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Profit/ Loss on F&O Transactions

CA Paresh Kothari (Service) (233 Points)

07 December 2007

Kindly reply as to whether the profit/loss on F&O Shares / Future Commodities Transction will be Income under Capital gains [ Short term] or income from Speculation Business under Income from Business & Profession head?

Also reply whether Profit / loss on Intra Day Shares/ Commodities transction will be Income from Speculation business or Income From Capital gain [ Short term ]

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10 Replies

Yogeesha (Service) (70 Points)
Replied 07 December 2007

Profit /Loss from F&O is not capital gain it will come under income from business and profession. Intra day profit /loss come either under capital gain or business income depending on the assessee's nature of transactions ie if a assessee bougt the shares for investment purpose and in the same day the price of the share went up so he sold, in this case it is capital gain.

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kanwardeep (student) (23 Points)
Replied 10 December 2007

when a person working in f&o market will have to get his financial staements audited

(Guest)

FUTURE AND OPTIONE TRANSACTION SHOULD BE TREATED AS A BUSINESS AND ALL GAIN FROM F & O SHOULD BE TREATED AS A BUSINESS INCOME.

(Guest)

FUTURE AND OPTIONE TRANSACTION SHOULD BE TREATED AS A BUSINESS AND ALL GAIN FROM F & O SHOULD BE TREATED AS A BUSINESS INCOME.

(Guest)

please show me the reply of treatment for income tax of F&O trading of shares,whether this is normal business or speculation business.

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(Guest)

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madan mohan chimmili (hyderabad) (24 Points)
Replied 30 August 2012

To Treat under Capital Gains:

First View: The investor may undertake derivatives transactions to hedge his investment portfolio. The period of any derivatives transaction cannot exceed three months. So just because the investor has to square up his position every three months and then take fresh position does not mean that this is a business transaction.
Second View: Derivatives are a right to acquire property. Thus, they are properties carrying a value and, hence, should be considered as a capital asset and subject to capital gains
Third View: Few of the indicative conditions to prove derivatives as capital assets:
- The derivatives should be held as capital assets (not stock in trade)
- Normally, The holding period should be fairly long
- The intention of purchase / sale should be for investment purpose or for hedging investment portfolio
- The accounting treatment should be as that of investments
- The frequency of transaction should be less
- There should not be any separate administrative set up.
- The source of funds should be your savings and existing sources of income only.

Consequence of showing under Capital Gains:

Long Term Capital Gains: If the gains are long-term, then the taxation will be as per Section 112, wherein if long-term capital asset is a security listed in any recognized stock exchange in India, then the assessee can pay tax by choosing any one of the following options. (Note: Securities as per Section 2(h) of the securities contracts (Regulation) Act, 1956 includes derivatives as securities)

Option1: Claim indexation and Pay 20% tax
Option2: Don’t Claim indexation and Pay 10% tax

Long Term Capital Loss: During the year, Long Term Capital Loss can be set off only against Long Term Capital GainsBrought forward LTCL can be set off only against LTCG.

Short Term Capital Gains: If the gains are short-term, then the short term gains will be added to Gross Total Income and normal tax rates of slab rate will apply. Although shown as capital gain and subject to the securities transaction tax (STT), derivatives transaction will not attract the concessional tax rate of 15% applicable to short-term capital gain (on which STT is paid). As per Sec.111A, the benefit of concessional tax rate of 15% is applicable only to equity shares in a company or units of an equity-oriented mutual fund.

Short Term Capital Loss: During the year, STCL can be set off against both LTCG and STCG.Brought forward STCL can be set off against both LTCG and STCG.

(II) To Treat under Business Income:

Income from derivatives trading is more likely to be shown under the head, ‘Business income’, due to the short duration and nature and sheer volume of transactions. Once classified as business income, the next issue arises as to whether it is to be shown as speculative business income or non-speculative business income. Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.Derivatives are not capable of being delivered as they are financial contracts without any physical existence. So the question of non-delivery does not arise. Therefore, derivatives trading is not speculative business. Also as per section 43(5) the gains from derivatives are not speculative.

Consequence of showing under Business Income:

§ Whether the derivatives transaction is shown as business income or capital gain, the tax liability remains the same if one is in the highest tax bracket. It is preferable to show it as business as one can also claim rebate under sec 88E, in respect of STT paid and deduction of expenses when the transaction is shown as business income. Chances of litigation are also less when the derivatives transaction is shown as business income. However, if it is a business income and the turnover exceeds Rs 60 lakh, then a tax audit is required. Failure to get the accounts audited) invites penalty.

§ There is no segregation of long term or short term. Every gain or loss is business income / loss

§ The gains will be taxed normally. No special treatment.

Under sec 88E, rebate of STT is allowed subject to the following conditions-

1. The income of the taxpayer includes any income chargeable under the head ‘Profit and gains of business or profession’ arising from taxable securities transactions.

2. The assessee furnishes along with the return of income evidence of payment of securities transactions tax in Form No. 10DB (in the case of transactions in stock exchange). The rebate under sec 88E is equal to STT paid by the assessee in respect of such taxable securities transactions. However, the amount of rebate cannot exceed tax calculated at the average rate of tax on the income from securities transactions i.e., Taxable income from securities transactions multiply by tax liability (before rebate, surcharge and cess) divided by net total income

Thumb Rule: Treat as business income because of following benefits:

Claim administrative expenses.
STT rebate is available
If loss is there, it can be easily set off with incomes from house property, other sources
Business for auditors, If turnover is > 40L
Normal slab rate tax to be paid (irrespective of treating as capital asset or stock-in-trade) so why not treat as business and claim above benefits also?
Avoid litigations, by claiming derivatives as business