“Understand the taxability of Future and Options (F&O) transactions from an individual’s perspective. Learn about turnover calculation, tax audit applicability, and how to report profits or losses in your income tax return. Explore the nuances of claiming expenses, loss carry forward, and optimizing tax implications in F&O trading.”
Income from Future and Options (F&O) transactions is treated as non-speculative business income and is taxable under the head ‘Profits and Gains of Business or Profession’ in the Income Tax Act, 1961.
Turnover Calculation: The turnover from F&O transactions is calculated as follows:
1. The total of positive and negative differences of all the F&O contracts traded during the financial year.
2. The premium received on sale of options is also included in the turnover calculation.
[However, where the premium received is included for determining net profit for transactions, the same should not be separately included.]
Example:
Case-1
Option Buy @ 70000 INR ; Sale @90000 INR
= Turnover is difference @20000 INR ; Profit-20000
Case-2 Future Buy @ 70000 INR ; Sale @50000 INR
= Turnover is difference @20000 INR ; Loss-20000
Case-3 Option Buy @ 70000 INR ; Sale @90000 INR = Turnover is difference @20000 INR
Option Buy @ 70000 INR ; Sale @120000 INR = Turnover is difference @50000 INR
Future Buy @ 70000 INR ; Sale @50000 INR = Turnover is difference @20000 INR
Combined Turnover @90000 [ 20000 profit + 50000 profit + 20000 loss* ] INR Profit-50000
Tax Audit Applicability:
Case-1 If the turnover from F&O transactions exceeds INR. 10 crore in a financial year, the trader is required to get his accounts audited under section 44AB of the Income Tax Act. The tax audit report must be submitted by a chartered accountant before the due date of filing the income tax return.
Case-2 If the turnover from F&O transactions INR. 2 crore to upto INR 10 crore in a financial year, incurred loss or net profit < 6% of turnover, and total income exceeds basic exemption limit, required tax audit; Otherwise not.
Case-3 If the turnover from F&O transactions upto INR. 2 crore in a financial year * if opting for presumptive taxation scheme, not required tax audit.
Case-4 If the turnover from F&O transactions upto INR. 2 crore in a financial year * if not opting for presumptive taxation scheme required tax audit.
Case-5 If Opted for presumptive taxation in any of the previous 5 years but not in the current year, and total income exceeds basic exemption limit required tax audit.
To show the profit or loss from Futures and Options (F&O) trading in the profit and loss (P&L) account:
Sales : Turnover Derived from above explanation
Expenses allowed if you are not opting for presumptive taxation scheme and going for mandatory or voluntary tax audit.
Expenses that you are eligible to deduct
The upside to filing your return as a business is that you can deduct the costs you incurred. It’s acceptable when claiming costs results in a business loss.
Expenses that were incurred solely and directly for business purposes should be claimed.
brokerage fees, broker commissions, journal subscriptions connected to trading, phone bills, internet costs, consultant fees (if you sought professional guidance for a fee), the salary of a staff member you hired to assist with your business.
These can all be asserted.
Remember to keep accurate records of your receipts and bills, and confirm that you are paying for purchases with checks or bank transfers rather than cash.
Loss Carry forward in F&O Trading
F&O trading losses are classified as non-speculative business losses.
It can be offset against any income in the current year, with the exception of salary income. It can be deducted from future business income (both speculative and non-speculative). The trader has 8 years to carry the loss forward.
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