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Income Tax on Trading

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Sakshi Shah

Last updated on December 13th, 2021

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 is 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.

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

Tax Rates for Trading Income

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

Total Income Tax Rate
Up to INR 2,50,000 NIL
INR 2,50,000 to 5,00,000 5%
INR 5,00,000 to INR 10,00,000 20%
Above INR 10,00,000 30%

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

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.

Due Date for ITR for Trading Income

Set Off and Carry Forward Loss – Income from Trading

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.

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.

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.

Got Questions? Ask Away!

  1. Hey @Hari_Haran,

    If your Income other than trading Loss is less than 2.5 lac & turnover less than crore , you won’t require Audit. You need to fill ITR 3

  2. Hi @Anoop

    Due date for filing the return has been extended.

    Due Dates to File Income Tax Returns for FY 2020-21 ( AY 2021-22 )

    Category of Taxpayer Original Due Date Extended Due Date
    ITR Filing when Tax Audit is not Applicable 31st July 2021 30th September 2021
    ITR Filing when Tax Audit is Applicable 31st October 2021 30th November 2021
    Tax Audit Report Filing 30th September 2021 31st October 2021
    Due Date for Filing Belated/Revised ITR 31st December 2021 31st January 2022

    So, You need to file ITR by 30th September 2021 when Tax Audit is not Applicable.

    Hope this helps!

  3. Hi @harijanardhan, tax audit is broadly applicable in three cases- in case of other income; reported loss; opted in/out of presumptive tax. Without knowing your entire income situation, I won’t be able to give a definite answer but you can go through this article which will help you understand your audit liability. If you face any other problem, please ask, would love to help.

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