Investments in the equity market can be either held as ‘capital asset’ or ‘stock in trade’. As per the definition in section 2, a capital asset includes a property of any kind but does not include any stock in trade. Whereas stock held with the purpose of selling is defined as ‘stock in trade’. Hence, the intention of the investor determines the taxability of equity investments. Due to this, there has been a large amount of ambiguity regarding the taxability of intraday gains. CBDT has issued many circulars suggesting guidelines to solve the issue and bring similarity in the reporting and taxability of the gains arising from the trading of shares.
According to these circulars and guidelines, gains from intraday trading are not taxable under the head capital gains, but the same will be treated differently. The gains and losses in trading shares are considered capital gains only when the money remains in the equity for at least a day, which is the case of delivery based investments.
Intraday trading is buying and selling stocks within the same trading day. Here, there is no delivery of stocks; only the gains and losses are transacted. Also, in intra-day trading, the investor intends to earn profits on the volatility of the shares on a particular day (speculation) and not on the company’s long-term growth prospects. Hence, in intra-day trading, the investor intends to make speculative profits and is treated as ‘speculative business income’. Intraday trading is done through a Demat account of the trader. While making a purchase, the trader has to specify if he intends to carry out intraday trading (without delivery) or opts for the delivery of shares (investment).
As the trader intends to earn profits on the speculation of stock prices, the income from intra-day trading is considered speculative business income.
Additionally, intraday trades in currencies and commodities, futures, and options are not considered speculative business income and are chargeable to tax as ‘non-speculative business income.
The profits earned from the intraday trading are taxable according to the normal slab rates as they come under the purview of business income. As against this, the capital gains are taxed at a concessional rate. The taxpayer has an option to declare the trading profit under section 44AD of presumptive business income or as a normal business income.
Also, the losses from the speculative business can be settled only against the profits from any other speculative business, but speculative gains can be set off against non-speculative loss. Speculative losses can also be carried forward for four consecutive years if the existing years’ profits are insufficient to absorb the losses. To carry forward the losses to subsequent years, the trader has to report them in the ITR in the year in which such losses are incurred.
ITR forms for reporting intraday trading
If you have intraday speculative business income/losses, ITR-1 and ITR-4 cannot be filed even if your total income is less than Rs.50 lakh and all other eligibility criteria meet.
ITR-3 to report income or losses from intraday trading of shares. ITR-3 also allows for reporting capital gains as well as business income or losses.
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