FAQs on Futures and Options

Trading in Futures and Options in the stock market can be highly rewarding but at the same time extremely risky. In F&O trading, two parties have to enter a derivative contract in which they agree to buy or sell an underlying asset (shares or commodities) at a predetermined price and date. Here in this type of trading one party expects the price to rise while the other to fall, only one party in the contract makes a profit and other bears the loss.

Here are few FAQs on Futures and Options.

Should the F&O trader file a Tax return?

Yes F&O traders are supposed to file tax returns irrespective of profit or loss.

What is the head of income under which the Futures and Options are taxed?

Income earned in Futures and Option trading is considered as Business income and is taxed under Income From Profits and Gains from Business or Profession.

Is Tax Audit a mandate for Futures and Options Trading Business?

Section 44 AB(a) and section 44 AB(e) of the Income Tax Act determines the applicability of Tax audit and conditions of F&O.

Provision for Tax Audit under Section 44 AB(a) of the Income Tax Act, 1961

The provisions for tax audit Section 44AB (a) prescribes the turnover limits for the applicability of tax audit on Futures and Options trading in India. Tax audit is  mandatory for all F&O transactions exceeding the turnover limit of Rs.10 crores, irrespective of the profit gained or losses faced in such transactions. Since, futures and options transactions are completely digital, the tax rate prescribed under section 44AD will be 6%, instead of 8% in all other cases.

Condition for Tax Audit under section 44 AB(e) of the Income Tax Act, 1961

A person carrying out F&O trading will have to necessarily get his accounts audited if section 44 AD(4) becomes applicable and his taxable income is in excess of what is prescribed as the basic exemption limit.

An assessee opted for a presumptive tax scheme under sec 44AD (1) cannot opt-out from the scheme for subsequent five years. In case, he wants to opt-out and declares losses or income at less than the presumptive rate in the current year, the audit is required to be done under section 44AB (e )

Audit is required only if a taxpayer has declared income at a presumptive rate in any of the previous five years but wants to declare losses or income at less than the presumptive rate in the current year, provided his total income in the current year exceeds the basic exemption limit. This is the new clause replaced by the old in Financial Act 2016.

Therefore Audit is mandate under 2 following condition:

1. When the turnover exceeds 10 crores.
2. A person engaged in business who has OPTED for presumptive taxation in any of the last 5 years but does not opt for the same in the current year.

How is Turnover calculated in F&O Trading?

Future & options Turnover is nothing but the total revenue generated from trading in futures and options. Each expense incurred in the process of trading in F&O like broker’s commission, office rents etc., is to be subtracted from the income generated to get an accurate estimation of F&O turnover.

While calculating F&O Turnover, the following are the key points to consider

• The difference between the positives and negatives is to be considered while calculating F&O turnover.
• The difference will also form a part of the turnover, In case of reverse trade entered by the trader.
• Premiums received from selling options are not to be included in F&O turnover when calculating for taxation as per the Income Tax Act.

What are the Expenses or Deductions available for F&Os?

The expenses associated with F&O trading like broker’s commission, office rents, depreciation, Demat charges, and cost of subscription for software and research can be used to set off against the income. Therefore any expenses deriving out of F&O trading can be deducted from total income.

The income generated from trading futures & options is classified into two types of income speculative & non-speculative.

The income generated from F&O trading is treated as non-speculative income. However, income generated from intraday trading is treated as speculative as there is no delivery of shares.

Non-speculative income can be carried forward for up to 8 years and adjusted against any non-speculative income. This includes income from house property, interest income and capital gains from various assets.

Is deduction under section VI A available for F&O trading?

An individual, you can claim all eligible tax saving deductions under in respect of income from F&O, just like any other normal business income.