Tax Deductions Available For Intraday Traders – Maximize Returns Now

Intraday trading has certainly grown in popularity among traders in the Indian stock market. While it offers the opportunity for significant gains within a single trading day, it is imperative for intraday traders to be aware of the tax implications and deductions available to them. Understanding the nuances of intraday trading tax can be the key to maximizing returns.

Understanding Intraday Trading Tax

Intraday trading involves buying and selling stocks within the same trading day, and it is often pursued with the goal of making quick profits. Unlike other forms of trading where holding periods are longer, intraday trading treats each transaction separately for tax purposes, that is called intraday trading tax.

For the taxation of intraday trading, any gains or losses are classified as speculative gains or losses. This classification is essential as it affects how these gains or losses are taxed and deducted.

Tax Treatment of Intraday Trading

1. Income Classification:

Intraday trading profits are classified as speculative business income. This classification is significant because speculative income is treated differently under the Income Tax Act of India. It is important to report such income under ‘Income from Business or Profession’ while filing returns.

2. Tax Rate:

The income tax rates for intraday trading income depend on the total taxable income of the individual. The tax slabs for the fiscal year 2023-2024 are as follows:

– Up to INR 2.5 lakh: No tax

– INR 2.5 lakh to INR 5 lakh: 5%

– INR 5 lakh to INR 10 lakh: 20%

– INR above 10 lakh: 30%

Additionally, incomes above INR 50 lakh attract a surcharge ranging from 10% to 37%, depending on the amount exceeding INR 50 lakh, along with a cess of 4% on the total tax.

Deductions and Expenses

Intraday traders can deduct various expenses related to their trading activities. Here are some notable deductions that can help in reducing taxable income and potentially increasing net returns:

1. Brokerage Fees:

Brokerage fees are charged by brokers for facilitating trade execution. This expense can be deducted from the intraday trading income.

Example Calculation:

Consider a trader who pays brokerage fees of INR 1,000 per month. Over a year, the brokerage fee sums up to INR 12,000 which can be deducted from the gross income.

2. Securities Transaction Tax (STT):

STT charges on intraday are a significant contributor to trading costs. STT on intraday trades is levied at 0.025% of the total transaction value for both buy and sell transactions.

Example Calculation:

Assume an intraday trader executes trades worth INR 10 lakh in a day. The STT cost would be:

INR 10,00,000 * 0.025% = INR 250 on buying

and similarly,

INR 10,00,000 * 0.025% = INR 250 on selling,

Total STT cost = INR 500.

Over multiple trades and days, these costs can add up substantially.

3. Internet and Communication Charges:

Since intraday trading heavily relies on real-time data, internet and communication expenses incurred for trading purposes can also be deducted.

Example Calculation:

Suppose a trader spends INR 2,000 monthly on internet and phone services primarily for trading. Over the year, this amounts to:

INR 2,000 * 12 = INR 24,000,

which is deductible.

4. Advisory and Training Fees:

Fees paid towards advisory services or trading courses to enhance trading skills are deductible expenses. The rationale is that these services directly contribute to the business of trading.

Example Calculation:

If a trader pays INR 15,000 for a trading course, this amount is also deductible from taxable income.

5. Depreciation on Assets:

Taxpayers can also claim depreciation on assets such as computers or laptops used for trading activities. The depreciation rate for computers and related peripherals is 40% on a written-down value basis under the Income Tax Act.

Example Calculation:

If a trader purchases a computer for INR 50,000, the depreciation claimable at 40% would be:

INR 50,000 * 40% = INR 20,000 for the first year,

and this continues for subsequent years reducing the asset’s value progressively.

Loss Set-Off and Carry Forward

1. Set-Off Against Income:

Speculative losses from intraday trading can only be set off against speculative profits in the same financial year. This means that any speculative gains can be reduced by speculative losses within the same assessment year.

Example Calculation:

If a trader has speculative gains of INR 1,50,000 and speculative losses of INR 60,000, the net taxable speculative income would be:

INR 1,50,000 – INR 60,000 = INR 90,000.

2. Carry Forward of Losses:

If the speculative losses exceed speculative profits in a given year, the excess losses can be carried forward for four subsequent financial years. This provision allows traders to use the loss as a buffer for future speculative gains.

Example Calculation:

If a trader incurs a speculative loss of INR 80,000 and no speculative gains in one financial year, this loss can be carried forward and set off against future speculative gains within the next four years.

Tax Filing and Compliance

To ensure proper tax compliance, intraday traders must maintain meticulous records of their trades, expenses, and other relevant documents. It is advisable to use trading software or maintain spreadsheets to track all transactions and associated costs accurately.

Furthermore, all deductions and expenses claimed should be backed by valid invoices or receipts, and proper documentation should be kept to substantiate claims during assessments or audits.

Conclusion

Navigating the complexities of intraday trading taxation requires a thorough understanding of the relevant provisions and regulations. While the potential for profit is significant, being well-versed in how taxes and deductions apply to intraday trading can make a substantial difference in a trader’s net returns.

Disclaimer:

It is crucial to conduct comprehensive research or seek advice from tax professionals to understand the full extent of tax obligations and deductions. Trading in the Indian stock market carries its own risks, and traders should weigh all pros and cons before engaging in intraday trading.