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The term intraday trading describes the phenomenon of buying and selling shares on the same trading day. This is not what long-term investing represents; in long-term investing, shares are held for an extended period. Given that intraday traders enter and exit stocks many times throughout the day for short-term gains and losses, they must understand the tax implications of this activity.
What is a Demat Account?
A Demat account holds shares and securities in an electronic format. It enables traders and investors to buy and sell securities digitally. Thus, having a demat account is a prerequisite for investing in the stock market; it serves as a record of intraday trading activities. But demat accounts don’t trigger a tax, and transactions done through them are taxable, especially in light of intraday trading.
Nature of Income from Intraday Trading
Under the Income Tax Act, the income derived from trading in intraday shares would be classified as income from a speculative business. This is because it is ultimately not a delivery share; the purchase and sale are conducted within the same trading day session. That is why taxation treatment is different from long-term capital gain or short-term capital gain arising from delivery trades.
Income Tax on Intraday Trading
Income earned from intraday trading gets taxed at the slab rates applicable under the Income Tax Act. Since it’s treated as speculative business income, this needs to be declared under the head “Profits and Gains of Business or Profession.” There is no special tax rate, barring the “business income” category for intraday trading. The entire amount is therefore added to taxable income and taxed accordingly. For example, an intraday trader earning ₹1,00,000 and paying a tax of 30% would owe tax on this income of ₹30,000 (without educational cess or any surcharge).
Recording Profits and Losses
Traders must keep accurate accounts of all intraday activities. The details include the date of trade, name of the security, quantity, purchase price, sale price, and profit or loss incurred thereon. These records are mandatory for income tax filing. The losses sustained from intraday trading are classified as speculative losses. These losses can be offset only against speculative gains made during the same financial year. If not fully set off, they can further be carried forward for the next four assessment years, provided they are shown in an income tax return that was filed on or before the due date.
Taxes’ Impact on Earnings
Taxation cuts down the earnings from intraday trading sharply. Thus, the post-tax income for a trader who earns ₹5,00,000 through intraday trading and falls in the 30% income slab is ₹3,50,000 (excluding cess and surcharge). Other such costs include brokerage fees, Securities Transaction Tax (STT), other exchange charges, and income tax, which can prove significantly harmful to the overall profit-earning potential of intraday trading.
Maintenance of Books of Accounts
Well, since this intraday trading falls within the core ambit of business activities, the maintenance of the books of accounts becomes mandatory for the individual trader if the turnover exceeds the prescribed limit. These books include cash books, journals, ledgers, trade statements, and bank statements. The proper maintenance of records thus aids tax audits and ensures compliance with income tax regulations.
Filing of Income Tax Returns
Traders engaged in intraday trading would have to file their income tax returns under ITR-3, which applies to individuals and Hindu Undivided Families (HUFs) having income from a business or profession. Traders can avail themselves of ITR-4 if they have opted for presumptive taxation under Section 44AD, although this is applicable under restricted conditions. Filing the returns in time is important to be able to claim a loss set-off and avoid penal interest.
Conclusion
All market participants must take note of both the Demat account tax on intraday trading and the income tax on intraday trading. Furthermore, traders must calculate their tax obligations correctly so they can stay compliant. Correct reporting and maintenance of records, timely advance tax payments, and return filing go a long way in efficiently navigating tax obligations. Though taxes do reduce the final income from intraday trading, by following due tax procedures, the trading process remains smooth and lessens legal challenges.
