Income Tax on F&O Trading

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Sakshi Shah

F&O Trading
Income from Business & Profession
ITR-3
Tax Audit

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.

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Invested in F&O?
Need to file ITR? Don't worry, we can help you!
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Head of Income, ITR Form and Due Date – Income Tax on F&O Trading

Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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Check which ITR Form to file?
Income Tax Return Forms to file depends on your Income Source, Residential Status, and other financial situation. Know which ITR Form you should file.
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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.

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.

F&O Trading Tax Audit

Trading Turnover up to Rs. 1 Cr

Trading Turnover more than Rs. 1 Cr and up to Rs. 2 Cr

Trading Turnover more than Rs. 2 Cr

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.

Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
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Tax Audit Applicability upto FY 2019-20
Applicability of Tax Audit from Trading Income
Read detailed situations under which Tax Audit as per Income Tax Act is applicable
Read More
Applicability of Tax Audit from Trading Income
Read detailed situations under which Tax Audit as per Income Tax Act is applicable
Read More

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

What is Income Tax on profit from Commodity Trading in India?

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.

What is Income Tax on Currency Trading in India?

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.

When is Tax Audit mandatory for F&O Trading?

– 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.

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