In 2016, India had just around 2 lakh traders, today there are around 1.5 crore traders and even women are making their presence felt in this traditional male bastion. In fact, women comprise 20% of all active traders in India. The country has seen a phenomenal increase in intraday traders in just a span of 4 years.
Indians are shedding the traditional misconception that share trading is all about speculation and gambling. Many have now realised that intraday trading is similar to any other profession and should be treated as such.
However, intraday trading taxability is a subject that overwhelms many day traders. Whether you are a beginner in intraday trading or an experienced trader, the following discussion on intraday trading tax audit will help you.
But before we begin, here’s a short introduction on intraday trading.
What is intraday trading?
In intraday stock trading, traders earn money by buying or selling stocks on the same day. Every intraday trade needs to be closed by the end of the day and there is no delivery of shares. The objective of intraday trading is to earn a profit by speculating on the daily price fluctuations of stocks.
Income Tax on Intraday Trading
Before we get into the taxability of intraday trading, it’s important to be aware of and know the difference between a few important terms. They include:
Stock investor– A stock investor is one who invests to earn long-term gains by buying a particular share. He takes delivery of the share and holds them to earn a profit when the price of share increases in the future or to earn dividends on the share.
Stock trader– A stock trader trades in shares to profit from daily price fluctuations without taking actual delivery of the shares.
Short-term gains/losses– If you sell a stock before 12 months and earn a profit or loss, they are termed short-term gains/losses.
Long-term gains/ losses– If you hold the share of a company for more than 12 months, they are called long-term gains/losses.
Taxability of Intraday Trading
Income gained from intraday stock trading is regarded as speculative business income. According to section 43(5) of the Income Tax Act, profits gained from intraday trading are added to taxable business income as taxed according to total income slab.
However, taxpayers (traders) have the option to consider the speculative business income under two different heads, which again has different tax implications:
- Presumptive Business Income u/s 44 AD: Presumptive business income from intraday trading is taxed at 6% of the turnover up to a limit of Rs. 2 crore, whether it’s a profit or loss. You cannot carry forward losses if you treat your income under presumptive business income. To file an income tax return for this type of income, you need to submit Form ITR-3.
- Normal Business Income:Under normal business income the trader is taxed as per individual tax slab. In this method, total taxable income is equal to total turnover minus expenses. You can claim deductions for expenses such as office rent, depreciation of computer system, brokerage charges, internet costs, phone expenses, books, consultation fees, etc.
How are intraday losses treated?
If you have suffered losses in intraday trading, you can carry forward the losses for the next 4 financial years. It will help you reduce your taxable income in future years. However, to enjoy carry forward of losses, you need to file the income tax return before the due date.
Intraday Trading Tax Audit
Under section 44AB of the Income Tax Act, 1961 intraday trading tax audit for traders is mandatory, if:
- – Presumptive business income turnover (profit/loss) is more than Rs. 2 crore in a financial year
- – Normal business income turnover ( profit/loss) exceeds Rs. 1 crore in a financial year
Note that when it comes to intraday trading, turnover means the sum total of absolute profits minus losses made on daily transactions.
Who performs tax audits for intraday trading?
If an intraday trader is subject to tax audit 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
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