Income Tax on Trading

Stock Trading means buying and selling financial instruments such as shares, mutual funds, commodities, currency, bonds, debentures, etc. An Investor buys and sells stocks and securities with the intention of building an investment portfolio. A Trader buys and sells stocks and securities with an intention to earn quick profits due to fluctuations in prices. Trading Income comprises equity (delivery, intraday, F&O), commodity trading, currency trading, etc. While equity delivery trading is usually considered to be an Income from Capital Gains, all other forms of trading are considered to be Business Income as per Income Tax.

Income Heads and ITR Form for Trader or Investor

Income from equity intraday trading is a speculative business income. The income from F&O trading is a non-speculative business income. Further, the income from equity delivery trading may be treated as either capital gains or business income.

• If a trader has Income from Capital Gains, then he/she should file ITR-2.
• If a trader has Business Income, then he/she should file ITR-3.
• The trader who has opted for the Presumptive Taxation Scheme should file ITR-4 on the Income Tax Website.

Speculative Business Income and Non-Speculative Business Income

Income from trading is treated as a Business Income. As per the Income Tax Act, business income can be either Speculative Business Income or Non-Speculative Business Income.

Speculative Business Income

As per the Income Tax Act, a contract in which the purchase or sale of any commodity including stocks and shares is settled without actual delivery is called a Speculative Transaction. Intraday Trading means trading in stock or security by squaring off the trade within the same trading day. Therefore, it is a Speculative Business Income.

The definition of Speculative Transaction specifically excludes derivative transactions. Thus, equity F&O, commodity trading, and currency trading are non-speculative in nature. The trader enters into such transactions for the purpose of hedging and thus such income is a Non-Speculative Income.

Non-Speculative Business Income

Any business income that’s not Speculative in nature is a Non-Speculative Business Income. Hence, this income includes trades in equity F&O, commodity trading, and currency trading. Since F&O Trading is a hedge and there is the delivery of the underlying security, it is non-speculative in nature. The definition of Speculative Transactions specifically excludes the intraday trading of Commodity and Currency. Thus, it is a Non-Speculative Business Income. Additionally, if the trader has significant trading activity in equity delivery and mutual funds, it is a Non-Speculative Business Income.

Due Date for ITR for Trading Income

• Up to FY 2019-20
  • 31st July is the due date for traders to whom Tax Audit is not applicable
  • 30th September is the due date for traders to whom Tax Audit is applicable
• FY 2020-21 Onwards
  • 31st July is the due date for traders to whom Tax 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 taxable at slab rates as per the Income Tax Act. Following are the slab rates for the old tax regime and the new tax regime.

Slab Rates if Traders opt for Old Tax Regime

Note: Surcharge is liable for the total income as per the prescribed surcharge slab rates. Further, a Cess is liable at 4% on (basic tax + surcharge).

Slab Rates if Traders opt for New Tax Regime

Calculate Advance Tax on Trading Income

If the tax liability of the trader or investor is expected to exceed Rs. 10,000, then they must calculate and pay Advance Tax. This is so as to avoid Interest under Section 234B and Section 234C. Advance Tax is to be paid in quarterly installments on 15th June, 15th September, 15th December, and 15th March. However, if trader opts for presumptive taxation u/s 44AD, they must pay the entire amount of Advance Tax in a single installment on or before 15th March.

The trader/investor should determine taxable income for each quarter, calculate tax liability, and make payment of Advance Tax.

Set Off and Carry Forward Loss – Income from Trading

A trader can claim and set off and carry forward the losses if a tax audit has been conducted by a professional chartered accountant in practice. The trader can carry forward such loss and set off against future profits to reduce the income tax liability.

• Short Term Capital Loss can be set off against Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG). The investor can carry forward the remaining loss for 8 years and set off against future STCG and LTCG
• Long Term Capital Loss can be set off against Long Term Capital Gain (LTCG) only. The investor can carry forward the remaining loss for 8 years and set off against future LTCG.
• Speculative Business Loss can be set off against Speculative Business Income only. The trader can carry forward the remaining loss for 4 years and set off against future Speculative Business Income only.
• Non-Speculative Business Loss can be set off against any income except Salary in the current year. The trader can carry forward the remaining loss for 8 years and set off against Business Income in future years.

However, if the trader has opted for the new tax regime, they cannot set off the brought forward business loss against business incomes. Further, they cannot carry forward the business loss to future years.

Calculate Trading Turnover – Income Tax on Trading

When the trading income is treated as business income, it is important to calculate the trading turnover to determine the applicability of the Tax Audit as per the Income Tax Act.

Note: The turnover calculation for options has been updated based on the eighth edition of the guidance note dated 14/08/2022 (w.e.f A.Y 2022-23). Previously, turnover for options trading was calculated as “Absolute Profit + Premium on Sale of Options.”

Tax Audit Applicability – Income Tax on Trading

The applicability of the Tax Audit is determined on the basis of Trading Turnover and the Profit or Loss on it. In the case of a stock trader, a Tax Audit is applicable in the following situations:

• If trading turnover is up to INR 2 Cr, the taxpayer has incurred a loss or profit is less than 6% of Trading Turnover and total income is more than the basic exemption limit.
• If trading turnover is more than INR 2 Cr and up to INR 10 Cr and the taxpayer has incurred a loss or the profit is less than 6% of Trading Turnover.
• When trading turnover is more than INR 2 Cr and up to INR 10 Cr, profit is more than or equal to 6% of Trading Turnover, and the taxpayer does not opt for the Presumptive Taxation Scheme under Sec 44AD
• Trading Turnover is more than INR 10 Cr.

Tax Loss Harvesting – Income Tax on Trading

Tax Loss Harvesting is the practice of realizing the unrealized loss through the sale of shares. And therefore, adjusting it with the realized profits to reduce the tax liability. Before opting for Tax Loss Harvesting, the trader should be aware of the rules to set off the loss as per the Income Tax Act.

FAQs