Did you know that your profits and losses from trading in futures and options have to be also shown in your tax returns? It does not matter if it is a profit or a loss and it does not matter if it is big or small. You are statutorily required to disclose any transaction in futures and options in your tax returns. The second question is whether futures and options are classified as speculative transactions or normally short term capital gains and losses? Interestingly, income from F&O is not classified as speculative income. You may wonder why intraday trading in equities is treated as speculative income but F&O is not. There is a reason for that. Futures and options are essentially hedging products and meant to protect the risk in your underlying position. Secondly, futures and options, by default, result in cash settlement although the assumption is that the transaction has been executed in the underlying. Income or losses from futures and options have to be always shown as business income while filing your tax returns.
Can I treat my income from futures and options as capital gains? Technically, you can if the volume is not too large and the futures trading are occasional and not core to your business. Otherwise, the tax officer may ask you to restate income from futures and options as business income and be taxed accordingly.
Which return a form to be filed if you have profits and losses from F&O
As stated above, unless your income or loss from F&O is very small or just occasional, it is to be treated as business income or business loss only. Consequently, the ITR-4 tax form would be required to be filed by the trader with the Income Tax authorities. Any taxable income trading in Futures and Options after any deductions will be taxed as per prescribed income tax slab rates. That means the applicable rate of tax for the business will be applied to your F&O income too. Losses can be written off against profits and also carried for a period of 8 consecutive years.
F&O is taxed as non-speculative income; what does that mean?
Under Section 43(5) of the Income Tax Act, any transactions in Futures and Options on equities and indices will be deemed as non speculative transactions. Therefore, any profits earned from trading in futures and options would be taxed, not as speculative income, but in the same manner as income from any other business. This means that, like in the case of any other business, the trader can claim deductions for any related and connected expenses incurred while trading in Futures and Options. Such expenses include brokerage costs, phone bills, mobile bills, internet bills, electric bills, administrative costs etc.
Income is great but what about losses that you may incur. It is not that you will always make profits in F&O. Quite often; you also make losses in F&O. How do you manage that? What it means is that any loss from trading in Futures and Options can be offset against any income arising from the taxpayer’s residential property, any other business as well and any other source except taxpayer’s regular salary. Also such losses cannot be set off against speculative profits. In addition, losses that are not absorbed in any year can also be carried ahead for a maximum period of 8 years.
When do you require tax audit for F&O trading?
In most businesses, tax audit is required if the total turnover is A tax audit will be mandatory if the turnover or income arising from trading of Futures and Options is above and beyond Rs 1 crore. Here turnover is not the volumes done on the stock exchanges but the actual income from futures and options. Only when such income exceeds Rs.1 crore in a fiscal year the tax audit is required.
Finally, there is one thing to be understood and that is about consistency. If your turnover is small and you are an occasional trader, then it is ok to show the income as short term capital gains. But you must maintain consistency of method practiced. Secondly, STT (Securities Transaction Tax) is not an eligible deduction if you show it as capital gains but it is eligible for deduction if shown as business income.
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