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Taxation of Futures & Options

Taxation of F&O income can be really confusing. Many individuals don't even declare their F&O income and losses while filing their income tax returns and that can turn out to be a really big mistake as you can even receive a notice from the tax department for non-compliance. Also, the declaration of such income comes with other tax benefits as well. We will try to understand this further below.

First of all, for an individual with F&O income, ITR-3 & ITR-4 are applicable.

One can file ITR - 4 only if he/she doesn't have any other capital gain. If you have other capital gains, ITR - 3 will be applicable. Income from F&O transactions are not speculative in nature hence they are treated as any normal business income and all the rules that apply to a normal business are applicable for F&O income as well but the only difference is the way the turnover is calculated. The turnover for F&O transactions is calculated based on the absolute value of profit and loss. Let’s understand this better with an example.

1. HOW IS MY TURNOVER CALCULATED?

Let's say the following is the list of your profits/losses from various F&O transactions:

SR. No Date Buy Sale Profit/Loss Absolute Value (ABS)
1 01/09/2021 55000 65000 10000 10000
2 02/09/2021 54000 34000 -20000 20000
3 03/09/2021 25000 32000 7000 7000
4 04/09/2021 55000 27500 -27500 27500
5 05/09/2021 23000 54000 31000 31000
Total 212000 212500 500 95500
  • Turnover for F&O is calculated based on the Absolute value of profit and loss. (No matter if you have loss or profit, both the amounts are added up to determine the total turnover)
  • Premium received on sale of options will be added.
  • If a reverse trade is entered then the difference thereon should also form the part of turnover.
2. Whether Losses from F&O Transaction can be carried forward to next year and how do can I set-off these losses?

Answer: Yes, losses can be carried forward. F&O transaction is treated as Normal business income, i.e. non speculative income, first it will set off against the intra head or inter head, if there is any unutilised F&O losses then that can be carried forward to next 8 financial years and can only be adjusted towards business income.

  1. Intra head - F&O losses can be set off against income from other business or profession income including speculative income as well.
  2. Inter head - Balance F&O loss can be set off from other head of incomes except income from salary.

3. Whether expenses can be claimed against F&O profit?

Yes, the expenses incurred for the purpose of Business are allowed to be claimed in the income tax return. Following is the list of expenses that can be claimed -

  • Brokerage
  • Broker’s commission
  • Subscriptions to journals related to trading
  • Telephone bills
  • Internet costs
  • Consultant charges
  • Salary of a person you hired to help with your business.

4. How do I know if Tax Audit is applicable to me?

Turnover Cash Receipts & Expenses Presumtive Taxation (6%/8%)
5% of Total ≤ 5 % of Total
less than ₹1 Cr No Audit No Audit YES
₹1 Cr - ₹2 Cr Audit No Audit YES
₹2 Cr - ₹10 Cr Audit No Audit NO
More than - ₹10 Cr Audit Audit NO
You can refer the above image to know if you are eligible for Tax Audit or you can simply use the tax audit calculator on our website to determine your Tax Audit eligibility. If your turnover is below the prescribed limit as mentioned above and Cash receipts or cash expenditure is less than or equal to 5% of total then your turnover limit becomes ₹10Cr and Tax Audit will not be applicable to you but if your turnover exceeds ₹10Cr, tax audit will be applicable. You can even opt for the PTS scheme under section 44AD and show your profits upto 6% and 8% respectively provided your turnover is upto Rs.2cr. Use the TaxBuddy Tax Calculator here - https://itr.taxbuddy.com/#/tax-audit.

5. Whether F&O traders need to maintain Books of account?

If you are opting for PTS scheme then there is no need for you to maintain books of account. However, if you are not opting for PTS then you need to maintain your books of accounts.

Following person requires to maintain of books of accounts as per the section 44AA of Income Tax Act, 1961

  • All specified profession or
  • Others - If income exceeds Rs. 1.2 Lakhs (In case of Individual or HUF Income - Rs. 2.5Lakhs) or if turnover from business or profession exceeds Rs. 10 Lakhs (In case of Individual or HUF turnover exceeds Rs. 25 Lakhs) in any one of the 3 preceding financial years.

Note - If you are opting presumptive taxation scheme and showing income less than 8% (6%, if all trades are in digital mode) of the turnover and income exceeding Basic exception limit then provision of Section 44AA will be applicable.

APPLICABILITY OF ITR 4 FOR F&O LOSS / BENEFITS
  1. Declaration of F&O income comes with the benefit of carry forwarding. If you have losses during the financial year then you can disclose such losses and it can be adjusted from income from remaining heads such as rental income or interest income (cannot be adjusted from salary income). The remaining unadjusted losses will be further carried forward for the next 8 years. In the near future, the unadjusted loss can be adjusted against non-speculative income. If you have F&O losses then ITR-4 would not be beneficial for you and you will have to file ITR-3 to be able to carry forward those losses.
  2. Another benefit of declaring your profit/losses from F&O is you can claim various expenses like brokerage, broker’s commission, subscriptions to journals related to trading, telephone bills, internet costs, consultant charges if you took an advice from a professional who charged you, or salary of a person you hired to help with your business. All of these can be claimed. (Remember to maintain a proper record of receipts/bills and make sure you are spending via cheques or bank transfers and not in cash).
FILING ITR - 3 FOR F&O INCOME

As mentioned above, you will have to file ITR 3 for F&O income only if you have other capital gains such as Long term capital gains (LTCG), Short term capital gains (STCG), Speculative income (Income from Intraday trading), etc. All the other conditions remain the same for the F&O income and taxation.