Income Tax on Trading

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Sakshi Shah

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

Read the provisions of income tax on trading income – calculate trading turnover, the applicability of tax audit, tax rates, applicable ITR Form, Due Date to file ITR, set-off and carry forward loss, calculation of advance tax, and tax loss harvesting.

Have any questions ?
Have any queries for trading income, ask us on TaxQnA and we will answer it in the simplest way!
Have any questions ?
Have any queries for trading income, ask us on TaxQnA and we will answer it in the simplest way!

Calculate Trading Turnover

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.

Type of Trading Calculation of Trading Turnover
Equity Intraday Trading Absolute Profit
Equity Futures, Commodity Futures, Currency Futures Absolute Profit
Equity Options, Commodity Options, Currency Options Absolute Profit + Premium on Sale of Options
Equity Delivery Trading & Mutual Fund Trading Sales Value

Tax Audit Applicability

The applicability of the Tax Audit is determined on the basis of Trading Turnover and the Profit or Loss on it.

Applicability of Tax Audit from Trading Income
Turnover limit for Tax Audit is increased from Rs. 1 Cr to Rs. 5 Cr in Budget 2020. Read about tax audit applicability for trading income.
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Applicability of Tax Audit from Trading Income
Turnover limit for Tax Audit is increased from Rs. 1 Cr to Rs. 5 Cr in Budget 2020. Read about tax audit applicability for trading income.
Read More

In the case of a stock trader, Tax Audit is applicable in the following situations:

Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
Explore

Tax Rates for Trading Income

Business Income is taxable at slab rates as per the Income Tax Act.

Total IncomeTax Rate
Up to INR 2,50,000NIL
INR 2,50,000 to 5,00,0005%
INR 5,00,000 to INR 10,00,00020%
Above INR 10,00,00030%

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

Need to determine your slab rate?
Here are the slab rates for AY 20-21 as released by the ITD.
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Need to determine your slab rate?
Here are the slab rates for AY 20-21 as released by the ITD.
Read More

ITR Form for Trader or Investor

Traders need to choose their ITR form based on the instruments they have traded in, this could be Equity, Mutual Funds, Intraday, Futures & Options, etc. The income tax department has notified ITR Form based on different income situations. Here is the defined ITR Form for Trader or Investor.

Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
Explore

Due Date for ITR for Trading Income

FY 2019-20: Due Date to file Income Tax Return for both audit and non-audit cases has been extended to 30th November 2020
Tip
FY 2019-20: Due Date to file Income Tax Return for both audit and non-audit cases has been extended to 30th November 2020

Set Off and Carry Forward Loss – Income from Trading

Not sure how much loss you can carry forward?
Read our article here to understand how to calculate your losses' set off and carry forward.
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Not sure how much loss you can carry forward?
Read our article here to understand how to calculate your losses' set off and carry forward.
Read More

Calculate Advance Tax on Business Income

If the tax liability of the trader 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 234C. Advance Tax is to be paid in quarterly installments on 15th June, 15th September, 15th December, and 15th March. The trader should also determine the taxable income for each quarter, calculate tax liability, and make payment of Advance Tax online.

Tax Loss Harvesting – Income from Capital Gains

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 loss as per the Income Tax Act.

Want to understand tax-loss harvesting better?
Read our article here to understand how to reduce your tax liability.
Read More
Want to understand tax-loss harvesting better?
Read our article here to understand how to reduce your tax liability.
Read More

If you are a Trader or Investor having income from trading in equity delivery, intraday, or F&O, you can log in to Quicko to file your Income Tax Return on your own. You can also go for CA Assisted Plans to take the help of an expert to prepare and file your Income Tax Return.

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Import Your Trades

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FAQs

I have incurred loss from F&O / Intraday trading. Is Tax Audit by Chartered Accountant mandatory?

Tax Audit as per Income Tax Act is mandatory if the profit is less than 6% of Trading Turnover. Since you have incurred a loss, Tax Audit under Section 44AB is mandatory. You must appoint a practicing Chartered Accountant to audit your books of accounts.

I am a trader having income from Intraday / F&O Trading. Am I liable to pay Advance Tax?

As per the Income Tax Act, an assessee whose total tax liability exceeds Rs. 10,000 should pay Advance Tax. Thus, if a trader’s total income tax liability exceeds Rs. 10,000, he/she should pay advance tax in 4 installments of the financial year. If the trader has opted for the Presumptive Taxation Scheme, he/she can pay advance tax for the entire financial year by 15th March.

I have earned profits from equity trading and F&O trading. How can I calculate the tax liability?

– Equity Delivery Trading is a Capital Gains Income. LTCG is taxed at 10% in excess of Rs. 1 lac. STCG is taxed at slab rates.
– Equity Intraday Trading is a Speculative Business Income and taxed at slab rates.
– F&O Trading is a Non-Speculative Business Income and taxed at slab rates.

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