F&O Taxation in India: What Every F&O Trader Should Know About Return Filing

For years, F&O traders were subject to tax audits only when their sales exceeded Rs 10 crore. However, the formula used to calculate Trading Turnover was recently changed. Traditionally, the option premium was considered part of the turnover, resulting in inflated figures that required traders to undergo tax audits. However, only positive and negative differences will be considered. As a result, turnover from F&O transactions will be much lower, resulting in no tax audits. If you are a F&O trader who struggles to understand the tax implications of your F&O trades, read on for a clear and complete explanation.

Budget 2024: Latest Update

To broaden the tax base, STT on futures and options is suggested to rise to 0.02% and 0.1%, respectively. FM Nirmala Sitharaman also recommended taxing the money received from share buybacks as a measure of equity.

Your gains (losses) from F&O trades must be reported in the ITR.

Many taxpayers active in F&O trading fail to submit F&O trading information on their tax filings. While this omission could be due to a lack of understanding, it is critical to identify all sources of income. If you fail to report, you may receive a notification from the tax department, which now has access to all stock market transactions conducted by taxpayers. If you suffer a loss from F&O trading, there are tax benefits to reporting such losses, which we shall go over in detail later.

Income Head: Treating F&O Trading as Business Income

Under Section 43(5) of the Income Tax Act, gains or losses from F&O trading are classified as non-speculative business income. Therefore, any profits or losses arising from F&O activities should be disclosed as Business Income under the PGBP category.

Which ITR should I file to report F&O income?

Because F&O revenue is classified as business income, those who engage in F&O trades must report the profit/loss on an ITR-3 form.

Taxability of Other Investments?

In addition to F&O trading, you can engage in intra-day trading or make long- or short-term investments. However, it is crucial to note that the taxes regulations for each of these activities vary. * Intra-day trading must be classified as a separate (speculative) business from F&O, with its income/loss computed separately. * If you engage in a high volume and frequency of short-term trading in equity shares, this may be classified as business income or capital gains. Choose a sound foundation and stick to it throughout the fiscal years. * If you are a long-term equity investor or own fewer short-term equity shares, your gains may be classified as capital gains.

Should F&O traders keep accounting records?

Once your activity is classified as a business, some additional tax laws may apply. If you operate a business either as an individual or a Hindu Undivided Family (HUF), it is necessary to maintain accounting records under the following circumstances:

• If your income exceeds Rs 2.5 lakhs,

• If the turnover surpasses Rs 25 lakhs in any of the preceding three years, or in the first year for a new establishment.

These requirements also extend to individuals engaged in businesses like Futures and Options (F&O) trading. In such cases, maintaining trading statements, expense receipts, and bank account statements should typically suffice for bookkeeping purposes.

Audit and Tax Filing

Anyone involved in business activities must undergo a financial audit if the turnover crosses Rs. 1 crore in the previous year and Rs. 10 crores if cash transactions are less than 5% of total receipts or payments. To ascertain the need for a tax audit, the Trading Turnover needs to be calculated.

How to Calculate F&O Trading Turnover?

For F&O trading, turnover equals the absolute profit. Absolute turnover encompasses the total of positive and negative variances.

It's important to note that the calculation for options trading turnover has been revised in line with the eighth edition of the guidance note dated 14/08/2022 (effective from Assessment Year 2022-23). Previously, options trading turnover included "Absolute Profit + Premium on Sale of Options."

Illustration:

Rahul buys 100 units of Futures for Rs 200 and sells them at Rs 210. Additionally, he purchases 200 units of options at Rs 300 and sells them at Rs 290. .

Here's how his turnover would be calculated:

Is a tax audit relevant to F&O trading under Section 44AB?

F&O traders frequently get confused regarding the application of tax audits. Let's break down the tax provisions. Keep in mind that some people may find these tax laws overwhelming. In that case, you can jump on to the next paragraph, where we examine the applicability of tax audits. Section 44AB: Tax Audit: Let us see what this section says regarding the tax audit.

Now that the tax audit is dependent on another part, part 44AD, let us examine the relevant piece.

Requirements for Tax Audit for Futures & Options (F&O) Traders

The eligibility for tax audits for F&O traders is analyzed based on turnover. According to the aforementioned tax regulations, tax audits apply only in scenarios 1 and 3.

