How Gain from Intraday Trading are Taxed?

There is hardly any income in India that is not taxed, so you are surely aware that there is an income tax on intraday trading profit in India. This taxon intraday is different from the normal equity tax in form and set-off. We will look at this subject purely from the perspective of income tax on intraday trading profit 2021. Broadly, you must understand that income tax or intraday trading tax in India is charged in the form of speculative transactions and that has a separate set of implications.

How gains from intraday are taxed?

Intraday trading tax or tax on intraday trading is unique due to its treatment. Unlike normal delivery trading, no capital asset is bought or sold intraday. At the end of the day, your net position is zero and there is no delivery. Such trades are classified as speculative and the tax on intraday is designed accordingly. While the intraday trading tax is the same for speculative income, there is a difference in the set-off and carry forward of such speculative losses.

Since income from intraday trading is speculative gain or loss it is obvious that the intraday trading tax will also be taxed on speculative income. In the case of intraday, there is no question of capital gains or losses so you must show it as speculative business income. Will this change the tax rate? Not, it does not because it is taxed at the same rate as non-speculative business income. The difference will be in the method of carrying forward losses and the methodology of setting off losses against gains.

In the case of investing with delivery, taxation is quite simple. The transaction of sale gives rise to either capital gains or capital losses. These gains and losses are classified as long-term and short-term capital gains depending on the holding period. For example, if you hold a stock for more than a year, it is classified as long-term capital gains, else short-term capital gains. The long-term gains are tax-free up to Rs.100,000 each fiscal year, but above that, they are taxed at 10% flat i.e., without the benefits of indexation. On the other hand, the short-term gains are taxed at 15%.

It is important to remember that when arriving at the income or loss from trading of stocks intraday, the Income Tax Act permits you to deduct expenses related to trading in stocks as business expenses. These would include outlays like internet charges, telephone charges, broker’s commission, and Demat account charges, among others. There is one more important aspect. STT cannot be claimed as a deduction in STCG or LTCG. However, if you show it as business income, the STT can be charged as an expense in the P&L account.

Here is the most important point to note about intraday trading taxation. The losses arising from intraday trading, being speculative, are allowed to be set off only against profit from any other speculative business. For example, you cannot set off the speculative loss against any other income, not even capital gains or non-speculative business income.

In the normal non-speculative business and capital gains, you can carry forward the loss not set off for 8 assessment years. In the case of speculative losses like from intraday trading, such losses can only be carried forward for the next 4 assessment years for set off against future speculative income.

What are the charges for intraday trading?

That would typically depend on whether the broker is a full-service broker or a discount broker. For example, full-service brokers tend to charge a higher brokerage as they promise to share tips and research on the stock market; both technical and fundamental. A discount broker, on the other hand, provides no-frills access to trade and thus charges a much lower brokerage. But in many cases, there are catches, so read the fine print carefully. You can find and assess such broker options using a stock trading app.

Typically, a full-service broker charges between 0.03% to 0.05% of the transaction value as brokerage along with a minimum fee of around Rs. 30 per transaction on intraday trades. However, discount brokers or low-cost brokers usually charge a flat fee per transaction.

What is the average price?

The average price concept assumes importance as you don’t buy all stocks in one go. For example, if you buy, 100 shares of RIL at Rs.2000, 200 shares at Rs.2050, and 300 shares at Rs.2100, what is your average price. Is it Rs.2050, which is the average of the 3 prices? No, it will be the weighted average as you bought different quantities so you must weigh these quantities by the prices. Here is how you can go about the task.

So, the correct average price in the above is Rs.2,067 and not Rs.2,050. So, if you sold these 600 shares of Reliance at Rs.2060, you may think you made a profit of Rs.10 but actually, you have made a loss of Rs.7. Here I am not even counting brokerage and statutory charges, which can deepen losses.

For tax purposes, it is not the average price but FIFO (First in First Out) method that is used to calculate the profit or loss. But even here, the guiding price should still be the weighted average price