In the COVID era, there has been a drastic increase in F&O trading. As per the SEBI report 2022, there were about 45.2 lakh users in India who are actively trading in the future and options. F&O Trading means buying and selling Futures & Options. They are classified as Derivatives. Derivatives are securities, the value of which is derived from the price of the underlying asset. If you trade in Futures and Options you need to file an income tax return for income/loss from these trades.
What is F&O Trading?
Trading in derivative instruments i.e. Futures & Options of an underlying asset at a pre-determined price is known as F&O Trading. The underlying asset could be an equity share, commodity, or currency. Thus, F&O Trading can be Equity F&O Trading, Commodity F&O Trading, or Currency F&O Trading i.e. Forex Trading.
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.
In Futures Trading, traders enter contracts to buy or sell assets on a specified future date, and at a predetermined price. In Options Trading, a contract is established between a seller and buyer for the exchange of a security at a predetermined price on a specified future date. Further, in Options Trading, 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.
Income Head, ITR Form, and Due Date for F&O Trading
| Income Head | F&O Income or Loss is a non-speculative business income as per the Income Tax Act. Thus, it should be reported as Business Income under the head PGBP (Profits & Gains from Business and Profession). |
| ITR Form | Since F&O Income is a business income, the F&O trader should prepare financial statements and file ITR-3 (ITR Form for individuals and HUFs having PGBP Income) on the Income Tax Website. |
| Due Date | 31st July is the due date for traders to whom audit is not applicable & 31st October is the due date for traders to whom Tax Audit is applicable |
F&O Turnover Calculation
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 for Futures & Options Trading = Absolute Profit
Absolute Turnover means the sum of positive and negative differences. Trading Turnover Calculation can be either through scrip scrip-wise method or trade trade-wise method.
Example: Rahul buys 200 contracts of Heremotoco Futures at Rs.100 on 05/05/2023. He sells these contracts at Rs.90 on 08/05/2023. Rahul buys another 150 contracts of Nifty Futures at Rs.45 on 07/09/2023. He sells these contracts at Rs.50 on 12/09/2023.
- 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 for F&O trading under section 44AB
Trading Turnover up to INR 2 Cr
- If the taxpayer has incurred a loss or the profit is less than 6% of Trading Turnover, has opted out of the presumptive taxation scheme in any of the immediate 5 previous years and his total income is more than the basic exemption limit in any of the previous years, then Tax Audit under section 44AB(e) is applicable.
- If the taxpayer has a profit of more than or equal to 6% of Trading Turnover, then a Tax Audit is not applicable.
Trading Turnover between INR 2 Cr and INR 10 Cr
- If the Trading turnover is between INR 2 Cr and INR 10 Cr then provisions of Section 44AB are not applicable as all transactions (which is more than 95%) are executed digitally via Demat. Hence, Tax Audit is not applicable irrespective of the profit or loss.
Trading Turnover of more than INR 10 Cr
- Tax Audit under section 44AB(a) is applicable irrespective of the profit or loss.
Note: In the case of F&O 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.
Slab Rates if F&O Traders Opt for Old Tax Regime
| Taxable Income (INR | Slab Rate |
| Up to 2,50,000 | NIL |
| 2,50,001 to 5,00,000 | 5% |
| 5,00,001 to 10,00,000 | 20% |
| More than 10,00,000 | 30% |
Note: Surcharge is liable for the total income as per the prescribed surcharge slab rates. Cess is liable at 4% on Total Tax (i.e. basic tax + surcharge).
Slab Rates if F&O Traders Opt for New Tax Regime from AY 2024-25
| Taxable Income (INR) | Slab Rate |
| Up to 3,00,000 | NIL |
| 3,00,001 to 6,00,000 | 5% |
| 6,00,001 to 9,00,000 | 10% |
| 9,00,001 to 12,00,000 | 15% |
| 12,00,001 to 15,00,000 | 20% |
| More than 15,00,000 | 30% |
Advance Tax for F&O Trading
A taxpayer whose tax liability on the total taxable income from all the sources during the financial year exceeds INR 10,000 is liable to pay Advance Tax. Income for F&O Trading is a non-speculative business and income is taxable at slab rates. Thus, Futures Trader and Options Traders are liable to pay Advance Tax as follows:
Advance Tax for F&O Traders who do not opt for Presumptive Taxation
If F&O Traders do not opt for presumptive taxation under Section 44AD and have F&O profits, then they must pay Advance Tax in four installments as per the table below.
| Advance Tax Liability | Due Date |
| 15% of Tax Liability | On or before 15th June |
| 45% of Tax Liability | On or before 15th September |
| 75% of Tax Liability | On or before 15th December |
| 100% of Tax Liability | On or before 15th March |
Advance Tax for F&O Traders who opt for Presumptive Taxation
If F&O Traders opt for presumptive taxation under Section 44AD and have F&O profits, he/she must pay the entire amount of Advance Tax in a single installment on or before 15th March.
