity-oriented funds is more than Rs 1 lakh. On short-term capital gains, there is a tax of 15 per cent when securities transaction tax is applicable.

An investor is different from a trader in terms of the asset in question, whether it is a trading asset or a capital asset. Trading assets refer to securities that an individual buys and sells to earn gains. Capital assets create an income after a year or more.

An investor can generate a speculative or non-speculative business income from a trading asset. Section 43 (5) of the Income Tax Act defines a speculative transaction as one that is ultimately or periodically settled not by transfer or actual delivery of the commodity or scrips. This definition clarifies that intraday trading is speculative, and its profits are speculative business income.

It is a non-speculative business income when an investor earns gains from delivery-based trades. These include currency, commodities, futures and options. Hedging contracts concerning shares and stocks are also non-speculative, as the purpose of entering into a hedging contract is to protect against loss in holdings arising from price fluctuations.

Additional Read: How Can You Hedge Your Positions in Futures and Options?

Tax on intraday trading

If you generate gains from intraday trading, the income is recognised as business income instead of capital gain. As a result, the gains are added to your overall income, which includes your salary and other income like gains from deposits, etc. The gains are taxed according to the slab rate.

In the Union Budget 2020, taxpayers were given the option to select between old and new income tax slab rates.

If you earn profits from intraday trading, the tax on intraday trading as per old and new income tax slabs applies as follows:6

Old income tax slab rates

There is no tax for income up to Rs 2.5 lakh. The tax is five per cent for income in the range of Rs 2.5 lakh and Rs 5 lakh. For the Rs 5 lakh to Rs. 10 lakh bracket, the tax rate is 20 per cent. When the business income is more than Rs 10 lakh, taxation is at 30 per cent.

Taxation is nil for senior citizens for an income slab of up to Rs 3 lakh. The other slabs remain unchanged.

New income tax slab rates

Taxation does not change for the first two slabs in the new tax regime.

For the Rs 5 lakh to Rs 7.5 lakh bracket, the tax rate is 10 per cent, while the Rs 7.5 lakh and Rs 10 lakh bracket attracts a tax rate of 15 per cent.

For the slab between Rs 10 lakh and Rs 12.5 lakh, taxation is at 20 per cent, whereas for the slab between Rs 12.5 lakh and Rs 15 lakh, taxation is at 25 per cent.

Tax is 30 per cent for income more than Rs 15 lakh.

Senior citizens also need to abide by the same rules for tax on intraday trading.

Summary

The income you generate from equity trades on intraday trading is recognised as speculative business income. It is taken as business income instead of capital gains. The business income from a speculative business is included in your overall income and taxed according to your respective tax slab rate. An intraday trading account helps you maintain a record of your gains and losses and calculate your intraday trading tax liability.