Futures & Options

Last updated on August 29th, 2022 at 07:22 pm

Future & Option (F&O) derives its value from the underlying assets like shares/commodities. Hence, F&O are considered derivative products in the stock market.

Is F&O speculative income?

NO.

Trading in derivatives of securities or commodities through a recognized stock exchange is a transaction of speculative nature. But section 43(5)(d) & section 43(5)(e) of the Income Tax Act, 1961 have specifically mentioned that it should be considered as a non-speculative income. (Taxation on speculative income)

Can F&O income be shown as income from capital gain?

NO.

Income from F&O trading is a non-speculative income and it will be shown as profit/gain from the business. It will not be considered a capital asset u/s 2(14)  and hence cannot be shown as income from capital gain.

Can expenses be deducted from F&O income?

YES.

Expenditures incurred wholly and exclusively for the purposes of the business (F&O trading) can be claimed as a deduction. For eg. STT charges, brokerage, internet charges, telephone expenses, depreciation, advisory charges, an employee if any, etc.

Can you opt for a new tax regime(Section 115BAC) if you derive income from F&O trading?

YES.

There is no restriction on opting for the new tax regime if you are deriving income from F&O trading.

Click>> Alternative(New) Tax Regime u/s 115BAC of Income Tax Act

How to calculate turnover in F&O trading for tax audit u/s 44AB?

ICAI Guidance note clarified how turnover in F&O trading should be derived for the purpose of tax audit u/s 44AB

(i) The total of favorable and unfavorable differences shall be taken as turnover.

(ii) Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.

iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

Click >> To understand the detailed calculation of turnover with examples

When tax audit becomes mandatory in F&O trading?

Tax Audit u/s 44AB shall be applicable

• If the turnover exceeds Rs 10 crores irrespective of profit or loss. [Sec 44AB(a)]

• If the turnover is above Rs 1 crore but up to Rs 10 crores and 5% digital transaction condition is not met. [Sec 44AB(a)]

• In case of persons eligible u/s 44AD, if the turnover is below Rs 2 crores but there is either loss or profit is less than 6% of the trading turnover & the taxpayer has not opted for presumptive taxation u/s 44AD or is restricted from opting presumptive taxation u/s 44AD and the total income exceeds the basic exemption limit. [Sec 44AB(e)]

Note: For determination of whether tax audit is applicable or not the turnover from F&O trading shall be calculated as explained above.

Which ITR should be filed for F&O?

• Net Gain from F&O  – ITR 3 or ITR 4
• Net Loss from F&O  –  ITR 3

What is the due date for filing ITR for F&O trading?

• 31st July of Assessment Year  (If tax audit u/s 44AB is not applicable)

• 31st October of Assessment Year (If tax audit u/s 44AB is applicable)

Click>> Due date for the current Assessment Year

Applicability of advance tax for F&O trading?

If the tax liability exceeds Rs 10,000/- for the AY then

• If opts for presumptive taxation u/s 44AD – Tax to be paid in one installment by 15th March of the financial year.

• If does not opt for presumptive taxation u/s 44AD – Tax to be paid in four installments by 15th June, 15th September, 15th December, and 15th March of the financial year.

Click >> How advance tax is to be calculated for income from F&O trading?

Can loss be set off from F&O trading?

Loss from F&O trading will be a non-speculative business loss. It can be set off against the following in the same assessment year:-

• Income from other sources
• Income from capital gain (long term/short term)
• Income from house property
• Income from winnings from lotteries, crossword puzzles, horse races, card games, gambling, betting, etc.
• Income from other businesses including income from speculative business.

Can loss be carried forward from F&O trading?

Loss from F&O trading can be carried forward for 8 years. The carried forward loss can be set off only against the business income including income from speculative business.

Can any other loss be set off against gain from F&O trading?

Income from F&O trading will be treated as non-speculative business income. Except for the following losses any loss can be set off against the non-speculative business income: –

• Loss from speculative business
• Loss under the head capital gain (long-term/short-term)
• Loss from the activity of owning and maintaining horse races.
• Loss from a specified business referred u/s 35AD.

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CA Ankita Khetan

Founder at Financepost.in

Chartered Accountant in practice, DipIFRS (from ACCA, UK), Post Graduate in Commerce, Certified Independent Director (from IICA), and holds a certification in Forex and Treasury Management course (by ICAI).

She can be contacted at info.financepost@gmail.com

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Disclaimer: The above content is for general info purpose only and does not constitute professional advice. The author/ website will not be liable for any inaccurate / incomplete information and any reliance you place on the content is strictly at your risk.

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