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Taxation of Futures & Options

Trading in Futures & Options? You need to know this before filing ITR ...

Taxation of F&O income can be really confusing. Many people don't even declare their F&O income 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.


FILING ITR-4 FOR F&O INCOME -

(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, everything else remains the same).

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.


What do I mean by speculative income?

Speculative transaction is a transaction of purchase / sale of a commodity including stocks and shares settled otherwise than by actual delivery or transfer of the commodity or scrip.

Example: An intra-day trading income is a speculative income. In Intra-day trading of shares, there is no actual delivery happening. The shares enter and exit from the trading account on the same date.


APPLICABILITY OF ITR 4 FOR F&O PROFIT -

  1. Total income from such transactions should be less than 50 Lakhs.
  2. One can show F&O income profit at minimum 8% (6%, if all trades are digital), just like any other business income. (You cannot claim losses in ITR-4)
  3. You can file ITR-4 opting presumptive taxation scheme provided your turnover does not exceeds Rs. 2 crores

If your total turnover exceeds 1 crore then Tax audit will be applicable. If this is true for you, you’ll have to get your accounts audited and you will have to submit the audit report along with your tax return. If you fail to maintain books of accounts or do not get the audit done, penalties shall be applicable as per the income tax act. The due date of filing ITR for most taxpayers is 31st July whereas if Tax audit is applicable to you then the due date for filing your ITR will be 30th September.


Use this Tool to calculate whether Audit applies or not- https://itr.taxbuddy.com/#/tax-audit


A. HOW IS MY TURNOVER CALCULATED? Turnover for F&O is Absolute value of profit and loss. No matter if you have a loss or a profit both the amounts are added up while calculating your turnover. We can further understand this with the following example. Let's say the following is the list of your profits/losses from various F&O transactions:

Profit / loss from F&O transaction
20000
(40000)
10000
(15000)
TOTAL TURNOVER = 85,000
(Addition of all the above figures)
The negative sign (for losses) is ignored. Total absolute value of profit & loss to be added. The absolute value is considered as turnover. If the turnover exceed 1cr then tax audit is applicable else audit is not required.

B. WILL I HAVE TO MAINTAIN BOOKS OF ACCOUNTS?

  1. If there is Loss in F&O trading or the Net profit is less than 8% (6%, if all trades are digital) of the turnover or the turnover exceeds Rs. 1 crore, then provisions of Tax Audit are applicable and in order to get tax audit done, maintenance of books of accounts are mandatory.
  2. If there is a profit in F&O and the profit is 8% (6%, if all trades are digital) or more of total turnover and Turnover is not exceeding Rs. 1 crore, then only the income has to be declared as business income and accordingly ITR has to be filed. There will be no need to maintain books of accounts.


F&O LOSSES 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), or Loss from F&O, Audit cases, etc. All the other conditions remain the same for the F&O income and taxation.