Budget 2024 Update
Effective 1st October 2024, STT rates on F&O trades have been revised:
- Futures in Securities: STT on sales will increase from 0.0125% to 0.02%.
- Options in Securities: STT on sales will rise from 0.0625% to 0.1%.
File your F&O taxes with Tax2win for seamless compliance!
What is Futures and Options, F&O?
Futures and Options, commonly referred to as F&O, are financial derivatives instruments traded on the stock exchanges such as shares, stock market indices, commodities, ETFs, and more. These are contracts signed by two parties for trading a stock asset at a predetermined price at a later date. They are agreements that allow investors to speculate or hedge their positions based on the future price movements of underlying assets such as stocks, commodities, currencies, or indices. Here's a brief overview of Futures and Options:-
Futures:
- A future is a forward contract between two parties in which the buyer promises to buy a specified quantity of stocks from the seller at a pre-determined price at a future date. A future grants a buyer and seller the right to purchase and sell a certain share at a set price.
- It obligates the buyer to purchase the asset and the seller to sell the asset at the agreed-upon price, regardless of the current market price at the time of contract expiration.
- Futures are traded on organized exchanges and are highly standardized in terms of contract size, expiry date, and settlement method.
Options:
- An options contract gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) on or before a certain date (expiry date).
- The buyer pays a premium to the seller for the option.
- The seller of the option is obligated to fulfill the terms of the contract if the buyer decides to exercise the option.
- Options are also traded on organized exchanges and are available in various types, such as index options, stock options, and commodity options.
- However, one point to be noted is that futures and options do not provide ownership of underlying financial instruments.
Types of Futures and Options
While futures contracts operate under uniform rules for both buyers and sellers, options derivatives are divided into two distinct types:
- Put Option: This contract allows individuals to sell a specific asset at a predetermined price on a future date. It is ideal for those seeking to protect against potential price drops in the asset.
- Call Option: This contract enables individuals to purchase a specific asset at a locked-in price for a future exchange. It is beneficial for those looking to capitalize on potential price increases.
Who Should Invest in Futures and Options?
Here's a breakdown of who should consider investing in F&O:
Experienced Investors
- Why? F&O markets are complex and require a deep understanding of market dynamics.
- Who? Investors with significant knowledge of technical analysis, market trends, and risk management.
High-Risk Tolerance Individuals
- Why? F&O investments involve substantial risk and potential losses, which can exceed the initial investment.
- Who? Those who can afford to take risks without jeopardizing their financial stability.
Traders Looking for Leverage
- Why? F&O allow investors to control larger positions with a smaller capital outlay.
- Who? Short-term traders seeking to amplify their gains (and risks) through leveraged positions.
Hedgers
- Why? F&O are often used to hedge against potential losses in other investments.
- Who? Businesses or investors looking to offset risks in equity, commodity, or currency markets.
Speculators
- Why? F&O provide an opportunity to profit from market volatility without owning the underlying asset.
- Who? Investors who are confident in predicting short-term market movements.
Arbitrageurs
- Why? They exploit price differences between different markets or contracts.
- Who? Professionals who can act quickly and understand complex strategies.
What is F&O Trading?
Futures & Options Trading is trading in derivative instruments of an underlying asset at a pre-determined price. This underlying asset could be a commodity, currency, or equity shares.
Under Futures, the trader buys or sells a contract at a predetermined price and a predetermined date in the future.
Under Options, the buyer can cancel the contract if he incurs any loss because it gives the right, not an obligation, to buy or sell.
Both futures and options traders must file their income tax return on the income they earn.
F&O Trades? Ensure Every Gain or Loss is Declared in Your ITR
Declaring your Futures and Options (F&O) loss while filing your income tax return is important, neglecting this can lead to a notice from the tax department as ITD have access to all the stock market transactions carried out by taxpayers. In case you have loss from F&O trading, there are tax benefits associated with reporting losses, let us discuss more:-
- Tax Deduction: A prime benefit of showing the loss is you may set it off against any other income earned by you. A loss on an F&O trade can be adjusted against all income apart from your salary. This may include income from house property, business or profession, or any other source. It reduces your overall tax liability. This can help in lowering your tax liability.
