What is Future and options income?
Futures and options are types of derivatives that are traded in financial markets. A derivative is a financial instrument that derives its value from an underlying asset, such as stocks, commodities, or currencies.
A futures contract is an agreement between two parties to buy or sell an underlying asset at a predetermined price and at a specific time in the future. Futures trading is often used for hedging purposes, where an investor tries to reduce the risk of price fluctuations in the underlying asset.
On the other hand, options trading gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and at a specific time in the future. An option contract provides the buyer the right to exercise the option, but it is not an obligation.
Income from futures and options trading is the profit or loss realized by a trader or investor from buying and selling futures and options contracts. The profit or loss is calculated based on the difference between the price at which the contract was bought and the price at which it was sold.
Taxability of Future and options income
Income from futures and options trading is considered as a form of business income and is taxed accordingly. In India, income from futures and options trading is treated as a business income, and it is taxed as per the income tax slab rates applicable to the taxpayer.
The income from futures and options trading is reported under the head “Income from Business and Profession” while filing income tax returns. The income is calculated by netting off the profits and losses of all trades done during the financial year.
It is important to note that the income from futures and options trading is also subject to the Securities Transaction Tax (STT), which is levied on the value of the transaction. The STT is a tax payable by the buyer or seller on the transaction value of securities traded on recognized stock exchanges in India.
Carry forward of losses from future and options –
If you have incurred a loss from futures and options trading, you can carry forward the losses and set them off against future profits for up to 8 years from the end of the financial year in which the loss was incurred. The carry-forward and set-off of losses are subject to certain conditions and limitations as per the Income Tax Act, 1961.
Which ITR to file for Future and options income??
If you have income from futures and options trading, you are required to file your income tax return (ITR) using ITR-3 or ITR-4.
ITR-3 is for individuals and Hindu Undivided Families (HUFs) who have income from profits and gains of business or profession. As futures and options trading is considered as business income, ITR-3 is the applicable form for taxpayers with income from futures and options trading.
On the other hand, ITR-4 is for individuals, HUFs, and firms (other than LLP) who have presumptive income from business and profession. If you have income from futures and options trading and you opt for the presumptive taxation scheme under Section 44AD of the Income Tax Act, then you can file your income tax return using ITR-4.
It is important to note that ITR-1 (Sahaj) and ITR-2 forms are not applicable for taxpayers who have income from futures and options trading. If you file your ITR using an incorrect form, it may result in the rejection of your tax return or lead to legal consequences.
*****
The author is an Income Tax and GST Practitioner and can be contacted at 9024915488.
Author Bio
Hi Sparsh wadhwa,
As per the guidance note issued by ICAI read with section 43(5) of income tax act 1961, any transaction entered with futures and options like sales and purchases shall deemed to be “Non speculative business transaction”.
Hence requesting you to re validate your article once again and correct the statement mentioning “As futures and options trading is considered as speculative business income” in paragraph 2 under the head “Which ITR to file for Future and options income??”.
And the provision of carry forwarding losses differs from non speculative to speculative business i.e 4 years to 8 years.
A small misconceptions, sometimes cause big error.
“As futures and options trading is considered as speculative business income, …….”
Kindly clarify as to what is the basis of your presumption that F&O income is a speculative one. I am of the opinion that in accordance with section 43(5) it is not speculative.
F&O income is taxable under head Business or Professtion head as it is consider as business income