A brief guide on trading income

Trading is a skill that youngsters and even middle-aged people want to learn today. Turning towards the stock market enables people to create alternate sources of income.

The rise in trading trends in India has been fueled mainly due to the pandemic leading to job losses that left millions of people with little to do in the lockdown. Moreover, technology, including the rise of trading apps and social media—YouTube influencers, Twitter, and Telegram stock-tipping chat groups—has attracted more and more people.

According to the data released by CDSL & NSDL, the number of active Demat accounts in the country crossed the 100 million mark in August 2022. The growth can be attributed to factors such as an increase in smartphone usage, easier digital onboarding of customers, and attractive returns delivered by the equity markets.

Now let’s understand a few forms of trading that are available in the market.

  1. Intraday Trading: The concept of buying and selling shares on the same day.
  2. Delivery Trading: The concept of holding the shares for longer than a day.
  3. FnO Trading: Also commonly known as ‘Derivatives’, FnO is a financial contract, which derives its value from an underlying asset.

Income Head Classification:
Income from normal (delivery) trading is treated as Income from Capital Gains and hence reported in ITR 2, whereas income from intraday and FnO trading is treated as Income from Business & Profession u/s 43(5) of the Income Tax Act, and hence reported in ITR 3.

Taxation on Trading Income
Traders can file their taxes either under the regular scheme or under the presumptive scheme of taxation.

  • Regular Scheme of Taxation
    Small businesses and professionals can have some obstacles in their day-to-day work. Right from building up their brand value to getting customers, hiring a workforce, and renting an office space, the everyday operations of small businesses and professionals can be quite challenging.
    On top of it, the Income Tax Act also requires that these businesses or professions maintain regular books of account, get an audit done and calculate & pay tax on the actual profits earned. This can be a time-consuming and costly affair for small businesses.

Hence, the Government of India came up with the presumptive taxation scheme under Section 44AD, Section 44ADA, and, Section 44AE.

  • What is Presumptive taxation?
    Presumptive taxation was introduced by the Income Tax Act for small businesses & professionals in order to relieve them from maintaining books of accounts and hence getting them audited. It is an optional scheme

This means that delivery trading cannot be reported under the presumptive taxation scheme, only intraday and FnO trading can be reported under the presumptive scheme as they are considered as business income u/s 43(5) of the IT Act.

Another advantage of opting for presumptive taxation is that if the taxpayer has to pay advance tax, then instead of estimating and paying it every quarter, he can pay together by 15th March of the relevant financial year.

Tax Liability:
A trader can claim certain expenses incurred wholly and exclusively incurred for the purpose of trading in order to reduce the tax liability while filing his ITR. Read about the expenses a trader can claim in an ITR.

  1. Since FnO & Intraday trading is treated as business income, income from the same is taxable at slab rates as per the regime chosen under Income Tax Act.
  2. Tax on delivery trading is based on the duration of holding. Long-term Capital Gain (LTCG) and Short- term Capital Gain (STCG) are taxed at special rates. Read more about the taxation on Long-term and Short-term Gains

Tax Audit Applicability:
The tax audit applicability depends on the trading turnover. Along with the turnover limits there are certain other conditions attached to it as well in order to determine Tax audit applicability.

Read about Tax Audit on Intraday Trading and Tax Audit on FnO Trading

Set off & Carry Forward of Losses:

  • FnO is treated as non-speculative business income whereas intraday is treated as speculative business income.
  • STCL can be set off against STCG and LTCG whereas LTCL can only be set off against LTCG.
  • Non- speculative loss can be set off against all incomes except Salary in the year of loss incurred. Once it’s carried forward then it can be set off only against Business income. In contrast, a speculative loss can be set off only against speculative gains.
  • Any loss under the income head Capital Gains & Non-speculative Business income can be carried forward that remains after set off for 8 assessment years. Also, any loss under Speculative Business Income can be carried forward that remains after set off for 4 assessment years.
  • Note: The taxpayer can carry forward and set off the loss only if he/she has filed their ITR u/s 139(1) on or before the due date.

Read more about the set-off and carry-forward of losses.

Got questions? Shoot them here!