Understand the taxability of Futures and Options (F&O) business income under the Income Tax Act, 1961. Learn about treating F&O income as business income, taxation of profits and losses, applicability of tax audit, reporting in Income Tax Return (ITR), and deductions. Explore the concept of turnover in F&O trading with an example, and know the criteria for tax audit based on turnover. Get insights on calculating turnover for futures and options trading and consult a chartered accountant for accurate turnover calculation.
Income from Futures and Options (F&O) trading in India is treated as business income, and it is taxable under the provisions of the Income Tax Act. Here’s a detailed explanation of how F&O income is taxable and the applicability of tax audit:
1. Treatment as Business Income: a. F&O trading is considered a speculative business activity, and the income generated from such trading is categorized as business income. b. It is important to maintain proper books of accounts to record F&O transactions, including details of purchases, sales, expenses, and other related financial information.
2. Taxation of F&O Income: a. Profit: The profit earned from F&O trading is added to your total income and taxed at the applicable slab rates as per the income tax slabs in India. b. Loss: Losses from F&O trading can be set off against any other business income or carried forward to subsequent years for set-off against future F&O profits for up to eight assessment years.
3. Applicability of Tax Audit: a. Turnover Criteria: As per Section 44AB of the Income Tax Act, if the turnover from F&O trading exceeds the specified threshold, a tax audit may be required. b. Threshold: For F&O trading, a tax audit is applicable if the turnover exceeds INR 10 crore in a financial year. c. Compliance: If the tax audit is applicable, a qualified chartered accountant needs to conduct the audit and submit the audit report along with the tax return.
4. Reporting in Income Tax Return: a. F&O trading activities should be reported in the Income Tax Return (ITR) using the appropriate forms. Generally, ITR-3 or ITR-4 (Presumptive Income) forms are used for reporting business income from F&O trading. b. Detailed information about the turnover, profit/loss, expenses, and other relevant details must be accurately reported in the respective sections of the ITR forms.
5. Tax Deductions and Compliances: a. Business Expenses: Expenses directly related to F&O trading, such as brokerage charges, transaction costs, and other permissible business expenses, can be claimed as deductions while computing taxable income.
Turnover criteria in F&O with example
Let’s understand the concept of turnover in F&O (Futures and Options) trading with an example:
Suppose an individual named Rahul is engaged in F&O trading during the financial year. Let’s consider the following transactions:
1. Futures Trading: a. Rahul enters multiple futures contracts of different underlying assets such as stocks or indices. b. For each futures contract, he engages in both buying (long) and selling (short) positions. c. The turnover for futures trading is calculated by considering the absolute value (ignoring the sign) of the differences in all the trades.
Example: Transaction 1: Rahul buys 100 units of Stock A futures at INR 100 per unit and sells them later at INR 110 per unit. Transaction 2: Rahul sells 50 units of Stock B futures at INR 200 per unit and buys them back at INR 190 per unit.
To calculate the turnover for futures trading: Transaction 1: Absolute value of (110 – 100) x 100 units = INR 1,000 Transaction 2: Absolute value of (200 – 190) x 50 units = INR 500
Total Turnover for Futures Trading = INR 1,000 + INR 500 = INR 1,500
1. Options Trading: a. Rahul engages in options trading by buying and selling options contracts. b. The turnover for options trading includes both the premium received from writing options contracts and the premium paid for buying options contracts.
Example: Transaction 3: Rahul writes (sells) a call option contract and receives a premium of INR 1,000. Transaction 4: Rahul buys a put option contract and pays a premium of INR 800.
To calculate the turnover for options trading: Transaction 3: Absolute value of premium received = INR 1,000 Transaction 4: Absolute value of premium paid = INR 800
Total Turnover for Options Trading = INR 1,000 + INR 800 = INR 1,800
Total Turnover for F&O Trading = Total Turnover for Futures Trading + Total Turnover for Options Trading = INR 1,500 + INR 1,800 = INR 3,300
If the total turnover for F&O trading exceeds INR 10 crore in the financial year, a tax audit may be applicable as per Section 44AB of the Income Tax Act.
It’s important to note that the example provided is for illustrative purposes, and actual turnover calculation may involve multiple transactions and different financial variables. It is advisable to consult with a qualified chartered accountant or tax professional for accurate turnover calculation based on your specific F&O trading activities.
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Author is A Practicing Chartered Accountant with over 5 years of rich experience in Company Law, Audits, Accounts & taxation. She is keen in streamlining business accounts of the Company and provide Business advisory services She can be connected on sweta@caswetamakwana.com or on 9819244185.
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