Involvement in share market leads to two type of income:
- Business Income
- Capital Gain
A person can have both the above incomes and these are taxable with few variations.
Income will be termed as a capital gain when an investor takes the delivery of shares. Depending on the period of holding Capital gain is classified as LTCG or STCG.
For the financial year 2017-18, LTCG on listed equity share is fully exempted whereas the STCG is taxable @ 15%.
Coming to the business income part, depending on the type of security, tax law further divides the business income into 2 parts:
- Speculative Business Income for intraday equity trading aka BTST or ATST
- Non-Speculative Business Income for future/option stock aka F&O
In this article, we will cover the taxation of speculative income from intraday trading for a retail investor and trader.
Profit or Loss in Intraday Share Trading
In intraday trade, a trader can buy 4x or more share with his limited cash aka leverage. This trade needs to be squared off before the market closes.
Initially, traders don’t pay any money however at the time of squaring off they end up with either profit or loss.
This profit or loss on intraday trading will be considered as speculative business income and will fall under the income head of PGBP. [Profit and Loss from Business or Profession]
A trader can consider his speculative business income either as:
- Presumptive Business income [u/s 44AD], or
- Normal Business Income
Tax Rate for Presumptive Business Income
Taxable Income: 6% of turnover
Tax Rate: Individual slab rate
Only 6% of turnover will be taxable If the aggregate of profit and loss from trading is up to Rs. 2 crores. [Section 44AD and ICAI Guidance Note]
The tax will be payable on taxable income if it exceeds the maximum non-taxable limit.
Demerit: Carry forward of loss is not possible when the tax return is filed for presumptive incomes.
ITR Form: Form ITR-3 [Income tax return for the assessment year 2018-19]
Mr Kajol, intraday trader, buy-
|Intraday Trade on 08-07-2018|
|Share||No. of Units||Price||Profit/Loss
|Turnover on 8th July 2018||105000|
|While calculating turnover, Loss in TCS share has been considered as the positive figure|
In this case, Taxable income will be Rs. 6,300 [105000 x 6%]
Tax Rate for Normal Business Income
Taxable Income: Turnover less Expenses
Tax Rate: Individual slab rate
A person can consider his intraday trade as normal business and file return accordingly. In this case, the trader can get the deduction of expenses incurred while performing the trade.
Example of expenses*:
- Brokerage paid
- Internet expenses, Phone Bill
- Depreciation of computer used for trading
- Office rent
- Salary paid to assistant
- Consultancy fees paid
- Newspaper, maid, books etc
*Bills, Invoice or self-made vouchers for expenses should be kept for future references.
Treatment of Losses in Intraday Trade
Although loss incurred in intraday trade is considered as turnover, any excess of expense over turnover is eligible for carrying forward for next 4 succeeding years.
This carry forward speculative loss will help to reduce future speculative income and thus tax outgo for coming years will be less.
Carry forward of loss is allowed only when the tax return is filed on or before the due date for ITR filing. [u/s 139(1)]
Tax Audit: Intraday Trading [u/s 44AB]
A tax audit is required when turnover during the financial year:
- Exceeds Rs. 2 crores: When trader opt for presumptive business Income
- Exceeds Rs. 1 crores: When trader opt for normal business income
Turnover for intraday trader will be aggregate of all profit and loss throughout a financial year. [ICAI guidance note on Tax Audit]
Example: During the financial year 2017-18, Mr.Ramesh had entered 3 intraday transactions:
Transaction 1: Profit of Rs.80 lakh
Transaction 2: Loss of Rs.30 lakh
Transaction 3: Loss of Rs.6 lakh
Turnover for Tax audit for FY 2017-18: Rs.1.16 crores [80+30+6]
If Mr Ramesh opts for normal business income, Tax audit will be necessary as the turnover exceeds Rs.1 Cr. whereas tax audit will not be required if he opts for presumptive taxation.
Recommended to Read: Tax audit Process under Income Tax