Future and Options (F&O) Trading is a popular activity amongst taxpayers due to availability of multiple online trading platforms. The Income Tax provisions on F&O trading need to be analysed carefully.
F&O Trading comprises of trading in futures and options. They are classified under Derivatives. Derivatives are securities whose value is derived from the price of an underlying asset. Futures is a contract made on a trading exchange to buy or sell a security at a predetermined price on a predetermined date and specified time in future. Example: Investor who plans to invest in gold can either buy physical gold or can trade in derivative of gold i.e. enter into a futures contract to trade gold at a predetermined future rate.
Options is a contract between buyer and seller which gives the buyer a right to buy or sell the security on a specific date at an agreed upon price. In Futures, the buyer does not have an option to cancel the contract, thus he may earn profit or incur loss. Whereas under Options, the buyer has the right to cancel the contract if he is incurring losses. Since the buyer has this advantage of exercising right, the buyer is required to pay a premium when he enters into the options contract. Thus, if the buyer cancels the options contract he still has to pay the premium amount.
Turnover of Futures = Absolute Profit
Turnover of Options = Absolute Profit + Premium on Sale of Options
The applicability of tax audit under the Income Tax Act can be determined from the trading turnover. Under F&O Trading, the turnover for futures is equal to sum of positive and negative differences i.e. absolute profit. The turnover for options is equal to absolute profit plus premium on sale of options.
Mr. X buys 2 contracts of Nifty Futures at Rs.1000 on 20th June. The contract expires on 10th July. Price on 10th July is Rs.500. Realised Loss = 2 * 500 = Rs.1000
Mr.X sells 2 contracts of Nifty Futures at Rs.2000 on 10th July. The contract expires on 30th July. Price on 30th July is Rs.1000. Realised Profit = 2 * 1000 = Rs.2000
Turnover = Absolute Profit = 1000 + 2000 = Rs.3,000
Tax Audit u/s 44AD is applicable if:
1. Taxpayer has incurred loss
2. Trading Turnover exceeds Rs.2 Cr
If Tax Audit is applicable, the taxpayer must appoint a Chartered Accountant in practice to:
Imp: If the taxpayer decides not to claim and carry forward the trading loss, he can avoid the hassle of tax audit.
Income Head, ITR Form and Due Date
Calculation of Income Tax
Income Tax is calculated at the prescribed slab rates as per the chart below:
Note: Surcharge is liable on the total income as per the prescribed slab rates. Cess is liable at 4% of (basic tax + surcharge)
Carry Forward of Loss
Loss under F&O Trading can be claimed if Tax Audit u/s 44AD is performed by a professional Chartered Accountant in practice. The loss can be carried forward and set off against future profits to reduce the income tax liability.
Since loss from F&O Trading is a Non-Speculative Loss, it can be carried forward for 8 years. It can be set-off against both Speculative Business Income and Non-Speculative Business Income.
Author is a CA at quicko.com | online tax filing platform