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The Basics of Taxation on F&O Trading

Introduction

Trading in the derivatives market comes with its share of perks, and is hence popular.  However, not much is known about the taxation aspect of this. You need to understand the tax implications on futures and options trading for reducing your taxes by making necessary ITR claims.

Understanding the basics of taxes on F&O trading

It is common to not report income from F&O trading for taxation purposes. This is largely owing to the fact that there isn’t much knowledge on the subject. However, if you state your losses while filing your ITR, it could be beneficial for you. Under Section 43(5) of the Income Tax Act, F&O transactions are non-speculative and follow taxations norms similar to other businesses. Thus, your income and profit/losses from this trading will be treated similar to income and profits/losses from other businesses. This means you can claim tax deduction for expenses such as utility bills, brokerage, commission, consultant charges, depreciation etc that you have incurred while trading in F&O. The expenses and income arising from this have to be accounted for while calculating your net taxable income. Once the net income is calculated, you can further calculate your tax liability depending on which income tax slab applies to you.

Benefits of reporting your F&O trading income and losses while filing your ITR

You can benefit from losses that you may have incurred while trading in futures and options. This is one key reason to file your ITR with F&O trading details. The losses you may have made in your F&O business can be adjusted with your income sources such as rent or interest. It can, however, not be adjusted from your salary. If you choose to not adjust your F&O losses for the existing assessment year, you can carry forward these losses for adjustment purposes for a period of eight years. But, in the future, you will be able to then adjust your losses only against sources of non-speculative income.

Watch Also: What-are-futures-and-options?

Filing ITR with F&O trading details

Typically, transactions in futures and options are huge owing to margin trading. They take place with regularity if you are well invested in the derivatives market. Due to this, the profit arising from these transactions are considered to be income from a business.

The first step towards filing your ITR with F&O business details is calculating your turnover from this business to understand your tax audit applicability. If you are applicable for a tax audit under section 44AB, you will have to maintain your books of accounts, have them audited and provide an audit report to the IT department with your ITR. A Chartered Accountant can help you in this process. In case you do not conform to these audit norms, you will face penalties. You can file your returns of taxes on options trading as well as taxes on futures trading using the ITR-4 tax form. 

To calculate your turnover from your F&O business, you must consider:

  • The total profit and loss from trading in F&O for the given assessment year.
  • The premium you have paid or received while trading in options for the given assessment year.
  • The volume of reverse trades entered and the difference between their profit and loss.

Total income in futures (for all the transactions of a given assessment year) = Total profit – total losses

Total income in options (for all the transactions of a given assessment year) = Total profit – total losses + total premium received for the sale of options – total premium paid for the purchase of options

Here, you should know that your total F&O business income could be positive or negative, depending on whether you have made more profit or losses. Thereafter, aggregate the difference and calculate your turnover.

Tax implications on your F&O turnover:

  • Deduct expenditure/s related to administration
  • Deduct Securities Transaction Tax (STT)
  • Offset losses arising from F&O trading against your other sources of income like rental, other business, etc. (besides your salary).
  • You will be subject to a mandatory tax audit if your F&O business is in profit and your income is more than Rs 1 crore.
  • Your tax audit will also be applicable if the net profit arising from your F&O transactions is less than 8% of the total F&O turnover. 6% is the limit in the case of digital trade.

Additional Read: Types of Equity Trading

Conclusion

It is wise to report every income or loss arising from financial investments as there could be several benefits for you. Plus, non-disclosure of income or expenses while filing your ITR could lead to intervention by the tax authorities for not complying with tax laws. Hence, create a win-win situation for yourself by understanding the tax implications of F&O trading, and comply with them.

Disclaimer:

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.

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