Indian investors are almost spoilt with choice. 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. As a result, the Indian investor is looking at not just mutual funds but also more specific avenues such as equity, futures/options and commodities trade, among others.
A substantial number of people in the market don’t really hold their securities for too long and prefer to sell them quickly and make profits on the speculation on their price movement. For instance, a long-term investor might hold a bank’s equity stock for a couple of years and prefer to grow with the bank. However, there are many traders who invest in stocks and derivatives and sell them within 24 hours to turn a profit on their day-to-day volatility. This is called intraday trading.
As the name suggests, intraday trading is not an investment but more of a business-like activity where traders aim to make profits by buying and selling market instruments such as derivatives within the same day. This income is not classified as capital gains under the Income Tax Act but considered to be business income. Hence, the income tax on intraday trading profits in India follows different guidelines.
Types of business income
Business income from intraday trading can be classified into speculative business income and non-speculative business income. While the tax liability on both these incomes is effectively the same, the separation between speculative and non-speculative determines your ability to offset your losses in the market. But, let’s first define these two incomes.
- Speculative income: 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.
- Non-speculative income: On the other hand, profits made from intraday or overnight trading of Futures and Options are considered to be non-speculative income by definition. 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. At the same time, all income from even longer F&O trades shall be considered non-speculative income if it forms a substantial part of your total income or it’s a business activity for you.
Tax on intraday trading profits
Now that we know that intraday trading is largely classified as business income – equity or derivatives, we should keep in mind that business income doesn’t have a fixed rate of taxation. This is unlike capital gains that are taxed at a fixed rate and applicable when a stock is held for a longer period of time. Hence, 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.
Things to remember
While the calculation of profits seems pretty straightforward for intraday profits, there are important things to keep in mind while calculating income tax on intraday trading profits. These deal with setting off losses and ensuring that you are not paying more tax than you are liable to and include:
- Business losses of speculative nature (intraday equity trading) can be carried forward into the next 4 years and can be set off only against speculative gains made in that duration.
- Meanwhile, non-speculative losses (intraday F&O trades) can be set off against income other than salary in the same year. So, losses on F&O trading can be set off against interest income from bank, rental income or capital gains but only in the same year.
- 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.