ITR filing 2024: Are you a salaried trader? Here's a tax primer for trading profits

When a salaried individual begins trading a portion of their income in the stock market, they may be unsure whether to file ITR 2 or ITR 3 to report their gains.

This confusion arises because the type of ITR that salaried individuals file depends on the other income heads included in their total income.

Alok Agrawal, Partner at Deloitte India, explained, "In the case of day trading on the stock market, there is no underlying delivery of the shares.

Under income tax law, a 'speculative transaction' means a transaction where a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. However, this provision should apply only if the underlying nature of income is business income."

In addition to earlier circulars, the Central Board of Direct Taxes (CBDT) issued Circular No. 6/2016 on February 29, 2016, which provides further clarity on the classification of income from listed shares and securities. One of the key determinants is whether the taxpayer holds the investments as "stock-in-trade."

"In the case of salaried taxpayers, the main source of income reported on the tax return would be salary income, and the number of trading transactions and resultant income would not be very significant. Further, such individuals would undertake such transactions to derive investment income, given that their primary occupation is as an employee, and they would not be allowed to undertake any business activities as per their terms of employment. Keeping this in mind, they should file ITR-2, assuming such income is in the nature of capital gains and salary income. In exceptional circumstances, if the individual has such trading income as business income, they should file ITR-3," said Agrawal.