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What is the tax on derivatives trades

What is the tax on derivatives trades?

Income from trading in F&O (both intraday or overnight) on all the recognised exchanges (such as NSE, BSE, MCX etc) is considered as non-speculative business income. The treatment is given as per frequency or volume of trades done. F&O trade is reported under the head ‘Business’ in Income Tax Return (“ITR”).

What is derivatives turnover?

Calculation of turnover in case of F&O trading is one of the important factors for every individual for income tax purpose. Turnover is calculated as the difference of total of positive and negative values for Futures segment. It makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.

In Options, Premium is to be included in turnover.

Let’s take a look below examples

  • If client bought & sold RIL one lot contract and booked a profit of Rs. 50,000.
  • If client bought & sold TCS one lot contract & booked a loss is Rs. 25,000
  • If client bought INFY 1700 CE one lot at a premium of at Rs. 12,000.
  • If client sold ITC 230 PE one lot at a premium of Rs. 22,400.

The turnover is calculated as Rs. 50,000 (Profit in RIL ) + 25,000 (Loss in TCS) + buy premium of INFY CE Rs. 12,000 + sold ITC PE premium of Rs. 22,400 then total turnover is Rs. 1,09,400.

 

Contract

Buy Rate

Qty

Buy value

Sell Rate

Qty

Sell value

Turnover

RIL

2500

250

625000

2700

250

675000

50000

TCS

4000

125

500000

3800

125

475000

-25000

INFY 1700 CE

40

300

12000

 

 

 

-12000

ITC 230 PE

 

 

 

7

3200

22400

22400

 

 

 

 

 

 

 

109400

Treatment of losses in derivatives?

Any unadjusted loss can be carried forward for eight years. However, in the future, they can only be adjusted from non-speculative income. If there is a loss in F&O, then file it before due date to carry forward the loss and set off from income in the future. The single most important reason to file F&O trading is to be able to benefit from losses you have incurred. If your business resulted in a loss, report it in your tax return. It can be adjusted from income from remaining heads such as rental income or interest income (cannot be adjusted from salary income).

When derivative tax audit is required ?

Tax Audit in the case for Futures & Options (F&O) is applicable in the below two scenarios:-

1. The turnover is more than Rs. 10 crores (audit applicability increased from Rs.5 crores to Rs.10 crores in Budget 2021). The threshold of Rs.10 crores is applicable for F&O as 95% of the transactions are through digital mode. Hence, the standard audit threshold of Rs.1 crore is not applicable in case of F&O.

2. The audit is required only if a taxpayer has declared income at a presumptive rate (Section 44AD) in any of the previous five years but wants to declare losses or income at less than the presumptive rate in the current year, provided his total income in the current year exceeds the basic exemption limit.

What are types of ITR forms and where do I fill Derivatives Income Tax?

ITR- 3 for individuals and HUFs having income from profits and gains of business or profession.

ITR-4 for Individuals, HUFs and Firms (other than LLP) who are eligible to opt ‘Presumptive taxation scheme’.

How to file tax if I am a small trader & don’t maintain Books of account?

This is applicable to Business/Profession whose gross receipts /revenue is less than or equal to ₹25 Lakhs (10 Lakhs for Profession) and profit is less than or equal to ₹2.5 Lakhs (1.5 Lakhs for Profession)

What documents are required for tax filing?

Form 16, Form 26AS Tax Credit Statement, trading account statement, Turnover report, profit & loss, transaction statement, bank statement if interest received is above Rs. 10,000/-, gross receipts & Income and Expense statements.

What is advance tax and when do I need to pay it?

The assessment of income of a year can be made only after the year has passed, advance tax is pre-payment of your tax liability in the year it is earned. If the tax liability is more than Rs 10,000 in a financial year then advance tax needs to be paid by assessee.  The dates are June 15, September 15, December 15 and March 15 are the dates to pay advance tax.

How are Open position/ closing position on 31st March considered for calculation of P&L ?

Open interest refers to a situation, wherein on the date of the financial year end, there are outstanding derivatives contracts in the hands of the market participants. Since, under the prudent accounting principles, derivatives contracts are marked-to-market (MTM), there can be unrealised MTM gains or losses prevailing as on March 31. Whether the assesse will be liable to tax on the gains or take the benefit of the losses in such a case.

Only real income/loss attracts tax provisions and not the notional gains/losses. However, in certain judicial decisions notional losses have also been allowed as a deductible expense. Nevertheless, this is one area which can attract litigative exercise.

Expenses treatment against F&O Income?

Expenses like brokerage, broker’s commission, subscriptions to journals related to trading, telephone bills, internet costs, consultant charges if you took an advice from a professional who charged you, or salary of a person you hired to help with your business. All of these can be claimed.

Where can client see profit and loss statement in ICICI direct?

After logged in to ICICI direct > Portfolio > Statements & Reports > P&L Statements > F&O > Select year > View. 

Can client use ICICI direct P&L statement for income tax return?

Yes, client can download statement for financial year & total is given in statement, so client can use ICICI direct P&L to file tax return.

ICICI direct provide transaction statement?

Yes, client can download the statement from path after logged in to ICICI direct > Portfolio > Statements & Reports > Transaction statement > Derivatives > View.

 

Disclaimer – ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. AMFI Regn. No.: ARN-0845. PFRDA registration numbers:  POP no -05092018. I-Sec acts as a Composite Corporate agent having registration number –CA0113. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The non-broking products / services like Mutual Funds, Insurance, FD/ Bonds, loans, PMS, Tax, Elocker, NPS, IPO, Research, Financial Learning, Investment Advisory etc. are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.

One Click Portfolio, Premium Portfolio and Golden Stock Portfolio related services are offered under Research Analyst license of I-Sec. Any complaint / dispute pertaining to the same would not be entertained by Stock Exchanges. 

Global Investment Platform is offered by ICICI Securities in collaboration with interactive brokers. Any complaint / dispute pertaining to the same would not be entertained by Stock Exchanges. Involvement of ICICI Securities Ltd. is restricted to Referral Only. ICICI Securities Ltd. does not offer this product directly to customers.  Client’s details will be shared with third party stock broker (Interactive Brokers Group, Inc.) with expressed consent from clients.  All dealings including KYC will be executed by third party stock broker (Interactive Brokers Group, Inc.) directly with client and ICICI Securities Ltd. will not incur any personal financial liability.  

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