New Tax Regime for F&O Trading
Futures and Options traders having income from F&O trading can opt for the new tax regime under Section 115BAC of the Income Tax Act. If the F&O trader opts for the new tax regime, here are the important points to note:
- Tax liability should be calculated as per the slab rates introduced in the new tax regime
- Trader cannot claim Chapter VI-A deductions
- Form 10IE must be filed on the income tax website
- A trader having business income and opting for the new tax regime has the option to switch back to the old regime. However, if they opt for the new tax regime once again, they cannot opt for the old regime for their entire lifetime.
Carry Forward Loss for F&O Trading
Loss from F&O Trading is a Non-Speculative Business loss. In the current year, it can be set off against any other income except salary income. In future years, it can be set off against business income only. The trader can carry forward the loss for the next 8 years.
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FAQs
Yes, It’s important to show the losses you had in F&O while filing the income tax return. This helps you follow tax rules and accurately show your financial activities. If you don’t report these losses, you could face fines and legal issues.
Yes, If you have incurred any F&O losses in the current financial year it can be set off against all other heads of income except salary. Further, if any loss is remaining after set off it can be carried forward for 8 years.
No, the tax audit depends on the turnover of F&O not based on loss. If your turnover exceeds the specified limit mentioned u/s 44AB then you are required to opt for audit.
As a salaried individual who engages in trading in F&O, you will need to fill out Form ITR 3 for your income tax returns.
What if we have proprietorship firm or partnership firm ?
Hi @Private,
If you have proprietorship firm or partnership firm involved in F&O trading business, the losses can be adjusted against any other business income except speculative business income.
Hope this clarifies!
proprietors firm does not have separate PAN CARD.
Can Individual deduct loss from Proprietor firm against his income from F&O ?
Hi @Private,
Proprietors firm has the same PAN as its owner’s. It does not have a separate PAN.
Yes, an individual can adjust loss from proprietor firm against his F&O income.
Hope this clarifies!
I have a few questions
You have mentioned Internet Expenses, Subscription to a trading magazine, mobile expenses etc. What are the other expenses we can show to set off out FnO income? If you can provide a list that would be great.
Can Mr Satish opt for 44AD? If the answer is yes please answer the following questions.
If Mr Satish wants to go for presumptive taxation (44AD) then how much he has to pay in what month? Suppose his income is erratic over the course of the year (some months he incurs losses/ some months he gains) how will 15%, 45%, and 100% income be calculated?
What is the deadline to choose if he wants to opt for 44AD or not?
Hi @Vivek_Kumar_Singh
Here are answers to your various queries.
Hope this helps.
Hi @dhruvp2
From a taxation perspective, trading in F&O as an individual or a company would have different implications.
As an individual, trading in F&O will be taxed as business income. The applicable tax rate would depend on your total taxable income and the tax slab you fall under. The maximum tax rate would be 30% + cess.
Additionally from a compliance point of view, there is no requirement of filing any forms except ITR. Tax Audit would be only applicable if turnover exceeds 10 crores.
And if you choose to trade in F&O as a company, firstly, doing only trading as a private limited company is not permitted. If you wish to engage in trading activities, you would be required to obtain an NBFC (Non-Banking Financial Company) license, which is regulated by RBI.
And the taxes would be levied as per the corporate tax rate of flat 25%. Additionally, companies are required to pay dividend distribution tax at a rate of 15%, which is applicable when dividends are distributed to shareholders.
For a company, the below compliances are mandatory irrespective of turnover and profits,
Hi @Shyam_Abhinandan_AOA
Yes, it is correctly mentioned by you, that, in both scenarios audit is not applicable.
Hi @RD_Prajapati
Can you please Submit a ticket : Help Center so that our team can have a deeper look into your income situation entered on Quicko and answer your question accordingly?
Hi @Bhagya_S
The turnover you get in the “Tradewise Exit” sheet is the actual turnover from Zerodha.