Profits from algorithmic trading are taxed under the Income-tax Act just like manual trades—classification depends on the type of trade (F&O, intraday equity, delivery). There is no GST on profits from buying/selling securities; GST applies only to broker/services on your contract note (typically 18%). Audit, ITR form, loss set-offs, and advance-tax rules still apply. (Tax Portal, CBIC GST)
Why this matters
As more Indian traders automate execution, it’s crucial to separate income tax (on profits/losses) from GST (on services) and to understand where algo execution does or does not change your compliance. This guide explains both—using Indian rules, examples, and quick checklists.
GST on algorithmic trading: what’s taxed and what isn’t
1) Trading profits themselves
- No GST on sale/purchase of securities (shares, bonds, derivatives). Under GST, securities are neither goods nor services; Schedule III keeps such transactions outside GST. (Tax Portal, CBIC GST)
2) Charges on your contract note (GST applies to services)
GST @ 18% typically applies to:
- Brokerage (broker’s service)
- Exchange transaction charges
- SEBI turnover fees (when recovered by the broker as a service component)
- DP (depository) charges
GST does not apply to STT or Stamp Duty (both are separate levies/reimbursements). (TaxGuru, www.bajajfinserv.in, ClearTax, NSE India)
Example (illustrative): If your contract note shows ₹100 brokerage + ₹50 exchange charges + ₹10 SEBI fee, GST = 18% of ₹160 = ₹28.8. STT and stamp duty are outside the GST base. (TaxGuru)
3) Special case: Securities Lending & Borrowing (SLB)
Fees for lending of securities under SEBI’s SLB scheme are taxable under GST @18%; intermediaries’ commissions are taxable too. (CBIC GST)
Income tax: how algo trades are classified
The method of execution (manual vs. algorithmic) does not change the head of income. What matters is what you traded and how.
Common buckets:
- F&O (equity, currency, commodity) on recognised exchanges → Non-speculative business income (Section 43(5) proviso). Losses are “non-speculative business losses.” File as business. (Indian Kanoon)
- Intraday equity (no delivery) → Speculative business income; losses are “speculative losses” with stricter set-off rules. (Indian Kanoon)
- Delivery-based equity → Usually capital gains (investor). If you run an organised trading business (high frequency/turnover), you may treat as business income; be consistent year-to-year.
Set-off basics (quick):
- Speculative loss ↔ can be set off only against speculative profits; carry forward up to 4 years. (Indian Kanoon, ClearTax)
- Non-speculative business loss (e.g., F&O) ↔ set off against any income except salary; carry forward 8 years (subject to return filing on time).
Turnover & audit rules that algo traders care about
Computing “turnover” for tax audit purposes (ICAI)
- Futures: turnover = sum of absolute profits & losses.
- Options: ICAI guidance has evolved. Many references use absolute P/L; some discussions include premium on sale depending on edition. When in doubt, follow the latest ICAI Guidance Note/your CA. (ICAI Knowledge Bank, Zerodha, Groww)
Example: Futures strategy with +₹2.0 lakh and −₹1.2 lakh across trades → turnover = ₹3.2 lakh (|+2.0| + |−1.2|).
Tax audit thresholds (Sec 44AB)
- ₹1 crore normal threshold.
- Up to ₹10 crore threshold if cash receipts + cash payments ≤ 5% (most algo traders qualify due to digital settlement). (ClearTax, www.bajajfinserv.in)
Tip: Even below audit limits, maintain proper P&L, ledger from broker, and working for turnover—especially if using multiple algos/brokers.
Presumptive taxation (Sec 44AD): can traders use it?
