All you need to know about Futures & Options Trading taxes

Futures & Options Trading Taxation under Income Tax

In recent years, Future and Options trading has gained significant traction. Now, as more individuals are getting into this kind of trading, it is essential for them to understand how taxes work in this situation. 

It's not just about making money; you also need to know how your profits and losses are treated for tax purposes. That's why we have got you this guide. 

What is Futures and Options, F&O?

• Futures

Imagine you agree to buy or sell something (like stocks or commodities) at a fixed price, but the deal happens in the future.

• Options 

It's like having a choice. You pay a fee for the right, but not the commitment, to buy or sell an asset at a predetermined price. If the stock price increases, you can choose the option and make a profit.

What Is Future & Options Trading?

F&O trading involves making bets on the future prices of things like stocks, currencies, or commodities. It's a hot topic among investors because it has the potential for big returns. However, along with the possibility of making money, there's also a risk of losing a significant amount.

F&O Turnover Calculation

Determining whether a Tax Audit is necessary involves calculating the Trading Turnover in Futures and Options (F&O) trading. We use the absolute profit to calculate Turnover for F&O Trading, considering both positive and negative differences. 

Here’s the formula. 

Let's consider an example with hypothetical transactions:

• Raj buys 100 contracts of XYZ Futures at Rs. 120 on 02/03/2023. He sells these contracts at Rs. 110 on 05/03/2023.

Loss from Trade 1 = (110−120)× 100 = Rs. -1,000

• Raj buys 80 contracts of ABC Futures at Rs. 60 on 10/06/2023. He sells these contracts at Rs. 70 on 15/06/2023.

Profit from Trade 2 = (70−60)×80 = Rs. 800

Absolute Profit = 1000 + 800 = Rs.1800   

The turnover for F&O Trading is an absolute profit of Rs. 1800.

Income Tax on F&O Trading

• Income Head

Under Section 43(5) of the Income Tax Act, any gains or losses arising from Futures and Options (F&O) trading are categorized as “Non-speculative business income”.

It is mandatory to report the profits or losses incurred in F&O transactions under the head of Profits & Gains from Business and Profession (PGBP) as business income.

• Income Tax Slab Rates 

The computation of income tax on trading income from Futures and Options (F&O) follows the prescribed slab rates outlined in the Income Tax Act. The taxation structure differs based on whether F&O traders opt for the old or new tax regime. Below are the slab rates for each. 

• Old Tax Regime

Important: Surcharge is levied at the rate of 4% of Total Tax. 

• New Tax Regime

For a detailed explanation of income tax slabs, click here. 

Which ITR Form Is Required To Be Filed While Reporting F&O Income?

Two ITR forms can be filed to report F&O income. 

ITR-3: If you're an individual or part of a Hindu Undivided Family (HUF) making money from a business or profession. 

ITR-4: If you are an individual, part of HUF or a non-LLP firm, and you can opt for the 'Presumptive Taxation Scheme.’ 

F&O Trading Tax Audit Under Section 44AB 

Futures and Options (F&O) traders in India are subject to a tax audit under Section 44AB of the Income Tax Act. This provision mandates a tax audit for certain taxpayers, including those involved in F&O trading, if their turnover exceeds the specified limit. 

Here's a breakdown of the key aspects: 

Scenario 1. If the trading turnover is up to INR 1 Cr

If the trading turnover is up to INR 1 Cr, no tax audit is applicable but the books of accounts are to be maintained and profit/loss can be declared as per books of accounts. 

Scenario 2.  If the trading turnover is between INR 1 Cr and INR 10 Cr

For trading turnovers falling between INR 1 Cr and INR 10 Cr, the provisions of Section 44AB do not apply if the total receipts and payments in cash do not exceed 5%. 

Why? Well, it's like this: more than 95% of the trades are done digitally using Demat accounts. Due to this, a tax audit is not required, whether it is a profit or loss.  

Scenario 3. If the trading turnover exceeds INR 10 Cr. 

In this case, the tax audit will be mandatory irrespective of profit or loss. 

The taxation rules for F&O trading can be complex, and it's advisable to consult with our tax professional for personalized advice based on your specific situation.  

Frequently Asked Questions (FAQs)

1. Is a tax audit necessary for Futures & Options Trading?

• Tax audit is not required if the turnover from F&O trading does not exceed Rs. 1 crore.

• Tax Audit is not required if the turnover is between 1 Cr to 10 Cr and the total receipts and total payments in cash do not exceed 5%.  

• Tax audit is mandatory if the turnover from F&O trading exceeds Rs. 10 crore, regardless of whether a profit or loss is declared.

2. Is it mandatory to pay advance tax on F&O Gains?

Yes, F&O income is considered non-speculative business income and is mandated for taxation at normal slab rates. If your anticipated income for the financial year exceeds Rs 10,000, advance tax must be paid in four quarterly instalments according to the relevant due dates.

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How the losses are treated under F&O

The losses will be allowed to be carried forward as per normal business losses which can be set off from any income source in the same year (except salary income) and after carry forward, it can be adjusted against business profits only in next years upto a period of 8 years.

Futures & Options and Speculative Trading Simplified - Know more