- Carry Forward: If your F&O losses exceed your total income in a particular financial year, you can carry forward the unabsorbed losses to future years. These losses can be set off against F&O gains in subsequent years, reducing your tax liability in those years.
- Tax Compliance: Declaring F&O losses ensures that you are in compliance with the income tax laws and accurately reporting your financial transactions. Non-disclosure of losses can lead to penalties and legal consequences. In case you have a loss from F&O trading, there are tax benefits associated with reporting losses.
- Audit Requirement: If you have F&O losses, declaring them in your tax return can help you avoid tax audit requirements. Tax audit is mandatory for certain taxpayers whose turnover or gross receipts exceed a specified limit. Properly declaring losses may keep you below that threshold.
- Documentation for Future Reference: Properly declaring F&O losses provides you with a record of your financial transactions, which may be useful for future references, such as loan applications or financial planning.
- Adjustment against F&O Gains: If you have both F&O gains and losses in a financial year, declaring the losses allows you to offset them against the gains, reducing the overall tax liability on F&O transactions.
What is the Tax Treatment for F&O Profits or Losses?
Futures and Options trading under Section 43(5) are considered as non-speculative transactions. This means any income that comes from F&O trading is taxed in a similar way as that of business transactions. Therefore, any F&O loss is treated as a business loss.
Such loss on F&O transactions is not subject to tax. However, reporting it in the ITR lets you claim certain expenses that have been incurred while conducting the F&O trade.
Under Section 43(5) of the Income Tax Act, income or loss from Futures and Options (F&O) trading is classified as non-speculative business income. Consequently, it is mandatory to declare profits or losses from F&O trading as Business Income under the PGBP (Profits and Gains from Business and Profession) head while filing your Income Tax Return.
Given below are some expenses you can claim as a deduction -
- Rent of the premises where F&O trade is conducted.
- Administration expenses for the trade. For example, telephone bills and the Internet.
- Salaries of the employees or individuals you have hired for the F&O trade.
- Brokerage, commission, or charges of experts.
- Depreciation on the assets used for F&O transactions.
Note: It is necessary for you to have proof of all these transactions in the form of bills and receipts which are filed properly. However, cash expenses exceeding Rs.10,000 cannot be claimed. In addition to this, you can also deduct the amount paid as Securities Transaction Tax (STT).
When is Tax Audit Applicable?
Once your account is treated as a business, it is important to note that if the income exceeds Rs 2,50,000 or turnover exceeds Rs 25,00,000 in any of the previous 3 years, then proper books of accounts are required to be maintained. The same applies to individuals doing business, such as F&O trading. The trader would be required to prepare normal books of accounts under Section 44AA of the Income Tax Act. If the total turnover of a person carrying on business exceeds Rs. 10 crores, they are required to have their accounts audited.
(The threshold of Rs. 1 crore will not apply in the case of F&O trading as 95% or more of the transactions are digital). This means you’ll have to get your accounts audited via a CA and submit the audit report along with your tax return within the due date as specified by the act.
There is a penalty if you do not maintain accounting records under Section 271A. This penalty is Rs 25,000/- Further, a penalty equal to a lower of Rs 1.5 lakhs or 0.5% of gross receipts or turnover can be levied under Section 271B for not getting books audited under Section 44AB.
How to show F&O Loss in ITR?
In the F&O loss scenario, transactions can be set off against all other income sources except salary. This is a prime benefit. These income sources could be a business or profession, house property, or other sources. For example, if you are receiving a rent of Rs 30,000 every month, which means annually, you are receiving 3,60,000. In the year, if you have incurred any loss on F&O, let us assume it is 90,000; you may set off this loss against your rental income. Thus your Taxable income will reduce to 270000.
