Income Tax on Future and Options – How Profits From F&O Are Taxed?

The futures and options (F&O) trading market in India is a vital component of the country’s financial market. It allows investors to hedge risks and speculate on price movements of various financial instruments.

The futures and options market in India presents significant opportunities for investors and traders.

With the right knowledge and strategies, participants can leverage this market for hedging, speculation, arbitrage, and diversification.

Budget 2024 Update

The rising trend of retail investors engaging in derivatives trading has raised a red flag. To discourage retail investors, Finance Minister Sitharaman proposed increasing the STT rates on the sale of options in securities from 0.0625% to 0.1% of the option premium and on the sale of futures in securities from 0.0125% to 0.02% of the traded futures price.

 

What is Futures and Options, F&O?

Differences Between Futures and Options

Feature	Futures	Options
Obligation	Both parties have an obligation to buy/sell	Only the seller has an obligation, the buyer has a right
Risk	Higher due to the obligation	Limited to the premium paid by the buyer
Potential Return	Unlimited, but so is the potential loss	Potentially high for the buyer, limited for the seller

 

Income Tax on Future and Options – How Profits From F&O Are Taxed?

The tax treatment for Futures and Options (F&O) profits or losses in India is quite specific. Here are the key points:

1. Classification: F&O trading is considered a non-speculative business under Section 43(5) of the Income Tax Act. This means that any income from F&O trading is treated as business income.
2. Tax Rates:
   • Individuals or HUFs: Taxed as per the applicable income tax slab rates.
   • Firms/LLPs: Taxed at a flat rate of 30%.
   • Companies: Taxed at rates of 22%, 25%, or 30%, depending on the turnover and other conditions.
3. Filing Requirements:
   • You need to file ITR-3 to report F&O income as it falls under the category of business income.
   • If your turnover exceeds certain limits, a tax audit may be required.
4. Turnover Calculation:
   • Turnover is calculated by summing up all the positive and negative differences from your trades.
   • For example, if you have profits of ₹20,000 and absolute losses of ₹7,000, your turnover would be ₹27,000.
5. Expenses:
   • You can deduct business-related expenses such as brokerage fees, interest on borrowed capital, commissions, and other expenses directly related to F&O trading.
6. Loss Treatment:
   • F&O losses can be set off against other business income, house property income, capital gains, or income from other sources, but not against salary income.
   • Losses can be carried forward for up to 8 assessment years and set off against future business income

How is F&O Turnover Calculated?

Trading turnover is a key factor in determining whether a Tax audit is necessary.

In the context of Futures & Options Trading, turnover is calculated as the Absolute Profit, which is the sum of all profits and losses made on various transactions throughout the year.

This Absolute Profit is derived from the sum of positive and negative differences.

For example,

if Mr. X buys 400 contracts of Nifty Futures at Rs.50 and sells them at Rs.30, incurring a loss of Rs. -8,000, and

also buys 200 contracts of Heromotoco Futures at Rs.100 and sells them at Rs.150, making a profit of Rs 10,000;

the Absolute Profit would be calculated as 800+10,000=18,000.

 

Who is Eligible for an F&O Trading Tax Audit?

An F&O trading tax audit is eligible for individuals or entities who engage in futures and options trading and meet certain criteria set by the tax authorities.

Case 1: Trading Turnover up to ₹2 Cr

• Profit ≥ 6% and opted for presumptive taxation: No Tax Audit.
• Profit < 6% or incurred a loss and income beyond exemption limit: Tax Audit applicable.

Case 2: Trading Turnover more than ₹2 Cr and up to ₹10 Cr

• Profit < 6% or incurred a loss: Tax Audit applicable.
• Profit ≥ 6% and not opted for presumptive tax: Tax Audit applicable.
• Profit ≥ 6% and opted for presumptive tax: No Tax Audit.

Case 3: Trading Turnover more than ₹10 Cr

• Tax Audit is applicable in all cases, irrespective of profit percentage or presumptive tax option.

 

Frequently Asked Questions

Futures: A futures contract is a standardized agreement to buy or sell an asset at a predetermined price at a specified time in the future.

Options: An option is a contract that gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) an asset at a predetermined price within a specified time period.

2. How is income from futures and options taxed?

Income from trading in futures and options is considered business income. Generally, F&O income is treated as non-speculative business income, which means it is subject to normal tax rates applicable to business income.

3. How do I report F&O income on my tax return?

F&O income should be reported under the “Income from Business or Profession” section. You will need to maintain proper books of accounts and may be required to get your accounts audited if your turnover exceeds certain thresholds as per tax laws.

4. What is the turnover in F&O trading?

Turnover in F&O trading is calculated by summing the following:

• The absolute profit (ignoring whether it is positive or negative) from transactions.
• Premium received on sale of options.
• The difference between the buy and sell price of futures contracts.

5. Can I claim deductions against F&O income?

Yes, you can claim deductions for expenses incurred for earning the F&O income, such as brokerage, internet charges, and other related expenses. These expenses should be directly related to your trading activities.

6. Is audit mandatory for F&O traders?

Audit is mandatory if the turnover exceeds the prescribed limit as per the Income Tax Act, which is typically ₹1 crore. However, if the turnover is below ₹1 crore, but the profit declared is less than 8% of the turnover and the total income exceeds the basic exemption limit, an audit is also required.

7. Can I carry forward losses from F&O trading?

Yes, losses from F&O trading can be carried forward and set off against business income in subsequent years. Speculative losses can only be set off against speculative income, while non-speculative losses can be set off against any other income except salary.

8. How is the tax liability on F&O income calculated?

Tax liability on F&O income is calculated by aggregating the income from all sources, including business income from F&O trading, and applying the applicable income tax rates based on the total taxable income.

9. Are there any specific records to be maintained for F&O trading?

Yes, you should maintain the following records:

• Contracts notes from brokers.
• Bank statements reflecting the trading transactions.
• Records of expenses incurred.
• Profit and loss statements for each trading session.
• Any other documents that validate your trading activities and expenses.

10. Are there any penalties for non-compliance in reporting F&O income?

Yes, there can be penalties for non-compliance, such as failing to maintain proper books of accounts, not getting the accounts audited if required, or not reporting the income accurately. Penalties can include fines and interest on the due tax amount.