Now a day Derivative Trading i.e. trading in future and options (F&O) on stocks, currencies, and commodities has become a hot topic amongst investors. Data suggest that during last two years during pandemics the trading in shares & derivative increased substantially. Unfortunately, most people have little knowledge about taxation & reposting of the same and which results in misreporting & consequently department may issue notice and have further consequences.
Derivatives: – Derivative are the instrument the value of which derives its value from the underlying assets/securities. Future & Option are two kinds of derivatives available for trading in stock market.
Nature of Income, Capital Gain or Business Income?
Generally, income derived from sale of shares & securities are considered as capital gain either LTCG or STCG. However, gain/loss from F&O are not considered as Capital Gain/loss rather considered as business income and treated accordingly.
Speculative or Non-Speculative
As per Guidance Note Issued by ICAI on Tax Audit U/s 44AB, A speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. So, premia facia F&O looks loke speculative in nature as generally they are settled otherwise then by actual delivery.
As Section 43(5) of the Income Tax Act states that any transactions that take place during Futures and Options trading through recognized stock exchange are deemed to be non-speculative transactions and accordingly any profits/loss from such trading would be treated in the same manner as profits/loss from any other business.
Red Flags for Salaried Person: –
As per Section 115 BAC of the Income Tax Act, Salaried person can switch between new & old tax regime every year at time of filling of Return. However, the person with business income can exercise this option only once & option once exercised shall continue for that year and all subsequent years. So, if salaried person trading in F&O then he should keep this in mind and choose the tax option wisely else in future they will be ends-up paying higher tax.
How to Compute Turnover:
The turnover in case of F&O transaction to be computed as below:
(i) The total of favourable and unfavourable differences (Profit/Loss) shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover.
(iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Please note whether the difference is profit or loss it will not make any difference, and all the difference aggregated to compute the turnover.
We can understand beet with the below example:
1) Bought 1 lot of RIL future having lot size of 500 shares @ Rs.2,000/ and sold at Rs. 2,100/- (Future Transaction)
2) Bought 1 Lot of TCS future having lot size 700 share @ Rs. 3200/- and sold at 3,150/- (Future Transaction)
3) Bought 1 lot of call option 500 shares of Maruti for Rs. 80 & sold at Rs. 100 (Call Option)
4) Sold 1 lot of put Option, lot size 500 share of Tata Motors for Rs 45 and latter on purchased at Rs. 50.
In the above example Turnover would be Rs. 1,70,000/- as worked out below:
| Script Name | Transaction Type | Lot Size | Purchase Value | Sales Value | Gian / (Loss) | Turnover |
| RIL | Future | 500 | 2,000 | 2,100 | 50,000 | 50,000 |
| TCS | Future | 700 | 3,200 | 3,150 | (35,000) | 35,000 |
| Maruti | Option | 500 | 40,000 | 50,000 | 10,000 | 60,000 |
| Tata Motors | Option | 500 | 25,000 | 22,500 | (2,500) | 25,000 |
| 70,200 | 77,750 | 22,500 | 1,70,000 |
Can we claim expenses against F&O Income?
As F&O income is considered as business income so we can claim expenses incurred to earn such income as deduction from F&O (business) Income such as STT, Brokerage, electricity charges, internet expenses, etc. However, onus is on the assess to prove that these expenses are incurred to earn such business income.
Carry forward & set-off of the losses:
As F&O income is considered as business income so it can be set-off against other business income, house property Income capital gain and other source income. Any unadjusted loss can be carried forward for eight years. However, in the future, they can only be adjusted from non-speculative income.
Tax Audit Requirement?
As F&O transactions are considered as business income so if turnover worked out as described above, exceeds the Tax Audit limit of Rs. 1 crore or 5 crore as specified U/s 44AB of the Income Tax Act Tax Audit needs to be done. Limit of Rs. 5 crores have been further extended to Rs. 10 Crore for FY 2021-22 in case when cash receipt and payment made during the year does not exceed 5% of total receipt or payment, as the case may be. F&O transactions are traded electronically so generally extended limit of 5Cr./10 Cr. applicable for Audit purpose.
