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

Taxable Income (INR) Slab Rate
Up to 2,50,000 NIL
2,50,001 to 5,00,000 5%
5,00,001 to 10,00,000 20%
More than 10,00,000 30%

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

Taxable Income (INR) Slab Rate
Up to 2,50,000 NIL
2,50,001 to 5,00,000 5%
5,00,001 to 7,50,000 10%
7,50,001 to 10,00,000 15%
10,00,001 to 12,50,000 20%
12,50,001 to 15,00,000 25%
More than 15,00,000 30%

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.

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

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

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. However, 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?

1) Equity Delivery Trading is a Capital Gains Income. The tax rate for LTCG income is 10% in excess of INR 1 lac. The tax rate for STCG income is at slab rates.
2) Equity Intra day Trading is a Speculative Business Income taxed at slab rates.
3) Trading in futures and options is a Non-Speculative Business Income and taxed at slab rates.

Is Intraday trading in Futures and Options also considered Speculative Business Income?

No. Intraday Trading in Futures and Options is a Non-Speculative Income. The definition of speculative transactions specifically excludes trading in derivative transactions. Further, such transactions are done with the intention of hedging.

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.

  4. Hi
    I have taken Voluntary early retirement offered by my company last FY. I have received an ex-gratia compensation for the same. I have heard that an exemption up to Rs.500000 is allowed for such compensation. If so where do I include this while filing the ITR. Also please let me know when the “ADD BROKER” feature will be enabled on your site.
    Thanks
    Girimon

  5. Hey @Girimon_Vasudevan

    As per my opinion, ex gratia compensation is exempt from tax if employee receives ex-gratia from Central govt/state govt/ local authority/Public Sector Undertaking, otherwise it is taxable.

    Further, add broker feature is already enabled on site.

    Hope, it helps!

  6. Hi @Girimon_Vasudevan

    The term ex-gratia defines the payment received by favour or gift voluntarily without having any obligation or legality involved from the employer side and hence, compensation by this nature may be taxable.

    But, If any amount received or receivable by an employee on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or scheme of voluntary separation, to the extent such amount does not exceed five lakh rupees, shall be exempt from tax.

    Further, such compensation has to be paid in purview of company’s voluntary retirement policies or obligatory by the employers and according to rule 2BA of income tax rules.

    I hope, it helps!

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