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Reporting intra-day trading losses could reduce your tax liability

You can claim your losses by filing an ITR-3 only and not an ITR-4

Archit Gupta 

Income Tax, tax
Photo: Shutterstock

The stock market has been an attractive investment option for the masses. Carrying out a one-off investment in stocks or trading in the stock market is preferred over other investments or trading options as it helps earn phenomenal returns. In fact, intra-day trading has gained much popularity of late -- not only among those who have taken this up full time, but also among small businessmen, salaried professionals, and retirees, among others. And one-off losses made in such trade do not deter them from moving on. In this article, we will discuss all about intra-day trading in stocks, their implications and reporting requirements.

Intra-day trading and income implications

When stocks are purchased and sold on the same day before the closing bell of the stock market, it is called intra-day trading. Here, the traders have to square off their trade on the same day. The profits from such purchase and sale are pocketed by the traders. Therefore, in such trading, the shares are not transferred to the Demat account of the trader. This means there is no physical delivery on the purchase and sale of shares.

Do note that the income laws of India consider intra-day trading as a speculative transaction and the resultant income or loss as speculative gain or speculative loss, as the case may be. Further, everyone who is into intra-day trading must offer profits from such activity as business income. You can arrive at your business profits by considering your gross income from transactions made during the year from your yearly transaction statement and then reduce expenses -- internet charges, Demat account charges, depreciation on laptop, and broker's commission, among others -- relating to such trading business from such income, which will help you arrive at your taxable profits.

As you are reporting business profits, the applicable to you is ITR-3. You might have to prepare a balance sheet and a profit and loss account for the purpose of completing your income tax return. It is important to note here that a taxpayer would be liable for an audit under the provisions of income tax where his turnover for a year exceeds Rs 10 million (Rs 1 crore). The turnover for intra-day trading will be the aggregate of positive and negative differences from trade for any given financial year.

One can also opt for the presumptive taxation scheme here where he or she can report taxable income as a percentage of the turnover. In that case, they must file ITR-4. He or she will also not be bound by a mandate of maintaining any books of accounts for this business.

Treatment of losses if any and reporting requirements

Incurring losses are a given in any business and the same is the case with intra-day trading too. Interestingly, the tax provisions relating to the treatment of losses from such activity, which is considered speculative in nature, are quite different from those that deal with regular business losses. While regular business losses can be carried forward for eight assessment years, a speculative loss can be carried forward for only up to four assessment years. Further, a speculative business is considered as a distinct business, losses from which can be set off only against speculative income and not against any other income, including income from any other business the taxpayer is engaged in.

Loss, if incurred, must be reported in your return. Reporting helps you carry them forward to future years and adjust the losses against income of subsequent years and accordingly reduce your tax liability. Losses must be reported in Schedule CFL under "Loss from Speculative Business".

What is most important is that if you have a loss in your intra-day trading business, make sure to file your return within the due date. Not doing so can disentitle you from carrying forward your losses. Remember, you can claim your losses by filing an ITR-3 only and not an ITR-4.


The author is Founder & CEO ClearTax. Views expressed are his own.

First Published: Fri, July 27 2018. 13:32 IST
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