If you trade in Futures and Options you need file tax for income/loss from these trades. 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. F&O Trading includes trading in Futures and Options of Equity, Commodity, and Currency. Read about Income Tax on F&O Trading activity.
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.
Head of Income, ITR Form and Due Date – Income Tax on F&O Trading
- 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 in case of F&O Trading
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
F&O Trading Tax Audit
Trading Turnover up to Rs. 1 Cr
- If the taxpayer has incurred loss or the profit is less than 6% of Trading Turnover and total income is more than basic exemption limit, Tax Audit is applicable.
- If the taxpayer has a profit of more than or equal to 6% of Trading Turnover, Tax Audit is not applicable.
Trading Turnover more than Rs. 1 Cr and up to Rs. 2 Cr
- If the taxpayer has incurred loss or the profit is less than 6% of Trading Turnover, the Tax Audit is applicable.
- If the taxpayer has a profit of more than or equal to 6% of Trading Turnover and has not opted for the Presumptive Taxation Scheme under Sec 44AD, Tax Audit is applicable.
- When the taxpayer has a profit of more than or equal to 6% of Trading Turnover and has opted for the Presumptive Taxation Scheme under Sec 44AD, Tax Audit is not applicable.
Trading Turnover more than Rs. 2 Cr
- Tax Audit is applicable irrespective of the profit or loss.
Note: In the case of Traders, since all these trading transactions are digital, the prescribed rate under Sec 44AD would be 6% instead of 8% in normal cases.
Income Tax on F&O Trading
Income Tax on trading income is calculated at prescribed slab rates as per the Income Tax Act as per the table below.
| Taxable Income | Slab 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 for F&O Trading
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 trader can carry forward the loss for 8 years.
FAQs
Commodity Trading means trading in commodity and F&O i.e. futures and options of commodity. Commodity Trading is a Non-Speculative Business Income as per the Income Tax Act. The trader should file ITR-3 and check the applicability of the tax audit. The profits are taxed at slab rates. The trader can set off the loss against any income except salary in the current year. The trader can carry forward the remaining loss for 8 years and set off against future business profits.
Currency Trading means trading in currency and F&O i.e. futures and options of currency. Currency Trading is a Non-Speculative Business Income as per the Income Tax Act. The trader should file ITR-3 and check the applicability of the tax audit. The profits are taxed at slab rates. The trader can set off the loss against any income except salary in the current year. The trader can carry forward the remaining loss for 8 years and set off against future business profits.
– Tax audit is not mandatory if the turnover from F&O trading does not exceed Rs. 1 cr.
– Tax audit u/s 44AB will be applicable if the turnover exceeds Rs. 1 cr and the net profit from such transactions is less than 6% of the turnover.
– Tax Audit u/s 44AB is mandatory if turnover exceeds Rs. 2cr irrespective of profit or loss declared.
Tax audit is applicable if the net profit from such transaction is less than 6% of the turnover. Can you please explain this with example?