Futures and Options (F&O) trading is a recent trend in India as a favourite investment process, particularly due to the increase in online trading. Futures are agreements by which the buyer and the seller commit to trade an asset at a specific price and date, whereas options allow the buyer and seller to have the right to sell or buy an asset but not the obligation. As much as these instruments present a means of hedging and speculation, they have tax consequences. Futures and options income taxation and the calculation of turnover are crucial knowledge that traders require in order to be in compliance and evade penalties.
Tax Rates on F&O Income
As capital gains of F&O income are calculated as income of the business, the rate of payment of taxes is based on the income slab to which the taxpayer is subjected in the case of individuals and Hindu Undivided Families. In case of companies and firms, there are standard rates of corporate taxes. The revenue is summed up with other revenue sources like the salary, rental income or interest and then taxed. F&O profit is not subject to any special concessional tax rate, so it differs in that regard from some capital gains on shares or mutual funds.
Treatment of Losses in Futures and Options
The losses that occur in F&O trading are regarded as non-speculative business losses. This is due to the fact that trading of F&O in recognized stock exchange is specifically omitted in the definition of speculative business. The non-speculative business losses may be offset with other business incomes, but not with salaries. In case such losses are not adjustable within the current year, they can be forwarded to eight assessment years and offset against business profits in the future. To take advantage of this benefit, it is important to report such losses properly on the income tax return.
Importance of Turnover Calculation in F&O Trading
By calculating turnover, it can be seen that it is important in establishing whether the audit of tax under Section 44AB of the Income Tax Act is applicable. The volume of transactions is not the only aspect of the audit requirement, as the derivatives trading turnover depends on its computation. Evaluating the possibility of using presumptive taxation schemes also requires that the turnover be reported correctly. This means that traders should be familiar with the methodology stipulated by the Institute of Chartered Accountants of India (ICAI) for the calculation of turnover in derivatives.
F&O Method of Turnover Calculation
Futures and options turnover is not equal to the amount of contracts that are traded, but is calculated as profit and loss. The turnover, as indicated by the ICAI guideline, is as follows. The total of good differences and bad differences is taken to be turnover. This implies that any gains made on any trades are summed up with any losses in order to come up with the figure of turnover. Turnover also includes premiums received on writing options. There are also other extra expenses that can be included in turnover in case there are any expenses recovered by traders, like brokerage or service charges.
As an illustration, when a trader makes a profit of Rs. 2,00,000 in a trade and a loss of Rs. 1,50,000 in another trade, he will have earned a turnover of Rs. 3,50,000 and not only the net profit of Rs. 50,000. Equally, a trader who writes options and gets a premium of Rs. 80,000 will also record this premium in the turnover. This approach guarantees a true evaluation of trading activity to be audited in taxes.
Tax Audit Requirement for F&O Traders
Where turnover is more than the stipulated maximum, tax audit under section 44AB takes effect. In the case of business entities, the audit requirement would be determined in the general cases where the turnover is more than Rs. 10 crore. But in the case of small taxpayers who have assumed presumptive taxation as provided in Section 44AD, the audit is obligatory when turnover is greater than Rs. 2 crore or when profits reported are less than 6 percent of digital transactions or 8 percent of cash transactions. Given that F and O trading turnover may dramatically increase with frequent trading, the traders may be subjected to audit even with small net profits.
Presumptive Taxation and F&O Trading
Under Section 44AD, some traders will choose to be subject to presumptive taxation to make it easier to comply. Nevertheless, the presumptive taxation is not usually applicable to F&O trading, but to small businesses. The derivatives trading nature is high frequency and speculative like and therefore it is not as feasible to assume presumptive taxation. In addition, most tax experts discourage the application of the scheme to derivatives because it can raise eyebrows with the tax department.
Record Keeping and Compliance for F&O Traders
Futures and options need correct records to file an income tax return. Examples of documents that traders are supposed to maintain include: contract notes, broker statements, bank account statements and computation sheets of turnover. Such records assist in the precise reporting of income, losses, and expenses. Trade-related expenses like the cost of brokerage, the cost of demat, the cost of the internet or the cost of advisory services can be regarded as business expenses when calculating taxable income. Correct compliance is not only important in ensuring easy filing of income tax returns but also shields the trader against scrutiny or tax audit.
Filing of Income Tax Return for F&O
F&O traders should file Income Tax Return in ITR-3 form, which is applicable to individuals and HUFs with business income. When filing, traders are required to produce gross receipts, expenses, net profit or loss and turnover information. In case of a tax audit, the audit report that a Chartered Accountant produces should be filed electronically within the due date. Late filing or misreporting may result in a penalty and loss of benefits, including the carryforward of losses.
Conclusion
Calculation of turnover and income tax on futures and options is a valuable application for every trader in India. Given the fact that F&O trading is treated as earnings of the business, it is taxable on the basis of slab rates and needs to be in accordance with the requirements to show audits in case the turnover surpasses the limits. Differentiating between turnover calculation and the treatment of losses, as well as the records that must be kept, can help traders avoid legal complications and unwarranted punishment. In the case of serious traders, it is always wise to seek the advice of a tax professional or Chartered Accountant to provide accurate filing and to optimise the available tax benefits within the law.