- Who can use 44AD? Eligible resident individuals/HUFs/partnerships (not LLPs) carrying on eligible business with turnover up to the notified limit (commonly explained as ₹2–3 crore depending on digital receipts). Professionals and persons earning commission/brokerage are excluded. (ICAI Knowledge Bank, ClearTax)
- F&O traders: Many practitioners allow 44AD (declare 6%/8% of turnover as income) because F&O is non-speculative business. Official circulars don’t explicitly bar F&O; professional commentary and CA portals frequently apply 44AD to F&O—confirm with your CA. Intraday (speculative) is generally not covered under 44AD. (CAclubindia, Rajput Jain & Associates)
Practical caution: Opting into 44AD reduces bookkeeping but triggers restrictions if you later opt out (audit consequences for 5 years). Choose thoughtfully. (Jaipur ICAI)
ITR form, advance tax, and due dates
- Which ITR?
- ITR-3 if reporting business income (F&O, intraday treated as business).
- ITR-4 (Sugam) only if using 44AD presumptive scheme and otherwise eligible. (Quicko, Economic Times)
- Advance tax: If net tax payable ≥ ₹10,000, pay 15%/45%/75%/100% by 15 Jun/15 Sep/15 Dec/15 Mar to avoid 234B/234C interest. Traders are not exempt. (Income Tax India, Business Today)
What if you sell algo strategies or infra?
If you sell signals/strategies, license software, offer co-location/API execution as a service, or run a SaaS for traders, you are supplying a service—GST registration may be required once you cross the threshold; the default rate is 18% for most such services. This is separate from your own trading activity (which remains outside GST). (ClearTax)
Quick reference: what you’ll actually pay on a trade
- Direct levies on trades: STT (equity/FO—segment-wise), Stamp Duty (unified one-sided rates since 1 July 2020). (ClearTax, PwC)
- GST (18%) is only on service components (brokerage, exchange fee, SEBI fee, DP charges), not on STT or stamp duty. (TaxGuru)
Compliance checklist for Indian algo traders
- Classify each strategy’s income correctly (F&O = non-spec business; intraday equity = speculative). (Indian Kanoon)
- Compute turnover using ICAI guidance (futures absolute P/L; options per latest note). Keep broker reports. (ICAI Knowledge Bank)
- Check audit need (₹1 cr or ₹10 cr with ≤5% cash). (ClearTax)
- Choose ITR (ITR-3; ITR-4 only if valid 44AD). (Quicko)
- Pay advance tax on time (15/45/75/100). (Income Tax India)
- Track GST only on service lines in your contract note; exclude STT/stamp from GST base. (TaxGuru)
- If selling algos/services, evaluate GST registration and rate (often 18%). (ClearTax)
FAQs
Q1. Is GST applicable on algorithmic trading profits?
No. Securities transactions are outside GST; only service components (brokerage, etc.) attract GST. (Tax Portal, TaxGuru)
Q2. Are F&O losses “speculative”?
No. Exchange-traded derivatives on recognised exchanges are non-speculative under Section 43(5) proviso; intraday equity is speculative. (Indian Kanoon)
Q3. How do I compute options turnover for audit?
Follow the latest ICAI Guidance Note. Historically there’s been debate (absolute P/L vs. add premium on sale). Your CA should apply the current edition consistently. (ICAI Knowledge Bank, Groww)
Q4. Can I opt for Section 44AD for F&O?
Many practitioners allow 44AD for F&O (non-speculative business) if eligible; intraday (speculative) is generally excluded. Decide carefully due to 5-year opt-out implications. (CAclubindia, Jaipur ICAI)
Q5. Which ITR should an algo trader file?
Usually ITR-3 for business income; ITR-4 only if you validly opt for 44AD. New ITR codes now explicitly cover F&O traders. (Economic Times)
Closing thoughts
For Indian investors using algorithms, the tax substance hasn’t changed: treat income by trade type, respect audit/turnover rules, and remember GST hits services, not profits. Build a clean audit trail—strategy-wise ledgers, broker statements, and turnover workings—to keep compliance smooth.
Disclaimer: This article is for education. Tax law changes; consult a qualified CA for your facts and assessment year.