Taxation on — Futures & Options (FOs) Trading

This document covers

1. What is a Derivative?
2. Taxability of Futures and Options (F&O Trading)
3. How to show F&O losses
4. Treatment of Expenses
5. Payment of Advance Tax
6. Turnover in Derivatives
7. Applicability of Tax Audit

1. What is a Derivative?

• A derivative is a financial product whose value is calculated using one or more fundamental variables referred to as bases (e.g., underlying assets, reference rate, or index). The underlying assets may consist of commodities, forex, or equities.
• Forward contracts, futures, and options are all derivatives.
• Futures : A futures contract is a bilateral agreement in which one party guarantees the purchase of a financial instrument or commodity underlying the contract at a specified price on a future date.
• Options : A buyer may purchase (Call Option) or sell (Put option) any underlying stock, foreign exchange, commodity, index, or other asset at a predetermined price within a specified time frame or on a particular date, regardless of changes in the price of the underlying market during that period.
• The trading of derivatives is often called "F&O Trading."

2. Taxability of Futures and Options (F&O Trading)

• Futures and options traders run the risk of making a profit or a loss.
• The profit or loss from Futures and Options trading must be considered "non-speculative" business income under the Income Tax Act of 1961.
• Traders are required to disclose both profits and losses on their income tax returns (ITR).
• Individuals/HUFs are obligated to submit Form ITR 3 in order to disclose their profits or losses from F&O Trading. The taxpayer may also file Form ITR 4 if he wishes to report profits subject to presumptive taxation under section 44AD.
• EZTax recommends you to file under ITR-3 to avoid future tax audits and complexity and to include expenses.
• Tax Rate: Since F&O trading is classified as business income, the profits generated from it are subject to taxation at the taxpayers' slab rates.

3. How to show F&O losses

• The taxpayer is required to report any losses incurred on his income tax return.
• F&O losses, being classified as business losses, are deductible against all other income in the same year, excluding salary.
• F&O losses can be carry forwarded to a maximum of eight (8) years and can set-off against future business profits.

4. Treatment of Expenses

As F&O trading is considered as business, the traders can claim the expenses related to the trading. Some of the examples are as follows:

• Brokerage Expenses
• STT, Transaction charges, GST, Stamp duty etc
• Software Expenses
• Telephone Expenses
• Internet Expenses
• Advisory Expenses
• Subscription to Journals
• Any other trading expenses *

* Some of these and other expenses that can be claimed would depend on intent and intensity of trading. Get the tax consultation with EZTax Team to know more on the taxability on trading, and advance tax to save on taxes.

5. Payment of Advance Tax

The taxpayers are required to pay Advance Tax in regular instalments as it regular business income

• By 15th June – 15% of Tax
• By 15th September – 45% of Tax
• By 15th December – 75% of Tax
• By 15th March – 100% of Tax

If the advance tax is not paid, the taxpayer is required to pay interest u/s 234C. Also if the taxpayer do not pay 100% of taxes before March 31^st, he is required to pay interest u/s 234B also.

6. Turnover in Derivatives

• Turnover is required to be calculated to check whether the taxpayer requires Audit or not
• The turnover for futures and options needs to be calculated as the sum of absolute turnover. Absolute Turnover means sum of profits and losses.

7. Applicability of Tax Audit

The trader needs to undergo through Tax Audit in certain situations. Tax Audit is applicable in the following situations.

• If the turnover in F&O is more than Rs 10 crores in a financial year but 95% of the transaction should be in digital mode
• If the taxpayer has declared income on presumptive taxation in any of the 5 previous financial years but wants to declare losses or income at less than presumptive basis

Use Income Tax Audit criteria, applicability & Calculator to check whether Audit is required or not