Newcomers to the trading world don’t always know how to include gains and losses in their income tax calculations. It is even more difficult to report gains from intraday trading as they are not considered as capital gains. As a result, many taxpayers are fined for submitting the wrong income tax returns (ITR) form. Some are also fined for reporting under a wrong head. Let’s look at how exactly you should report your gains or losses from intraday trading in the ITR.
All about intraday trading
A trading transaction completed within the period of a single business day is known as intraday trading. Here, the trader holds no positions at the close of the day. Instead, they try to profit from the price variations of a stock during one business day. To become a day trader, you will need to open a trading account with a reliable broker like Kotak Securities.
Income head for incorporating intraday trading gains
Gains from intraday trading do not meet the minimum holding period of one day to qualify as capital gains. These gains are listed under business income and taxed as per the investor’s tax slab.
Such gains may also be classified as speculative income because there is no delivery of shares. The shares purchased in the morning are sold off by the evening.
Advantages and disadvantages of speculative income
Speculative income is filed under income from business. Any profit is added to the total tax payable by the individual in keeping with the relevant tax slab. For a losing speculative business, however, the losses have to be set off against a gaining speculative business.
ITR form for declaring income from intraday trading
A salaried person with gains from intraday trading will have to fill out ITR-3. Any loss could be set off against only an intraday gain. One can carry forward the loss for a maximum period of four assessment years, provided they fill up IT returns for all those years. Securities transaction tax (SST), which is payable for all stock market trades, can be claimed as a deduction along with other expenses incurred with regard to day trading.
Advantages of paying business taxes
- Tax rates: If your total income is not more than Rs 5 lakh, then you need to pay only 10% of your income as taxes.
- Deductions: Under business tax, you can apply for deduction of the SST paid plus all other expenses made for the business. These expenses may include brokerage, other taxes, educational materials, and even depreciation of the electronic gadgets used.
- Carry forward: You can carry forward any loss incurred for the next four years and use it to offset profits made in the later years.
Disadvantages of paying business taxes
- Tax rates: In case of high profits, you could land in the highest tax bracket. This could happen because the profit from intraday trading is added to your total taxable income.
- Audit: If your turnover is more than Rs 2 crore or your profit is less than 8% of your turnover, you may be audited. So, maintain your book of records with care.
- Filing tax returns: Filling out ITR-3 could be difficult. You might need professional help.
Before you start, it is important to know your income tax slab. Do fill up all the details on your ITR form as incorrect data or wrong form can earn you penalties. Once you know the finer points of ITR-3, you will understand how to report intraday gains and losses in the most effective way.