Intraday Trading Tax Treatment
Profits from intraday equity trading — buying and selling shares on the same day without taking delivery — are classified as speculative business income under the Income Tax Act and taxed at the applicable income tax slab rate, with strict set-off and carry-forward restrictions.
The Income Tax Act, 1961 creates a specific classification for intraday trading in shares: speculative business. Section 43(5) defines a speculative transaction as one where a contract for purchase or sale of a commodity, including stocks, is periodically or ultimately settled otherwise than by actual delivery. Because intraday trades are squared off on the same day without delivery of shares, they meet this definition.
The speculative classification has significant tax consequences. Speculative income is computed as the net profit from all intraday trades during the financial year — all intraday profits less all intraday losses. If the net result is a profit, it is added to the trader's total income and taxed at the applicable income tax slab rate, which ranges from five to thirty percent plus surcharge and cess, depending on total income.
The set-off rules for speculative losses are highly restrictive. A speculative loss can only be set off against speculative income in the same year. It cannot be set off against salary income, capital gains from delivery-based equity investing, rental income, F&O income, or any other head of income. This restriction means a trader who made intraday losses but earned salary or capital gains in the same year pays tax on the other income without any relief from the trading loss.
Speculative losses can be carried forward for up to four assessment years and can only be set off against speculative income in those future years. This four-year limit is far shorter than the eight-year carry-forward period available for business losses from non-speculative activities.
For tax filing purposes, intraday trading income must be reported under the head business and profession, which requires filing ITR-3. Traders with significant intraday activity should maintain detailed records including contract notes, which are provided by brokers after each transaction. If the gross turnover from speculative activity exceeds specified thresholds, a tax audit under Section 44AB may be required, adding compliance costs to the activity.