Futures and Options (F&O) trading has become an integral part of the Indian financial markets, allowing traders to speculate on the future price movements of assets like stocks, commodities, currencies etc. However, F&O trading also comes with complex tax implications that need to be properly understood to ensure tax compliance and optimise liabilities.
The income generated from F&O trading is categorised as non-speculative business income as per Indian tax laws. This is an important classification since speculative income has more restrictions in terms of the setoff of losses and carrying forward of losses to future years. Treating F&O trading as a non-speculative business activity allows traders to offset losses against other business income and carry forward any unadjusted losses for 8 subsequent assessment years.
For salaried individuals who also trade in F&O, the appropriate Income Tax Return (ITR) form is crucial for proper reporting of trading income and claiming relevant deductions.
Computing turnover from F&O trading activity is important to determine if a tax audit is applicable. Turnover is calculated by summing up the total of all positive and negative price differences on trading of futures and premiums received on options trading.
This turnover calculation helps in determining if the threshold of ₹1 crore under section 44AB has been crossed, which would mandate a tax audit.
Section 44AB of the Income Tax Act governs tax audit requirements for all businesses based on turnover thresholds. For F&O traders, a tax audit becomes mandatory if:
In case a tax audit becomes applicable, the accounts have to be audited by a chartered accountant before the due date for filing ITR.
Securities transaction tax (STT) is a direct tax payable on the purchase and sale of securities listed on recognised stock exchanges in India.
For F&O trades, the STT rates are:
The upward revision in STT is aimed at reducing speculative trading in the derivatives market. However, it also increases the transaction costs for traders.
The business expenses incurred for F&O trading purposes can be deducted from total trading income to arrive at taxable business income.
However, expenses connected with earning exempt income or personal in nature are not allowed as deductions.
Any business loss arising from trading can be set off against other heads of income except salary income in the same assessment year. For instance, F&O trading loss can be adjusted against income from house property, capital gains, or other business income. Unadjusted F&O trading loss can be carried forward to subsequent years for setoff against business profits up to 8 assessment years. However, setoff against salary income is not permitted.
F&O traders with an estimated tax liability of more than ₹10,000 in a financial year have to discharge advance tax in 4 instalments – 15% by June 15, 45% by September 15, 75% by December 15 and 100% by March 15. This helps avoid interest on late payments under sections 234B and 234C.
The recent increase in STT rates aims to curb speculative trading by making transactions more costly. This change may particularly impact retail traders who have a linked to their trading account, who engage in frequent trades with small margins. The government hopes these measures will encourage more cautious participation in the derivatives market
Understanding the nuances of the tax treatment of F&O trading income and expenses can help traders be tax compliant, avoid penalties, and optimise tax outgo. Maintaining meticulous accounts, choosing the right ITR form, timely tax audit, and availing deductions and advance tax payments are key focus areas. For personalised guidance, consulting a chartered accountant or tax expert is advisable. Proper tax planning and compliance can help traders enhance their overall returns from F&O trading activity.
Disclaimer: Trading F&O can be risky and may not be suitable for all investors. The risk of loss can be substantial. Information on the platform is for general market commentary and is not intended as investment advice.
Stay informed on all the , real-time updates, and follow all the important headlines in and on Zee News.
