Intraday trading refers to the buying and selling of stock within the same trading day to capitalize upon short-term price movements that may result from any number of developing situations. It serves as one of the strategies that benefits from making quick entries and exits. The trade also features specific tax implications that arise in contrast to long-term investments. The importance of gaining an understanding of tax on intraday trading has taken root among retail investors since not doing so might make them look at tax penalties, interest charges, and compliance-related issues.
Tax Aspects and Deals with Intraday Trading
Intraday involves a separate treatment for its tax purposes in juxtaposition to delivery-based trades as per the Indian Income Tax Act. The luminous idea here is that profits or losses of intraday trades are treated as business income and not capital gains. Which means all profits have to be added to the whole lot of the trader’s income and taxed at an applicable slab rate.
Illustration:
If an individual falls within the 30% dividend bracket, he or she would be taxed on the intraday advantages at that rate.
The losses that come under intraday trading are speculative business losses, and no such losses can be set off against speculative income, but these losses can be set off against non-speculative income or salary income.
The aforesaid difference often confuses retail traders who sometimes assume that income from intraday trading is going to be taxed as if it were capital gains.
Taxation relating to GST and brokerage
Besides personal taxation, a number of indirect costs come into play at the nontax level. These include Goods and Services Tax (GST) applied to the brokerage and transaction taxes collected by the broker. In this way, the cost of a trade undoubtedly becomes higher. Irrelevant, feeble as they may seem for each transaction, all these constraints arise cumulatively for active intraday traders. It had an impact on the net profitability.
Advance Tax and Compliance Obligations
With this income considered business, any gain on an intraday trade would make anybody liable to pay advance tax by way of installment during the financial year if the tax amount likely to be paid is over the stipulated limit. Pursuant to non-compliance, taxpayers may be subjected to interest under Section 234B and 234C of the Income Tax Act.
Towards the close of the year, filing income tax returns under the category of business income or even that of professional income becomes mandatory. This typically necessitates maintenance of detailed documentation on trades, expenses, and profit and loss balance sheets. Retail investors discarding these essentials are likely to be issued notices or suffer penalties.
Unchecked Penalties Faced by Retail Investors
Failure to pay advance tax on the due dates results in interest charged, thereby increasing the limit of liability.
Penalty for Late Filing
If the income tax return is filed after the due date, late fees according to Section 234F should be paid. This will also result in all deferred benefits for previous years, along with the benefits of carry-forward of speculative losses.
Disallowance of Expenses
Business expenses for internet accounts and advisory fees, among others, can be claimed by the intraday trader. Nevertheless, the lack of documentary proof could lead to a disallowance for assessment purposes.
Mismatch with Demat and Broker Records
If the income shown in the return does not tally with the broker statement or the Form 26AS, defiance may lead to scrutiny.
Demat Account Opening and Compliance
While intraday trades do not one iota of delivery into the demat account opening the demat account is still a prerequisite for any retail investor wishing to venture into the listed securities game. Brokers absolve the trading account in connection with the demat account to operate through both delivery and intraday segments. While infrequent, some compliance requirements with regard to intraday trading relate primarily to taxation. Likewise, proper establishment of an account ensures a smooth going when reporting and reconciliation in filing returns.
Conclusion
In light of the above, knowing one’s compliance with taxes holds equal importance to mastering trading strategies. From buying and selling to intraday trading, retail investors heed market entry and exit, often burying their heads in tax: incorrect tax planning may hamper wealth across every possible channel, ultimately. From recognizing intraday profits so construed business income to making advance tax payments, all grounds to be strictly avoided require attention. Getting started with demat account opening and activation of trading account, awareness of these basics will put one on a compliant track of market participation.