Income Tax on F&O Trading

by Shakshi Bharti | May 8, 2024 | Income Tax, Income from Trading | 0 comments

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Important Keyword: F&O Trading, Income from Business & Profession, ITR-3, Tax Audit.

Income Tax on F&O Trading

The rise in Futures and Options (F&O) trading, especially during the COVID-19 era, has been significant. F&O trading involves buying and selling futures contracts and options contracts, both of which are categorized as derivatives. Derivatives derive their value from the price movements of underlying assets such as stocks, commodities, or indices.

Given the popularity of F&O trading and its classification as derivatives, traders engaging in such activities are required to file income tax returns to report their income or losses from these trades. It’s crucial for traders to accurately report their F&O trading activities to ensure compliance with tax regulations and avoid any potential penalties or legal issues.

What is F&O Trading?

Futures and Options (F&O) trading involves agreements to buy or sell assets at a predetermined price and date in the future. These derivative instruments derive their value from the underlying assets, which could be stocks, commodities, currencies, or indices.

In Futures trading, traders agree to buy or sell assets at a specified future date and price, regardless of the market price at that time. This allows traders to hedge against price fluctuations and speculate on future price movements.

Options trading, on the other hand, gives traders the right, but not the obligation, to buy or sell assets at a predetermined price within a specified timeframe. Options traders pay a premium for this right, which provides them with flexibility and risk management strategies.

Both Futures and Options trading can be used for various purposes, including hedging, speculation, and arbitrage, making them essential components of financial markets worldwide.

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

Determining whether a Tax Audit is applicable involves calculating Trading Turnover, which is crucial for tax assessment. However, it’s important to note that the tax liability doesn’t hinge on Turnover alone.

Trading Turnover in Futures & Options Trading is computed as the Absolute Profit. This involves summing up the positive and negative differences from trades. The calculation method can be either scrip-wise or trade-wise.

For instance, let’s consider Rahul’s trading activities:

He purchases 200 contracts of Heremotoco Futures at Rs. 100 on 05/05/2023 and sells them at Rs. 90 on 08/05/2023.
Next, he buys 150 contracts of Nifty Futures at Rs. 45 on 07/09/2023 and sells them at Rs. 50 on 12/09/2023.

From these trades:

Loss from Trade 1 = (90 – 100) * 200 = Rs. -2,000
Profit from Trade 2 = (50 – 45) * 150 = Rs. 750

Hence, the Absolute Profit is Rs. 2,750 (|Rs. -2,000| + Rs. 750). This figure is crucial for assessing whether a Tax Audit is necessary and for other tax-related evaluations.

Applicability of Tax Audit for F&O trading under section 44AB

Trading Turnover up to INR 2 Cr

If a taxpayer incurs a loss or the profit falls below 6% of the Trading Turnover, and they have opted out of the presumptive taxation scheme in any of the immediate 5 previous years, while their total income exceeds the basic exemption limit in any of the previous years, then a Tax Audit under section 44AB(e) is applicable. However, if the profit equals or exceeds 6% of the Trading Turnover, a Tax Audit is not necessary.

For Trading Turnovers ranging between INR 2 Cr and INR 10 Cr, the provisions of Section 44AB do not apply because the majority of transactions, over 95%, occur digitally through Demat. Consequently, Tax Audit is not required regardless of profit or loss.

In cases where the Trading Turnover exceeds INR 10 Cr, Tax Audit under section 44AB(a) is obligatory, irrespective of profit or loss. It’s noteworthy that for F&O Traders, since all transactions are digital, the prescribed rate under Sec 44AD would be 6% instead of the usual 8%.

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

If F&O Traders choose not to opt for presumptive taxation under Section 44AD and have profits from F&O trading, they are required to pay Advance Tax in four installments as outlined in the table below:

15% of the advance tax by June 15th of the financial year.
45% of the advance tax by September 15th of the financial year.
75% of the advance tax by December 15th of the financial year.
100% of the advance tax by March 15th of the financial year.

This schedule ensures timely payments of advance tax based on estimated F&O trading income, preventing last-minute financial burdens on the taxpayer.

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

For F&O traders who choose presumptive taxation under Section 44AD and generate profits from their F&O trading activities, the entire amount of Advance Tax must be paid in a single installment on or before March 15th.

New Tax Regime for F&O Trading

Under the new tax regime introduced by Section 115BAC of the Income Tax Act, F&O traders have the option to calculate their tax liability based on slab rates specified in the new regime. Notably, they are ineligible to claim Chapter VI-A deductions, and they must file Form 10IE on the income tax website.

Should a trader with business income opt for the new tax regime, they retain the flexibility to revert to the old regime. However, if they subsequently choose the new regime again, they forfeit the option to revert to the old regime for the remainder of their lifetime.

Carry Forward Loss for F&O Trading

Regarding the treatment of losses from F&O trading, such losses are classified as Non-Speculative Business Losses. In the current assessment year, they can be set off against any income except salary income. However, in subsequent years, they can only be set off against business income. F&O traders have the option to carry forward these losses for up to 8 years.