In case, if you cannot set off this loss in the current year, it can be carried forward over the next 8 years. However, the condition will remain the same in these subsequent 8 years; you may set it off only against business income.
Which ITR to File for Reporting F&O Income?
Since F&O income is categorized as business income, individuals engaged in F&O trading must report their profits or losses using the ITR-3 form (the designated form for PGBP Income).
When you file with Tax2win, there’s no hassle of manually selecting the correct ITR form. Our platform automatically identifies and selects the right ITR form for you based on your income and other relevant details. File Now.
How is F&O Turnover Calculated, and What Factors are Taken into Account?
Trading turnover is important to calculate to check whether the Tax audit is applicable or not.
Turnover for Futures & Options Trading = Absolute Profit ( sum of profit and loss made on various transactions throughout the year)
Here, the Absolute Profit= Sum of positive + negative differences.
Let us understand this with an example:-
Mr. X buys 400 contracts of Nifty Futures at Rs.50 on 07/09/2022. He sells these contracts at Rs.30 on 08/10/2021. Also, Mr.X buys 200 contracts of Heromotoco Futures at Rs.100 on 05/05/2022. He sells these contracts at Rs.150 on 12/09/2022.
- Loss from Trade 1 = (30-50) * 400 = Rs. -8,000
- Profit from Trade 2 = (150-100) * 200 = Rs. 10,000
- Absolute Profit = 8000+10,000=18,000
Who is Eligible for an F&O Trading Tax Audit, and Under What Circumstances?
Case 1:-Trading Turnover is up to 2 Cr.
If the profit is more than or equal to 6% of Trading Turnover and has opted for presumptive taxation, a Tax Audit is not applicable.
If the taxpayer has incurred a loss or has a profit that is less than 6% of Trading turnover and income is beyond the exemption limit, a Tax Audit is applicable.
Case 2:-Trading Turnover is more than 2Cr and up to 10Cr
- If the taxpayer has incurred a loss or has a profit that is less than 6% of Trading Turnover, a Tax Audit is applicable.
If the profit is more than or equal to 6% of Trading Turnover and has not opted for presumptive tax, the Tax Audit is applicable.
If the profit is more than or equal to 6% of Trading Turnover and has opted for presumptive tax, the Tax Audit is not applicable.
Case 3:- Trading Turnover is more than 10Cr
Tax Audit is applicable in all cases, irrespective of trading turnover.
Which Expenses are Deductible from Futures and Options Income?
Business expenses can be deducted from F&O income. However, only the business expenses that are directly and exclusively related to F&O trading activities are eligible for deduction. Expenses such as broker’s commission, telephone bills, consultation charges, subscription to trading-related journals, internet costs, etc. These expenses can be claimed even if you have suffered a loss from F&O.
Note :- Cash expenses exceeding 10000 may not be eligible for deduction.
Ready to optimize your F&O trading taxes and boost your financial gains? Our team of skilled eCAs is here to guide you through the intricacies of F&O taxation. Maximize your deductions, accurately report your F&O income, and stay compliant with tax regulations. Hire online CA now!
Case Study
From ₹26 Lakh Loss to ₹68 Crore Tax Demand: A Costly F&O Mistake
In 2014, a Karnataka farmer lost ₹26 lakh in Futures & Options (F&O) trading. Thinking no profits meant no ITR filing, he ignored it. By 2021, the Income Tax Department reopened his case, linking ₹69 crore F&O turnover to his PAN. A missed notice led to the entire turnover being taxed as income in 2022, resulting in a ₹68 crore demand for taxes, penalties, and interest.
Key Lessons:
- File ITR Always: Report losses to offset future profits and avoid scrutiny.
- Stay Alert: Check emails and tax notices regularly.
- Seek Expert Advice: F&O taxation is tricky—professional help is essential.
Don’t risk it—stay compliant! Need help? Tax2win is here for you. Book tax consultation