44AD Applicability:
Under Section 44AD of presumptive taxation, small taxpayers with less than 2 crores of turnover are not required to maintain books of accounts and their profits are presumed to be 8% or 6% of their turnover. Even though F&O income are considered as business income as per my personal view 44Ad can’t be availed in case of F&O income. As these transactions executed through recognized stock exchange and the stockbroker maintain records of the same & report the details of F&O transaction executed through them to the department, so if assess declare the different income in ITR it will be tracked, and department will issue notice for that. As records of every single transactions are maintained in actuality so we can’t opt for 44AD. However other person may have different opinion and even some website suggest to claims 44A.
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Disclaimer: The above article is prepared for understanding & study purpose. We recommend you consult your CA or tax consultant before taking any decision & author will not be responsible for any lose due to decision take based on above article.
You can reach Author at ca.rahuldwivedi@gmail.com or 9004485377.
Author Bio
Hi Rahul,
I am a salaried person. But I have F&O loss of Rs 7,00,000 for turnover of Rs 3 crore. I will go for Tax Audit?
Also, I have gained Rs 5 lakhs in Longterm. can manage F&O loss with capital gain?
Please advise.
Thanks,
Sekar
Dear Sekar
Audit not required in your case.
Business loss can be adjusted agst. LTCG.
For further assistance you can approach us at ca.rahuldwivedi@gmail.com or 9004485377
Sir f&O trading profit +loss = 16000000 turnover
Profit. 1500000 how to prepare tarding acc turnover show trading acc sale coloum but purchase coloum which file figure correct G.P
Hi, Is Tax payable on turnover or profits. Kindly clearify
Sir
During previous year, there is loss of Rs.350000 with turnover of 29L in F&O, options trading. Does it require audit of accounts as loss is to be carried forward in ITR 3.
Can i also submit return without showing loss in Options trading F&O, in case i dont wish to avail benefit of carry forward of loss in Itr-1 or so without showing business loss.
Hi, I am a salaried individual (ITR1) , this year i tried my hand at FNO and gone big last few months, did just ok compared to turnover 😀 . The below are the results for FY22, on broker tax statement:
FNO turnover: 6 Cr
Profit: 3L
Charges & Taxes: 1.5L
Questions:
1. Do i need to get tax audit?
2. i have bills for new laptop and internet etc. plan to set this off against the profit
3. After all these bills i will still have about 80K profit, do i pay self assessment tax on that?
4. whether to file ITR3 or 4 this year?
article is useful
if i am having income from profession and filing under 44ADA since last few year
this year if i have a professional receipts of 25 lac i am showing 14 lac profit under 44 ADA
also i have 1.7 lac loss in fno with turnover of 7 lac in fno.
is audit necessary or
i can file professional income with 44 ADA and
fno loss in regular income
or audit necessary for both
As per the Guidance note of ICAI(Tax audits)
Turnover definition includes Premium received on sale of options..
In this case Turn over is 170000+ 3327500=3497500
Qty Premium received on sale of Options
500 2100 10,50,000.00
700 3150 22,05,000.00
500 100 50,000.00
500 45 22,500.00
33,27,500.00
Correct me if im wrong…
Thank u
Hi Sir,
I have a profit of 25000 in stcg and 85000 in ltcg and i have loss of 1.5L in f&o transaction and 13k loss in intraday.
Will the f&o loss is set of against stcg profits( I am an salaried person with 30% tax)
Will my carry forward losses be
25000+85000-150000= -40000
Or
I will pay 15% on my 25000 and
for 85000 no tax and
complete -1.5L loss carry forward
Dear Swaroop,
Please note intra day loss (Speculative Loss) can be at off against speculative income, business loss can be set off against any income other than salary, LTCL can be s/o agst LTCG, STCL can be S/o agst LTCG and STCH.
