The widespread trading style among active market participants is intraday trading, where traders buy and sell financial securities within the same trading day. It provides opportunities from fluctuating market sentiment; however, it has separate tax regulations. In India, taxation on profits from intraday trading is considered speculative business income and is taxed at applicable slab rates under the Income Tax Act of 1961. However, some provisions and practices enable traders to legitimately manage and reduce their tax obligations.
1. Keep Accurate Records of Trades
Maintain a clear and comprehensive record of all intraday trades, with transaction dates, names of stocks, volumes, pricing, brokerage charges, and other relevant expenses. Well-maintained records will ease the claiming of permissible business expenses and ensure the accurate calculation of net taxable income, thus preventing disallowance while filing for taxable income.
Some transaction records may also serve as a reference to substantiate oneself while assisting income tax return (ITR) filing or assessments through low brokerage demat accounts and trading platforms.
2. Claim Business Expenses
Intraday trading taxation allows traders to deduct genuine business expenses incurred while performing intraday trades. Just a few examples:
Brokerage and transaction charges
Internet and mobile charges
Advisory or research fees
Depreciation on computers and trading equipment
Subscriptions to market data services
Organizing the recording of such expenses would ensure that taxable income is calculated only on net profit, thereby reducing total tax liability.
3. Go for a Low Brokerage Demat Account
The low brokerage demat account works for every trader, as it minimizes transaction costs on every single trade. Even if brokerage charges are not by themselves a major tax factor, having lower rates effectively reduces the total expenses of the trading business, thereby increasing business profits. Since profiting through intraday trading is subject to tax, through the implementation of a low brokerage account, these traders manage their expenses, ultimately controlling their total profits subject to taxation.
4. Set Off Speculative Losses
Speculative losses made on intraday trading can be set off against speculative profits of the same financial year. In a case where the trader has incurred an intraday loss, more speculative income against which the possibility of adjusting these losses for tax purposes may arise.
Whereas, if speculative losses cannot be set off entirely during the specified assessment year, as per the provisions of the Income Tax Act, such losses may be carried forward for the subsequent four assessment years and set off against future speculative profits.
5. Filing Income Tax Returns Should be Timely
Such an opportunity helps a trader to carry forward their speculative losses, as any challenges related to time warrant cancellation of the faraptor to adjust the aforementioned losses in the succeeding years. Working traders should make a point of declaring speculative business income together with losses and be in the proper ITR form.
6. Separate Personal vs. Business Expenses
Mixing personal and business expenses may lead to disallowances during tax assessments. Wherever possible, a trader should maintain separate bank accounts, mobile numbers, and internet utilities for their trading activity. Such a separation allows easier justification of business-related expenses under intraday trading taxation rules.
7. Annually Review Applicable Tax Provisions
With each budget announcement, there may be changes to tax laws and slab rates during the ensuing financial year. It is important for traders to keep abreast of any changes in the latest provisions with reference to those applicable to taxing intraday trading regarding rates, deductions, and any guidelines concerning speculative business income. This will enable correct tax planning based on current provisions.
Conclusion
Intraday traders are usually subjected to certain tax rules governing speculative business income. That is, profits are being taxed as per individual slab rates. Traders can reasonably be expected to manage and lower their tax liabilities by following avenues available to them: keeping records accurately, claiming avoided expenses, using a low brokerage demat account, and making provisions for setting speculative losses. Regular compliance coupled with an understanding of the current tax regulations is a must for promoting financial and tax management for intraday traders.