1. Trading turnover up to INR 2 crore.

If the profit or loss from F&O trading is less than 6% of the turnover, and you have not opted for the presumptive taxation scheme in any of the five immediate past years, and your total income surpasses the basic exemption limit, then Tax Audit is required [Section 44AB(e)].

Contrarily, if the trader's profit is equal to or exceeds 6% of the Trading Turnover, a Tax Audit is not mandatory.

2. Trading turnover ranges between Rs 2 crore and Rs 10 crore.

If the trading turnover falls between Rs 2 Cr and Rs 10 Cr, and the majority of transactions (more than 95%) are conducted digitally, a tax audit is unnecessary, irrespective of profit or loss (Section 44AB).

3. Trading turnover exceeding INR 10 crore.

Tax audits are obligatory regardless of profit or loss [Section 44AB(a)].

F&O Losses: Set-off and Carry Forward Provisions.

If you have incurred losses from trading in Futures and Options (F&O), the primary purpose of filing your Income Tax Return (ITR) is to carry forward these losses. You can carry forward your F&O losses and offset them against your income for the next eight years, which can help reduce your tax liability in the future. However, these losses can only be set off against non-speculative income in the subsequent years.

F&O trading losses are categorized as non-speculative losses.

On the other hand, losses from intraday stock trading are considered speculative losses and can only be adjusted against speculative income. Unadjusted speculative losses can be carried forward for up to four years.

Can F&O traders deduct their expenses?

Yes, you are allowed to deduct business expenses from your F&O income. It is also permissible to recover these expenses if you have incurred a loss as a result of F&O trading.

Make sure to claim only those expenses that are directly related to your business. These expenses may include brokerage fees, broker commissions, subscriptions to trading-related publications, phone bills, internet charges, consultant fees for professional assistance, or the salary of personnel hired to aid your business. All these expenses are eligible for deduction.

Keeping accurate records of receipts and invoices is crucial, and it is recommended to make payments digitally rather than in cash. Expenses exceeding Rs 10,000 in cash may be deemed not eligible for deduction. When an expense serves both personal and business purposes, claim a reasonable amount that can be attributed to the business.

Example:

Rahul is employed at ABC Ltd and received a salary of Rs 15 lakh in the financial year 2017-18. He enrolled in a brokerage firm to start trading by paying Rs 5,000 as registration fees. Rahul incurs brokerage charges at a rate of 0.02% for each F&O trade, amounting to a total of Rs 98,000 in brokerage charges for the year.

Rahul's telephone expenses for the year sum up to Rs 36,000, with approximately 50% of the bill being related to his F&O trades. Rahul dedicates a significant portion of his time to researching trading strategies online. His monthly internet bill stands at Rs 1,200. After analyzing his trading activities, Rahul realizes a loss of Rs 3 lakhs from F&O trading.

His total turnover amounts to Rs 30 lakhs (computed using the mentioned method). Rahul is uncertain whether he should include his F&O trading activities for reporting purposes or ignore them due to the losses incurred. Apart from his salary, Rahul earns Rs 80,000 from interest and Rs 3.5 lakhs from rental income. It is necessary for Rahul to categorize his futures and options trading as a business.

The breakdown of Rahul's F&O expenses is as follows.

Expenses of F&O Business

Income (loss) from F&O

Total taxable income of Rahul

* Note: Business Loss cannot be adjusted from the salary income

Answer: The declared company income is Rs -5,400. The presumptive income at 6% on his turnover is Rs 1.8 lakhs, which exceeds Rs -5,400. Furthermore, the total taxable income is Rs 15 lakh, which exceeds the basic exemption ceiling of Rs 2.5 lakh. Thus, a tax audit is required, as is the filing of a balance sheet and profit and loss statement with the income tax return.

Is it advisable for F&O traders to consider the new tax regime?

F&O traders have the option to adhere to the new tax system outlined in Section 115BAC of the Income Tax Act. Should F&O traders transition to the new tax framework? Deliberate on the following key aspects of the new tax regime:

• Tax obligations will be calculated based on the revised slab rates.

• F&O traders will not qualify for deductions under Chapter VI-A, which includes 80C and 80D.

• Traders who select the previous tax regime can switch to the new system only once in their lifetime. To opt out of the new tax scheme, Form 10-IEA must be submitted.