Intraday trading has developed into a highly accessible approach for individuals wanting to participate in the stock market. With technology making live trades easier and the ability to open a demat account online, many retail traders come in trying to make profits with short-term strategies. Taxation, however, is an area causing a lot of confusion. A common question that keeps popping up is this one: What happens if you don’t declare intraday trading profits?
While knowing intraday trading’s implications from a tax perspective can help traders avoid penalties, become law-abiding citizens, and make intelligent financial decisions, it also becomes important. This article deals with taxation related to intraday trading, risks involved in non-disclosure, and importance attached to correct disclosure.
Opening a Demat Account and Entering into Intraday Trading
There needs to be some kind of interactivity going on within the activities of trading-a demat account alongside trading account opening. The demat account keeps your securities-electronic, while the transactions are carried out by the trading account.
In intraday trading, all positions are squared off in a single day. So buying and selling stocks within the same day and not allowing them to stay overnight. Since there are no long-term holdings, for the purposes of taxation, the gains or losses from intraday trades are treated differently when compared to investments.
Tax Treatment of Intraday Trading Profits
The Income Tax Act in India classifies intraday equity trading as making business income rather than capital gains because intraday trading is considered to be of a speculative character. Here’s how it works:
Profits from intraday trades would constitute an extra income chargeable to tax.
These profits would be taxed according to the applicable income tax slab rates.
All the expenses incurred in the course of intraday trading such as brokerage, internet expenses, etc., would be permitted to be deducted from the profits before an income tax slab rate is applied.
What Happens If You Don’t Declare Intraday Trading Profits?
A failure to declare intraday trading profits could have several implications:
1. Tax Notices and Penalties
The Income Tax Department gets transaction details from Stock Exchanges and Brokers. If your ITR does not match data available with them, it may be the cause for a notice. Non-declaration of profits can result in penalties, interest on overdue taxes, and scrutiny of earlier returns.
2. Interest on outstanding tax
If not disclosed, the profit becomes tax treatment outstanding. Interest is charged on the outstanding sums under sections of the Income Tax Act like 234B and 234C till the tax is paid up. Thus, increasing the monetary burden much beyond the base tax amount.
3. Loss of Credibility for Future Filings
Habitual non-compliance jeopardizes your credibility in the eyes of the tax authorities, which may turn out to be a hurdle when, for instance, you want to apply for loans or credit facilities or face an in-depth audit.
4. Ineligibility to Claim Losses
It is important to declare trading activity, albeit with losses. Intraday losses fall under the category of speculative losses and can be carried forward for a period of 4 years utilizing them against future speculative profits; this would be possible only when these losses are declared in the tax return. Therefore, failing to report them means you have lost the opportunity to set them off.
Stating Intraday Trading Profits-The Way Out
In order to remain compliant, a systematic approach must be adopted towards declaring intraday trading activities:
File Under Business Income: Declare Profit or Loss as Business Income in ITR-3.
Maintain Records: Retain copies of trade confirmations and broker statements, and keep an expense account.
Audit Requirement: If turnover from intraday trading crosses prescribed limits, a tax audit may be required
Advance Tax: If tax liability exceeds ₹10,000 in a year, payment of advance tax is a must.
Following the above measures will help you avoid any unnecessary hassle and penalties.
Why Many Traders Ignore Declaration
Several reasons have been put forward about why new traders often tend to ignore or delay declaring intraday profits:
Unfamiliarity with tax rules.
They think it is not worth filing taxes for small profit amounts.
They think that their brokerage account would not be scrutinized by the CA.
As they focus on short-term trading, compliance considerations are simply ignored.
All the above reasons are fairly common but should not deter scrutiny. The data-sharing road from brokers to exchanges to tax authorities is now increasingly smooth, and hence it is very difficult to conceal such activities.
Final Thoughts
While intraday trading creates prospects for short-term profits, taxes are one of the unavoidable burdens that go with it. Making oneself aware of intraday profit reporting would apply just as much when one opens a demat account and begins trading. At times, not reporting intraday profits opens the door for one taxable notice, penalty, or calamity.
