Income Tax on F&O Trading

If you trade in Futures and Options you need to 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 futures trading and options trading of Equity, Commodity, and Currency (Forex).

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.

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 a currency. Thus, F&O Trading can be Equity F&O Trading, Commodity F&O Trading or Currency F&O Trading i.e. Forex Trading.

Under Futures Trading, the trader buys or sells a contract on a predetermined date in the future, at a predetermined time in the future, and at a predetermined price. Under Options Trading, there is a contract between a seller and buyer to trade a security at a predetermined price on a predetermined date in the future. 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. Both futures trader and options trader must report their income from trading in the Income Tax Return.

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 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
    • Up to FY 2019-20
      31st July is the due date for traders to whom audit is not applicable
      30th September is the due date for traders to whom Tax Audit is applicable
    • FY 2020-21 Onwards
      31st July is the due date for traders to whom Tax Audit is not applicable
      31st October is the due date for traders to whom Tax Audit is applicable
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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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 Trading = Absolute Profit
  • Turnover for Options Trading = Absolute Profit + Premium on Sale of Options

Absolute Turnover means the sum of positive and negative differences. Trading Turnover Calculation can be either through scrip wise method or trade wise method.

Example: Rahul buys 200 contracts of Heremotoco Futures at Rs.100 on 05/05/2021. He sells these contracts at Rs.90 on 08/05/2021. Rahul buys 150 contracts of Nifty Futures at Rs.45 on 07/09/2021. He sells these contracts at Rs.50 on 12/09/2021.

  • 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 INR 2 Cr

  • If the taxpayer has incurred a loss or the profit is less than 6% of Trading Turnover and total income is more than basic exemption limit, a 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 INR 2 Cr and up to INR 10 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 INR 10 Cr

  • Tax Audit 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.

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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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.

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 (basic tax + surcharge).

Slab Rates if F&O Traders opt for New 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 7,50,000 10%
7,50,001 to 10,00,000 15%
10,00,001 to 12,50,000 20%
12,50,001 to 15,00,000 25%
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 income taxable at slab rates. Thus, Futures Trader and Options Trader 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 Trader and Options Trader 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
  • The trader cannot set off any brought forward business loss
  • The trader cannot carry forward the business loss to future years
  • Form 10IE must be filed on the income tax website
  • A trader having business income and opting for the new tax regime have an 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 the entire lifetime.

Carry Forward Loss for F&O Trading

Under F&O Trading, the trader can claim and set off and carry forward the losses 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.

If F&O Traders have opted for the new tax regime, they cannot set off the brought forward business loss against business incomes. Further, they cannot carry forward the business loss to future years.

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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 also 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. Further, the trader can carry forward the remaining loss for 8 years and set off against future business profits.

What is Income Tax on Forex Trading in India?

Forex 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. Further, 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.

Do I need to pay Advance Tax on my F&O Profits?

Income from F&O Trading is a non-speculative business income taxable at slab rates. If the tax liability of the F&O trader from all sources of income during the financial year exceeds INR 10,000, he/she is liable to pay Advance Tax in four quarterly installments as per the applicable due date.

Got Questions? Ask Away!

  1. Hey @Niraj,

    F&O Trading is considered to be a non-speculative business income. You can adjust the loss against any income except salary income. Also, you can carry forward the remaining loss for 8 years and adjust against future F&O profits.

    Hope this helps

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