F&O Trading Income Tax: How Income Tax Works in Futures and Options

Traders in India prefer future and options trading as it is convenient. Futures and options come under derivatives. They get their value from an asset base, though the higher value may be attributed to marketability. Speculators employ them to hedge risks or to bet on fluctuations in the prices of stocks or other financial instruments. In India, future and options trading occurs on the stock exchange market, NSE & BSE, among others.

It is, therefore, essential to have some knowledge of the FnO full form, F&O trading income tax laws. Knowing the F&O trading income tax laws will avert legal complications. Along with that, we will also discuss the taxation of futures and options in this article.

Imposition of Taxes on Futures and Options

F&O taxation makes it necessary for calculations to be appropriately done and reported on the trading statements. Trading profits become part of income under the Head of Income from Business or Profits. You must keep records of all business transactions properly. This entails the purchase date, sale date, contract note, and all other expenses accompanying the purchase or sale of services or goods.

Futures and options India are part of business income and cannot be taxed through the sector. The income tax department holds F&O trading as other qualified business income. Therefore, there are the tax laws.

According to Income Tax rules, income or losses from futures and options (F&O) trading are categorized as business income, not speculative income. Hence, any profits or losses from F&O must be declared under the Business Income section (Profits/Gains from Business and Profession) when filing returns. This non-speculative classification enables combining F&O income/losses with other business incomes for tax purposes.

F&O Tax Calculation

The calculation of F&O trading income tax necessarily incorporates profits and losses. It finds out the gross profit or gross loss for F&O trades. Claim expenses that can be directly attributed to income generation, such as fees paid to brokers, Internet connection costs, and all expenses incurred in trading. You should add this net profit or loss to your entire income.

F&O Turnover Calculation

Are you confused about how to calculate turnover in F&O? It is straightforward. The F&O turnover calculation is essential for any tax compliance. It helps compute the turnover resulting from selling financial and or operating assets. F&O turnover calculation can be obtained by summing up the absolute profit and absolute loss of all F&O trades. For instance, suppose that a trader has a profit of ₹50,000 and a loss of ₹30,000; then the absolute turnover would be ₹80,000.

F&O Income Tax Rate

The F&O income tax rate is, however, calculated using the slab rates used in the case of individual income tax. F&O is to be included as part of traders’ revenue. The F&O tax calculation also depends on their income slab.

Applicability of Tax Audit under Section 44AB

Here, we’ll discuss the taxation slabs for Income tax on option trading and futures trading.

1. Trading Turnover up to ₹ 2 Cr for F&O Trading

Tax Audit under section 44AB(e) is applicable if the taxpayer has lost money or made less than 6% of trading turnover, has chosen not to participate in the presumptive taxation scheme in any of the five years prior, and has had total income exceeding the basic exemption limit in any of the prior years. A tax audit is unnecessary if the taxpayer’s profit exceeds or exceeds 6% of trading turnover.

2. Between ₹ 2 Cr and ₹ 10 Cr, Trading Turnover

Since over 95% of transactions are conducted digitally through demat, the provisions of section 44ab do not apply to trading turnovers between ₹ 2 cr and ₹ 10 cr. Therefore, tax audits are irrelevant regardless of profit or loss when transaction value exceeds ₹ 10 cr.

Section 44ab(a) applies to tax audits regardless of profit or loss. In the case of f&o traders, the prescribed rate under sec. 44AD would be 6% rather than 8% in typical circumstances because all these trading transactions are digital.

3. Trading Turnover of more than ₹ 10 crore

If the annual turnover from trading activities exceeds ₹ 10 crores, tax audit compliance becomes mandatory under Section 44AB(a), irrespective of whether the trader has booked a profit or loss.

In simple terms, traders with over ₹ 10 crore turnover have to get their accounts audited by an independent CA every year and submit the audit report along with their tax filing documents. The profit or loss position does not exempt them from this tax audit requirement.

What if There is a Loss?

If you’re unsure how to show loss in F&O trading income tax return, disclose it in business income. File ITR-3 for individuals who have square-off F&O trades. You can carry forward losses to as many as eight succeeding years. Employ them to counterbalance future business revenues. It is mandatory to show an F&O loss in ITR if a trader has incurred an F&O loss on his trading account during the financial year. It does not matter whether he has sold his stocks or not.

If you are not sure if is it mandatory to show F&O loss in ITR, then yes, all F&O losses have to be reported. It has the option of ‘carrying forward losses.’ That can offset an amount of profit from previous years with a loss made in the current or later years. Employ them to reduce expected future earnings. To this end, ensure that you do not record false data so that you do not attract penalties.

Tax Audit Requirement for F&O Loss

If you are wondering that is tax audit compulsory for F&O loss, then the answer is no. Tax audit is not required if the total turnover from trading is less than ₹ 2 crores. It becomes applicable if turnover exceeds ₹ 2 crores, but the net profit is below 6%. Additionally, tax audits become mandatory under section 44AB if the annual turnover from trading crosses ₹ 10 crores, regardless of the profit or loss declared.

In simple terms, traders with less than ₹ 2 crore turnover are exempt from tax audit compliance. Audit applies to those above ₹ 2 crore turnover but with low profit percentages. And when turnover hits ₹ 10 crores, tax audit is compulsory irrespective of income reported.

The simple trading book for Taxation on F&O indicates the kind of surveillance the regulators will have to undertake in the future. Sustaining an essential trading book for tax on FnO is also required. Keep a record of all the trades, income expenses, and losses. Book records can be helpful during the preparation of returns to the taxation authority and help obey tax laws.

Conclusion

F&O trading income tax rules are mandatory for any trader to know. Correct comprehension minimises legal problems and sanctions. Keep accurate records. Ensure that you prepare and submit all your returns. Acquire the required knowledge about tax on futures and options. Compliance makes trade a smooth affair.

FAQs

1. What is F&O Trading?

F&O stands for Futures and Options. It is a type of trading where people buy or sell agreements for a future date, not the actual shares or stocks. Think of it like making a promise to buy or sell something in the future at a set price. People trade in F&O to make money from changes in prices.

2. Do I have to pay income tax on F&O trading?

Yes, you must pay F&O trading income tax if you make money from it. Your money is considered a part of your income, just like a salary or business profit. You need to report this income to the government and pay the correct tax.

3. How is the F&O trading income tax calculated?

The F&O trading income tax is calculated like a business. First, you find out how much money you made (profit) or lost. You can subtract some expenses from this amount, like the cost of internet, trading software, or phone bills related to trading. After this, the remaining amount is your net profit, and you pay tax on that based on your total income for the year.

4. Can I subtract my losses in F&O trading from other income?

Yes, if you have lost money in F&O trading, you can subtract these losses from other types of income, like salary or rent. This is called “setting off” losses, and it helps reduce the total amount of income on which you need to pay tax.

References:
https://groww.in/blog/income-tax-return-filing-for-futures-and-options-traders-all-you-need-to-know
https://eztax.in/taxation-on-futures-options-trading

Author: All Content is verified by SMC Global Securities.