Let us discuss about the income tax applicable on algo trading or Intraday trading at large. We are not going to calculate trading-related tax slabs or deduction under different sections here.
When it comes to robo trading income tax. It can be Intraday trading tax or Positional trading related tax. Tax shall be different for Intraday or Positional Traders depending on which instrument you are trading.
Intraday Algo Trading Tax:
As an intraday Algo trader, if you are trading on Equity then you shall be doing Speculative Trade . If you are trading on FO (Future and Options) then that falls under non speculative Trade .
Positional Algo Trading Tax:
As a positional Algo Trader, if you are holding your position for more than 1 day then irrespective of the trading instrument ie on Equity or FO (Future and Options) it falls under non Speculative Trade .
Once we know under which Trader category our trade falls ie Speculative income or non Speculative income, our tax calculation becomes very easy and clear. Any income from either speculative or non speculative income comes under Business income or Other income other than Salary income.
Calculation of income tax:
As an example if my Annual Salary or primary business income is Rs. 10L and by Speculative income is Rs. 1L and non speculative income is Rs. 1L then my total taxable income is
10 (Salary/Primary business income) +1 (Speculative income) +1 (Non speculative income) = 12L (Total taxable income).
Once you know how much is your taxable income, you can calculate under which tax bracket you shall fall by deducting tax waived under different clauses as per your tax saving investments. This is the same as you are currently calculating your tax after deducting your tax saving expenses (ie Home Rent, Home Loan, Insurance premium, Medical expenses, Under 80C, 80D, etc) based on your primary income. I am not going to explain that in this post, there are many posts available on how to calculate your tax liability from taxable income.
Algo Trading Loss Adjustment :
Now this is little complicated when we plan to adjust or offset our losses from Algo Trading. Be it speculative or non speculative trade related loss. Setting off losses or adjusting loss with income from Tax are calculated differently for Speculative and non-speculative losses.
By now you already know your trades shall fall under which category ie Speculative or non speculative or both. Accordingly you can calculate your trading Income tax.
Let us now take trading type and understand how we can set off the respective losses to them.
Speculative Trade Loss Adjustment:
Any speculative trading loss shall be carried forward for 4 years. Where the speculative trading loss can be set off only with Speculative income during that period.
Non Speculative Trade Loss:
Any non-speculative loss can be carried forward for 8 years. Whereas the loss can be setoff with any business income in the first year (which includes Speculative income too), excluding any Salary income. From 2nd year onward it can be set off only with non speculative incomes.