Taxation of income and loss arising from futures and options (F&O) trading is tricky, with several misconceptions, for many traders. Let us clear it for you.
Income from F&O trading is treated as business income.
F&O trade transactions are varied from trading in the cash segment and it appears to be speculative transactions. But this is the widely spread misconception about F&O trading.
In reality, both income and losses of F&O trading are treated as a business income or business loss. In case of a loss on an F&O trade, you may not need to pay tax; still, filing income tax returns is mandatory. This filing is beneficial as you can carry forward the loss to the next year.
It is specifically defined in the Income Tax Act that F&O income is not speculative income. The income earned in F&O transactions is an ordinary business income. Salaried persons are involved in business activities unknowingly through F&O trading.
Thus, Income from F&O trade is treated as non-speculative income, and the basic exemption limit is available to traders.
For example, if your only income is from F&O trading and there is no other income source, then income up to Rs 2.5 lakh is exempted from taxation. A trader can claim a tax-saving deduction under section 80C, just like income from a business.
While traders need to open demat account online to trade in the cash segment, it is optional in the case of F&O trading. If you need an instant demat account to hold all your financial instruments in the stock market, you can open it for free with a discount broker.
Read also:- Housing Finance- Everything you Need to Know
Taxation on F&O trading profit
For example, if an F&O trader earns Rs 18 lakhs and has a loss of Rs 5 lakhs on another F&O trade, taxable income is (profit-loss) (18-5) = 13 lakhs.
But Rs 13 lakhs is not the taxable income from F&O. Deduct all incidental expenses made to carry out F&O trade. It may include spending on any analyst also. You need to understand that the expenses should be incidental, and no expense should be in cash.
If all expenses incurred are incidental in the above example, amounting to Rs 1 lakh, you need to deduct it from the taxable profit. The taxable income is 13 – 1= Rs 12 lakhs.
Does an F&O trader need to go for an audit in case of net loss?
It is very easy to understand. If an F&O trader has to bear a loss, there is no need to go through the audit process as long as the F&O trading value is less than the prescribed limit.
The F&O turnover has been increased to Rs 10 crore, provided all trade transactions are done via the banking channel. In case, the cash receipts and payments are less than 5% of the total payments or receipts, 10 Crore will be read as 1 Crore.
Traders need to ensure to file ITR before the due date. Filing returns is necessary to carry forward this F&O loss to the next financial year.
Speculators like swing traders, day traders, and hedgers usually trade in stock futures to avert potential losses due to unfavorable price movement. To trade in F&O, you need to predict the future shifts of the underlying asset. Often, an F&O contract is issued for three months with decided terms on price, quality, and time. Futures & Options can be traded by paying margin only.
How to calculate the F&O turnover?
The absolute profit and loss value is the F&O turnover and not the total F&O transaction value. If it’s an options trade, you also need to add the premium.
Suppose you have placed two F&O trades. One gave you a loss of Rs 20 lakhs, and another transaction brought a profit of Rs 35 lakhs. The turnover is the absolute value of loss and profit, i.e., 20 + 35= 55.
So, the turnover is Rs. 55 lakhs which is less than Rs. 10 crores. This audit is not required.
- F&O turnover refers to the total of favorable and unfavorable stances, i.e. profit/loss.
- Premium on options is also to be included in turnover.
- If there are any reverse trades, the difference thereon is also a part of the turnover.
Thus, it is easy to understand tax treatment on F&O trades.