Tax Treatment for F&O Traders

Author
By Sakshi Shah on August 14, 2019

F&O Trading means buying and selling of Futures & Options. They are classified as Derivatives. Derivatives are securities, the value of which is derived from the price of the underlying asset. Example: If an investor wants to invest in silver, he can either buy physical silver or buy a futures contract for trading silver at a predetermined future rate. Thus, a Futures contract is a Derivative whose value depends on the price of the underlying asset i.e. silver.

Futures & Options

Futures is a contract to buy or sell a contract on a predetermined date in future, at a predetermined time in future and at a predetermined price.

Options is a contract between a seller and buyer to trade a security at a predetermined price on a predetermined date in future. Under Options, the buyer has the right to cancel the contract if he is incurring losses. Since the buyer has the advantage of exercising his right, he must pay a premium amount.

ITR for F&O Traders View Plan

Head of Income, ITR Form and Due Date

  • Income Head – Business Income under head PGBP (Profits & Gains from Business and Profession)
    F&O Income or Loss is a non-speculative business income or loss as per the Income Tax Act
  • ITR Form – ITR-3 (ITR Form for individuals and HUFs having PGBP Income)
    Since F&O Income is a business income, prepare financial statements and file ITR-3
  • Due Date for FY 2018-19
    31st August 2019 – for traders to whom Tax Audit is not applicable
    30th September 2019 – for traders to whom Tax Audit is applicable

Calculation of Turnover

To determine whether the Tax Audit is applicable or not, we must calculate Trading Turnover. It is important to note that tax liability does not depend on Turnover.

Turnover of Futures = Absolute Profit
Turnover of Options = Absolute Profit + Premium on Sale of Options

Absolute Turnover means the sum of positive and negative differences.
Example: Rahul buys 200 contracts of Heremotoco Futures at Rs.100 on 26/12/2018. He sells these contracts at Rs.90 on 27/12/2018. Rahul buys 150 contracts of Nifty Futures at Rs.45 on 07/09/2018. He sells these contracts at Rs.50 on 12/09/2018.
Loss from Trade 1 = (90-100) * 200 = Rs. -2,000
Profit from Trade 2 = (50-45) * 150 = Rs. 750
Absolute Profit = 2000+750 = Rs.2,750

Applicability of Tax Audit

Situation 1: Total Trading Turnover is less than or equal to Rs.1 Cr
Tax Audit is not applicable

Situation 2: Total Trading Turnover is more than Rs.1 Cr and less than or equal to Rs.2 Cr
In case of losses = Tax Audit applicable
If the profit is less than 6% of turnover = Tax Audit applicable
If the profit is more than or equal to 6% of turnover = Tax Audit not applicable
(Note: If the Total Income is less than or equal to the basic exemption limit of Rs.2,50,000, Tax Audit is not applicable)

Situation 3: Total Trading Turnover > Rs.2 Cr
Tax Audit is applicable

Income Tax Calculation

Income Tax on trading income is calculated at prescribed slab rates as per the Income Tax Act as per the table below.

Taxable IncomeSlab Rate
Upto Rs.2,50,000 NIL
Rs.2,50,001 to Rs.5,00,000 5%
Rs.5,00,001 to Rs.10,00,000 20%
More than Rs.10,00,000 30%

Note: Surcharge is liable on the total income as per the prescribed surcharge slab rates. Cess is liable at 4% on (basic tax + surcharge)

Carry Forward Loss

Under F&O Trading, the loss can be claimed and carried forward if a tax audit has been conducted by a professional chartered accountant in practice. This loss can be carried forward to future years and set off against future profits to reduce the income tax liability.

Loss from F&O Trading is a Non-Speculative Business loss. In the current year, it can be set off against any income except salary income. In future years, it can be set off against business income (both speculative and non-speculative). The loss can be carried forward for 8 years.