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Income Tax on Trading

by | May 7, 2024 | Income Tax, Income from Trading | 0 comments

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Income Tax on Trading

Stock trading encompasses the exchange of various financial instruments such as shares, mutual funds, commodities, currencies, bonds, and debentures. Investors typically construct portfolios with a long-term perspective, aiming for gradual growth and income generation. On the other hand, traders engage in frequent buying and selling transactions, seeking to capitalize on short-term price movements for rapid profit accumulation.

For tax purposes, the income generated from trading activities is classified differently based on the nature of the trade. Income from equity delivery trading is treated as capital gains, while income from other forms of trading, including intraday trading, futures and options (F&O) trading, commodity trading, and currency trading, is considered business income. This classification determines the applicable tax treatment for the respective trading activities.

Speculative Business Income and Non-Speculative Business Income

Income from trading activities is indeed categorized as business income under the Income Tax Act. This business income can further be classified into two main categories: Speculative Business Income and Non-Speculative Business Income.

Speculative Business Income

You’re correct. According to the Income Tax Act, a speculative transaction refers to a contract where the purchase or sale of any commodity, including stocks and shares, is settled without actual delivery. Intraday trading, where trades are squared off within the same trading day, falls under this category, making it speculative business income.

However, it’s important to note that the definition of speculative transactions specifically excludes derivative transactions. Therefore, activities such as equity futures and options (F&O) trading, commodity trading, and currency trading, where the trader enters into derivative contracts for hedging purposes, are considered non-speculative. As a result, income generated from such transactions is classified as non-speculative business income for tax purposes.

Non-Speculative Business Income

Non-speculative business income covers a broad spectrum of trading activities that aren’t considered speculative. This category includes trades in equity futures and options (F&O), commodity trading, and currency trading. F&O trading, despite involving hedging and the delivery of underlying securities, falls under non-speculative business income due to its structured nature and risk mitigation characteristics.

Intraday trading of commodities and currencies is also classified as non-speculative, as it is explicitly excluded from the definition of speculative transactions. Therefore, income generated from intraday trading in commodities and currencies is considered non-speculative business income.

Moreover, significant trading activity in equity delivery and mutual funds contributes to non-speculative business income. This encompasses buying and selling shares in the equity market and investing in mutual funds with the goal of generating returns.

Income Head, ITR Form & Due Date

Income Head1. Income from equity intraday trading is a speculative business income.
2. Income from F&O trading is a non-speculative business income. 
3. The income from equity delivery trading may be treated as either capital gains or business income.
ITR Form1. If a trader has income from Capital gain, then they should file ITR 2.
2. If a trader has Business Income, then they should file ITR 3.
3. The trader who has opted for the Presumptive Taxation Scheme should file ITR-4.
Due Date31st July is the due date for traders to whom audit is not applicable &
31st October is the due date for traders to whom Tax Audit is applicable

Tax Rates for Trading Income

Business income is taxed at slab rates according to the provisions of the Income Tax Act. The tax rates vary based on the taxpayer’s income level and the tax regime they choose to follow. Here are the slab rates for both the old tax regime and the new tax regime:

Slab Rates if Traders Opt for Old Tax Regime

Taxable Income (INR)Slab Rate
Up to 2,50,000NIL
2,50,001 to 5,00,0005%
5,00,001 to 10,00,00020%
More than 10,00,00030%

It’s important to note that surcharge is applicable on the total income as per the prescribed surcharge slab rates. Additionally, a cess is levied at 4% on the basic tax and surcharge amount. This means that after calculating the tax liability based on the applicable slab rates and any surcharge, the total tax amount is further increased by 4% to account for the cess. This additional amount goes towards various government initiatives and welfare programs.

Slab Rates if Traders Opt for New Tax Regime

Taxable Income (INR)Slab Rate
Up to 3,00,000NIL
3,00,001 to 6,00,0005%
6,00,001 to 9,00,00010%
9,00,001 to 12,00,00015%
12,00,001 to 15,00,00020%
More than 15,00,00030%
Calculate Advance Tax on Trading Income

To avoid interest charges under Sections 234B and 234C, traders and investors should anticipate their tax liability to exceed INR 10,000 and pay Advance Tax accordingly. This must be done in quarterly installments due on the 15th of June, September, December, and March. However, if a trader opts for presumptive taxation under Section 44AD, the entire Advance Tax amount must be paid in a single installment on or before the 15th of March.

It’s essential for traders and investors to assess their taxable income for each quarter, compute the corresponding tax liability, and remit the Advance Tax promptly to adhere to regulatory requirements and avoid any penalties.

Set Off and Carry Forward Loss

Traders can utilize the strategy of setting off and carrying forward losses to mitigate their income tax liability effectively.

For Short-Term Capital Losses, they can be offset against both Long-Term and Short-Term Capital Gains. Any remaining loss can be carried forward for up to 8 years to offset against future Short-Term Capital Gains.

Long-Term Capital Losses, however, can only be set off against Long-Term Capital Gains. Similarly, any unabsorbed loss can be carried forward for up to 8 years for future offsetting against Long-Term Capital Gains.

In the case of Speculative Business Losses, they can be set off exclusively against Speculative Business Income. The trader has the option to carry forward any unutilized loss for up to 4 years for future offsetting against Speculative Business Income.

Non-Speculative Business Losses, on the other hand, can be set off against any income except Salary in the current year. These losses can be carried forward for up to 8 years to offset against Business Income in future years, providing traders with flexibility in managing their tax liabilities over time.

Calculate Trading Turnover

When trading income is considered as business income, it’s crucial to calculate the trading turnover to ascertain whether Tax Audit is applicable according to the Income Tax Act.

Type of TradingCalculation of Trading Turnover
Equity Intraday TradingAbsolute Profit
Futures & Options Trading (Equity, Commodity, Currency)Absolute Profit
Equity Delivery Trading & Mutual Fund TradingSales Value

Note: The turnover calculation for options has been revised as per the eighth edition of the guidance note dated 14/08/2022 (effective from Assessment Year 2022-23). Previously, turnover for options trading was computed as “Absolute Profit + Premium on Sale of Options.”

Tax Audit Applicability

The applicability of Tax Audit for stock traders is contingent upon Trading Turnover and Profit or Loss. Here are the scenarios:

  1. If trading turnover is up to INR 2 Cr and the profit is less than 6% of turnover or there’s a loss, Tax Audit applies if the taxpayer has opted out of presumptive taxation in any of the immediate 5 previous years and total income exceeds the basic exemption limit.
  2. For turnovers between INR 2 Cr and INR 10 Cr, where over 95% of transactions are digital via Demat, Section 44AB provisions don’t apply, making Tax Audit unnecessary regardless of profit or loss.
  3. When trading turnover exceeds INR 10 Cr.

Tax Loss Harvesting

Tax Loss Harvesting is a strategy to utilize unrealized losses by selling shares, offsetting them against realized profits to minimize tax liability. Traders should understand the Income Tax Act’s rules for loss set-off before implementing Tax Loss Harvesting.

Read More: CAMS: Services, Features & Consolidated Capital Gains Statement

Web Stories: CAMS: Services, Features & Consolidated Capital Gains Statement

Official Income Tax Return filing website: https://incometaxindia.gov.in/

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