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In the last few years, derivative trading has significantly increased, i.e., Trading in futures and options. Commonly known as F&O. Initially, individuals used to be involved in it temporarily while now pursuing it full-time. Individuals are making additional money through trading along with their jobs. F&O investment allows investors to gain high returns by predicting the stock or commodity price. However, it comes along with a high risk.
Trading in the future and options or F&O on stocks, currencies, and commodities is the hot buzz among investors, but they need to be made aware of how this is taxed. Let us understand further how to tackle your taxes.
Futures and Options, commonly referred to as F&O, are financial derivatives instruments traded on the stock exchanges. These are contracts signed by two parties for trading a stock asset at a predetermined price on 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:
Options:
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.
Declaring your Futures and Options (F&O) loss while filing your income tax return can provide several benefits, including:
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. Given below are some expenses you can claim as a deduction -
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).
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.
The due date to file ITR for FY 2023-24 is 31st July 2024, but those on whom audit apply have a due date of 30th September 2024. Let Tax2win’s Experts to help ensure a smooth ITR filing process. Get CA-Assisted ITR Filing Today!
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 could not 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.
There are different types of ITR forms available to file ITR. Choosing the right one is important based on the nature of your income, as F&O income or losses are considered normal business income/loss. If the F&O loss is treated as a business loss, then it should be reported in ITR-3. Similarly, if the F&O loss is not treated as a business loss or you run a business or profession and file taxes as per the presumptive income scheme, then ITR-4 will be the right form to report this income. It's crucial to select the correct ITR form to ensure accurate reporting of your income and avoid any discrepancies.
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.
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, 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 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.
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. Book your eCA consultation now!
F&O losses refer to losses incurred in Futures and Options trading.
The following documents are required to show F&O losses in ITR:
Yes, F&O losses can be set off against other gains such as capital gains from the sale of assets or business income. The losses can be set off in the same financial year or carried forward for up to eight years.
There is no limit for setting off F&O losses against other gains. However, the losses can only be set off against gains in the same category, i.e., short-term losses can be set off against short-term gains, and long-term losses can be set off against long-term gains.
