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:
- If trading turnover is up to INR 1 Cr, the taxpayer has incurred 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 1 Cr and up to INR 2 Cr and the taxpayer has incurred loss or the profit is less than 6% of Trading Turnover.
- If trading turnover is more than INR 1 Cr and up to INR 2 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 2 Cr.
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.
- A trader having Income from Capital Gains should file ITR-2.
- A trader having Business Income should file ITR-3.
- Trader who has opted for the Presumptive Taxation Scheme should file ITR-4 on Income Tax Website.
Due Date for ITR for Trading Income
- Up to FY 2019-20
- 31st July – for traders to whom Tax Audit is not applicable
- 30th September – for traders to whom Tax Audit is applicable
- FY 2020-21 Onwards
- 31st July – for traders to whom Tax Audit is not applicable
- 31st October – for traders to whom Tax Audit is applicable
Set Off and Carry Forward Loss – Income from Trading
- Short Term Capital Loss can be set off against Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG). A trader 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. A trader 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. A 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. A trader can carry forward the remaining loss for 8 years and set off against Business Income in future years.
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.
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.
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.
– 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.