Tax Treatment and Applicability of Audit for Intraday Trading in India

With improving IT infrastructure such as swift Internet and availability of Smartphones, Investors' education has shown phenomenal development. With this, stock traders in India have been grown expeditiously. Today in this article we have tried to simplify perplexity of tax treatment, Tax Audit Applicability on Intraday Trading, Calculating Turnover for Intraday Trading under Income Tax Provisions.

First, let us talk about what is Intraday Trading in brief

WHAT IS INTRADAY TRADING?

Intraday Trading refers to a single day trading in a stock market in which shares are purchased and sold in a single day with an objective to earn profits from the price fluctuations at a given point of time during the operation of the stock market.



In Intraday Trading:

  • Shares are traded in a single day.

  • All the intraday shares are squared off at the end of the day, even if the desired price has not been achieved.

  • The trader does not take the actual delivery of shares.

  • Here, the Intention of the trader is not to Invest but to earn profit from fluctuation in Prices

TAXABILITY OF INTRADAY TRADING

Intraday Trading under Income Tax
Income Tax treatment for Speculative Income

  • Intraday Trading is considered as SPECULATION BUSINESS under Income Tax, where there is no actual delivery of shares (As per section 43(5) of the Income Tax Act).

  • Profit from Intraday Trading will be considered as Speculation Gain and Loss from Intraday Trading will be considered as Speculation Loss.

  • Results of Intraday Trading i.e Profit or Loss is chargeable to tax under the head "Profits & Gains from Business or Profession" and is chargeable as business income.

CALCULATING TURNOVER FOR INTRADAY TRADING AS PER INCOME TAX

Turnover in the case of Intraday Trading is Absolute Turnover, which is the Sum of difference value after squaring up purchase and sale value.

Let us see an example for calculating turnover for Intraday as per Income Tax Provision:


Mr.X buys 1000 shares of ABC Ltd at Rs.100. He sells the shares at the end of the day at Rs.110. On the next day, he buys 200 shares of PQR Ltd at Rs.300. At the end of the day, he sells the shares at Rs.280.


Turnover Calculation for Intraday Trading
Turnover Calculation - Intraday Trading
TAX TREATMENT FOR INTRADAY TRADING

Intraday Trader has to file his Income Tax return using FORM ITR-3 and has an option under Income tax to declare the trading profit as per Presumptive Business Income u/s 44AD or as a Normal Business provision.


1. In the case of PRESUMPTIVE BUSINESS:

  • Declare minimum of 6% of turnover (as calculated above) as profit from Intraday, even if the trader has loss in actual.

  • The trader is not required to maintain books of accounts under this scheme.

  • Traders having turnover (as calculated above) up to 2 crores in a year can opt for the Presumptive Business option.

  • No further deduction for expenses is allowed under Presumptive Business.

  • Tax will be calculated as per the Slab rate on Total Taxable Income.

2. In the case of NORMAL BUSINESS:

  • The trader can claim deductions for expenses such as Office rent, Telephone Expense, Electricity, Internet Charges, etc, and income so derived after considering these expenses will be the taxable income.

  • The trader will require to maintain books of Accounts under this system.

APPLICABILITY OF TAX AUDIT FOR INTRADAY TRADING

Tax audit on Intraday Trading will be applicable in the following scenario:


1. In the case of PRESUMPTIVE BUSINESS:

  • If profit from Intraday Trading is declared less than 6% AND.

  • Total Income exceeds Basic Exemption Limit

When these 2 conditions are satisfied, Tax Audit will be applicable and the trader would require to maintain books of accounts and get it to audit by a Chartered Accountant, and chartered accountant will submit the Tax Audit report.


2. In the case of NORMAL BUSINESS:

In the case where turnover (as calculated above) for the year exceeds 2 crores (for AY 2020-21) and the threshold limit is Rs.5 crores for AY 2021-22

In such a case Tax Audit is required and the trader has to get its books of accounts audited by a Chartered Accountant.


CARRY FORWARD OF INTRADAY TRADING LOSSES

Sometimes the trader may incur Intraday Trader may have overall Loss from trading and such loss is called SPECULATION LOSS.


Loss from Intraday Trading (Speculation Loss) can be:

  • Carried forward for a period of 4 years from the year in which loss has been incurred.

  • Such loss can be setoff against future Speculative Income only and can not be setoff against any other heads.

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