What is F&O Trading?
F&O trading involves speculating on the future price movements of stocks, indices, and other financial instruments. This trading can result in significant profits or losses. The Income Tax Department has provided specific guidelines for reporting these transactions. If you fail to comply with these guidelines, it can lead to penalties and legal complications.
How is F&O Trading Income Taxed?
F&O trading is considered a non-speculative business, and therefore, both F&O trading profits and losses must be reported while filing the ITR. Many F&O traders think that only profits are to be reported in the ITR, but the truth is, both profits and losses must be reported in the ITR.
F&O trading income is taxed at the applicable slab rates under the head “Profits and Gains from Business/Profession”.
Tax Audit Applicability on F&O Trading Income
- Turnover upto Rs. 2 Crore: If profits are less than 6% of turnover and you have not opted for the presumptive taxation scheme, then it is mandatory to get a tax audit under section 44AB(e). If the profits are higher than 6%, a tax audit is not required.
- Turnover Between Rs. 2 Crore to Rs. 10 Crore: If 95% or more of the transactions are digital, there is no need for a tax audit.
- Turnover Above Rs. 10 Crore: It is mandatory to get a tax audit under section 44AB(a), irrespective of profit or loss.
STT on F&O Income
STT or Securities Transaction Tax is a type of tax levied on the sale of securities, futures, and options during trading.
- The STT on futures in securities is 0.02%
- The STT on options in securities is 0.1%
Where to Report F&O Transactions?
Since the tax on F&O trading is calculated under the Business Income head, the F&O transactions, i.e, both profits and losses, should be reported in ITR-3 form. And if your annual income is less than Rs. 3 crore (for businesses) and Rs. 75 lakh (for professionals), then you can opt for the presumptive income scheme. If you have opted for the presumptive taxation scheme, you need to report it in ITR-4.
How to Minimize Tax on F&O Trading Income?
There are various ways in which you can minimize your tax on F&O income. Given below are some tax-saving strategies on F&O income –
Claim All Eligible Expenses as Deductions
Since F&O trading is treated as a non-speculative business, F&O traders can claim a deduction for the expenses incurred in doing F&O trading from their income. This can reduce the overall tax liability for F&O traders.
Set off F&O Losses Against Other Income
If you have incurred any losses from your F&O trading, you can set them off with any other income (except salary) in the current year. For example, if your annual income, excluding salary income, is Rs. 7 lakhs and your F&O losses amount to Rs. 2 lakhs, you can set them off against this income. This means your annual taxable income will be (Rs. 7 lakhs - Rs. 2 lakhs), Rs. 5 lakhs.
Carry Forward Unabsorbed Losses
If your F&O losses during the year exceed your annual income, you can carry forward these losses upto the next 8 assessment years. This means that if you are not able to set off all your losses in the current year, you can carry them forward until they are fully set off, up to a maximum of 8 years. For example, if your F&O loss in the current year is 7 lakhs, and your non salary income is Rs. 2 lakhs, then, you can set off your losses upto Rs. 2 lakh in the current year and carry forward the remaining loss upto the next 8 assessment years, until it is fully set off.
Explore the Presumptive Taxation Scheme
If you are eligible and your annual turnover is within the limits of Rs. 3 crore (business) and Rs. 75 lakhs (for profession), you can benefit by opting for the presumptive taxation scheme, wherein you are neither required to maintain books of accounts nor conduct a tax audit.
If you’ve traded in F&O this financial year, you must report both profits and losses in your ITR, regardless of whether you made a gain or loss. It is also important to understand the different ways in which you can save tax on your F&O income.
Since F&O income is considered business income, you need to file it using ITR-3 or ITR-4, based on your eligibility. F&O taxation can be complex, especially if you're unfamiliar with the process. That’s where our experts come in. We simplify the filing process, help you save taxes, and ensure complete compliance.
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