Know the taxation rules for income F&O trading

Futures and options are stock derivatives that are traded in the stock market. It is a contract between two parties for trading stock or index at a particular price or level at a future date. While many people trade in futures and options, it is advisable to understand the income tax implications before investing in them. Here is what you need to know.

Classification of income from derivatives

The income from F&O trading should be treated as a business income. According to the Income Tax Act, there are five heads of income- salary, business and profession, house property, capital gains, and other sources. You should report F&O income under the head income from business or profession. It is irrespective of the frequency or volume of F&O transactions.

The business income is normally divided into speculative and non-speculative income. F&Os are used for hedging and for taking/giving delivery of underlying contracts. Hence, F&O income will be considered a non-speculative business. 

How to calculate the total turnover

The contract notes issued in every trade specify the value of derivatives bought or sold. However, for accounting purposes, only the difference between is used. For example,

1. Mr JP bought one lot of ABC ltd. at Rs 2 lakh and sold it for Rs 2.6 lakh (Profit = Rs 60,000).
2. Mr JP bought one lot of FAB ltd. at Rs 5.5 lakh and sold it for Rs 5 lakh (Loss = Rs 50,000)

The turnover shall be calculated as Rs 60,000 + Rs 50,000 = Rs. 1.30 lakh. If any premium is received when writing an option, it must be added to the turnover amount.

Hence, all the positive or negative differences are aggregated to calculate the turnover.

Claiming of expenses from F&O business

When the income from F&O trading is classified as business income, the provisions of maintenance of books of account and tax audit will become applicable.

You are allowed to take deductions for expenses incurred for carrying out F&O transactions, such as Demat charges, electricity expenses, telephone expenses, etc. If you are trading in shares in multiple forms, like intraday trading, F&O, etc., each business income should be separately reported since the tax treatment differs based on the type of deal.

Audit requirements

If you are carrying on F&O trading, you should get your accounts audited if the turnover exceeds Rs 10 crore (the digital transactions are 95% or more). 

You can opt for a presumptive taxation scheme when turnover does not exceed Rs 2 crores and declare your taxable income at 6% of the total F&O turnover. 

Tax audit becomes mandatory if you opt for a presumptive scheme of taxation and declare an income lower than the presumptive income and total taxable income(after including income from other heads) exceeds the maximum amount not chargeable to tax i.e. Rs 2.5 lakh.

Also, if you opt for presumptive taxation in any of the last five years but do not opt for the same in the current year, however, you wish to report and carry forward F&O losses, then a tax audit would be required to be done for that particular year.

What if there is a net loss from F&O

F&O trading loss is considered a non-speculative business loss. You can adjust it against income from businesses (other than speculative income) or rental or income from other sources. Any unadjusted business loss can be carried forward for eight subsequent years and set against the business income. 

Applicable ITR form 

If you have F&O income, you must file ITR-3. But, if you follow a presumptive taxation scheme and declare profits at 6% of the total turnover, then ITR-4 needs to be filed. However, which ITR form is applicable will further depend on your other sources of income. For example, if you earn salary income and income from F&O, ITR-3 will apply. Whereas, if there are losses from F&O trading, you can only adjust and carry forward the losses if you file ITR-3.

So, if you are trading in the security market, especially in F&O trading, it is mandatory to follow the above income tax rules. 

For any clarifications/feedback on the topic, don’t hesitate to contact the writer at namita.shah@cleartax.in.