Your example of rs170000/is defective. From where do you get this amount?
Dear VkSingh Ji,
I have already explained the way to calculate the turnover & in this way you have to calculate the Turnover in case of F&O. In present ex. T/o work out to Rs. 1,70,000/-
Dear Sir,
Very good article.
One doubt.
Suppose we sell option –
For example Sold Tata Power Call option 290 – 6750 per lot @ Rs.1.25
It was not purchased back and entire amount is profit
What would be the turnover for the purpose of presumptive taxation
Respected Sir,
I have salaried income 384000/-,
Intraday loss = -18048/- (Sale Value=17717401, Buy Value=17735449)
F&O Loss = -14130/- (Sale Value=2370, Buy Value=16500)
Short Term Capital Gain Profit= 10747/- (Sale Value=438319, Buy Value=427572)
can i show all this as Short Term Capital Gain in ITR-2 & I need tax audit?? THANKS
Whether usd/inr pair futures day trading would have same taxation and audit rules as equity futures day trading? If no, please explain actual position
Thank you responding to queries.
I have a turnover of 10 crore and a loss of 2 lakhs. Do i need to pay anything related to tax? Does Options turnover have any impact on tax calculation or paying tax apart for the criteria to decide about the audit?.
Mr. Raj, as i understood during Fy 2020-21 (AY 2021-22) you have turnover of Rs. 10 CR from F&O business, in that case you have go for Tax Audit and you will be able to carry forward your losses of Rs. 2 Lacs. However be careful in calculating F&O turnover.
Feel free for further clarification
Hi sir, my salary is 8lacs/annum, I did fno trading, turnover is 44 lacs and loss 1lacs, should I need to audit this
Hello Sir,
I’m a salaried employee with net income more than 2.5 L and have F&O loss of 9K. Turnover is around 3L. This is the first time, I did F&O trading. Im really confused with the audit requirements.
Since I’m claiming loss, do I need get it audited? Income tax portal warned me of possible defect “You have claimed income less than 8% of Gross Turnover and audit information is not filled up”
Please help me.
Sir, My FNO turnover in FY 2020-21 is around 23 Lakhs and gross loss is around 40,000. Shall I get my books audited. Thank you.
Rahul Ji,
Extremely knowledgeable write up. Thanks. I am pensioner with monthly pension of Rs 50000. But I have F&O loss of Rs 50000 for turnover of Rs 1.25 crore. I will go for Tax Audit? What books are required to be maintained? Kindly guide. Thanks & Regards
Dear Suryakumar Ji,
First of all you need to be very careful while working the Turnover in case of F&O transaction. I am assuming that turnover of Rs. 1.25 Cr calculated by you is correct, in that case prima facia Tax Audit will be applicable in you case. However Please note you can avail the benefit of extended limit for audit purpose of 5 Cr. in case of digital transaction. For further assistance you can reach me at ca.rahuldwivedi@gmail.com or 9004485377
Dear Mr.Rahulji,
though, suryakumarji could avoid tax audit as his turnover is less than rs.5 crores, assuming cash transactions less than 5%. But sec 44ad would be applicable as profit is less than 8/6% of his turnover of rs 1.25 crore and ( he is having loss), Section 44AB(c) will be applicable and would be subject to tax audit
Very detail valuable discussion. But which ITR is applicable in case of salaried individual assessee with derivative loss suffered in FY 2020-21 (AY 2021-22) ? Will it be ITR-4 please ?
ITR-3 should file
Excellent….!
Really very helpful…… Thanks Rahul👍
if i form partnership firm or LLP & do trading how the income was calculated ? what is the tax slab rate for partnership firm or LLP. kindly guide me . good luck
As it is considered as business Income, F&O income taxed at normal IT Rate. For partnership firm & LLP tax rate is 30% +4% cess. Surcharge Applicable if income exceeds 1cr. However rates are little lower in case of company. For individual it will be taxed as per slab.
realy this topic is very helpfull