Taxation of Futures and Options

Futures & Options (F&O) traders often enter large-scale operations but the profits they make from such purchases are very small. As the volume and number of transactions are very high, the ITR and computation of Turnover methodology for Tax Audit purposes are slightly different compared to other businesses. This article will discuss Futures and Options taxation.

Futures and Options taxation

Both revenue and losses arising from futures trading and options should be treated as revenue or loss of business and require the filing of a return using the ITR-4 tax form. Post-deduction taxable income is also taxable. Entering income tax returns about any income earned by trading in Futures and Options often confuses most taxpayers. Most Futures and Options transactions are very large and occur frequently with low profits generated. Due to the high value of services performed, tax revenue on profits or losses incurred on these activities are treated differently than profits or losses arising from any other type of business. Keeping this in mind, revenue from trading Futures and Options may be regarded as business income or as a cash return.

Benefits under Section 43 (5)

Section 43 (5) of the Income Tax Act states that any transaction that occurs during the Futures and Options trading should be regarded as unpredictable transactions. This means that any profits made from that trade will be taxed in the same way as income or profits from the conduct of any other type of business. Therefore a taxpayer may require a tax deduction for any expenses you may incur while trading Futures and Options such as telephone bills, electricity bills, internet bills, etc.

Benefits of including Future Income and Options as a Business Income

• If any proceeds or profits from the Futures and Options trading are treated as revenue for the business then the following profits will arise:
• Any administrative costs are considered deductions
• Securities Transaction Tax or STT will also be considered deducted
• Any losses resulting from Futures and Options trading may be made on any income from the taxpayer’s residence, any other business, and any other source that restricts the normal income of the taxpayer.
• Any deductions that are not deducted may be deducted from any taxpayer’s income from any other business and may continue for a period longer than 8 years.
• Tax audit will be mandatory if profits or revenue from trading Futures and Options are higher than Rs 1 crore.

Ramifications of Treatment for Future Income and Options as a Capital Gain

If any revenue or profit from the trading of Futures and Options is considered to be a significant gain then the following benefits will arise:

• Any income will be treated as income or interim profits and will be taxed according to the normal income tax rates.
• Securities Transaction Tax or STT will not be considered a deduction, unlike any costs incurred as a result of trading Futures and Options.
• Any losses will be considered as short-term capital losses, which may be compensated for any capital gains earned by the taxpayer through other sources. This loss can be continued for a maximum of 8 years.

How Losses from trading in the Future and Options are managed?

Any losses incurred on trading Futures and Options are treated as follows:

• All personal losses incurred on trading Futures and Options are allowed to be compensated for any income they earn from other business sources, other than income from earnings. This is because any transaction that takes place related to Futures and Options is considered to be inherently unpredictable.
• The losses incurred on trading Futures and Options can be further processed in the following years and deducted from any income one may receive at this time. However, this can only happen if the person in question does not pay for his or her loss from any income he or she earns from other sources within the relevant financial year.
• For any losses incurred in trading the Futures and Options person wishing to continue or repay, he or she is required to provide full disclosure of the loss in his or her Income Tax Returns, and these tax returns will need to be included in advance until the application deadline.
• If such disclosure of losses can be provided by the person in his or her tax return, the person in question will not be allowed to transfer the loss in subsequent years.
• Any losses incurred by the Income Tax Returns lodged after the expiry date of the filing date, will not be allowed to be transferred for subsequent years.

How to earn Income or Profit from trading in Future and Options for Tax Audit?

Any revenue or profits from the Futures and Options trading in the market should be treated as follows for tax purposes:

• The general provisions as set out in the Income Tax Act will apply to any income or profits made from trading Futures and Options, as these revenues will be regarded as revenue from the ordinary business.
• In terms of Section 44A of the Income Tax Act, the person in question will be required to prepare and maintain a general record of accounts showing all transactions that have occurred as a result of the transaction.
• In terms of Section 44AB, if the trader’s profit margin during the financial year exceeds Rs 1 crore, the trader will be required to assess the tax under the provisions set out in this Income Tax section. Do it
• If a trader discloses income or profit of less than 8% of the gross income during the financial year, then the trader will be required to assess a tax under the provisions set out in section 44AB of Income Tax. 

Final words

Any revenue or losses arising from Futures and Options trading should be considered and treated as an income for the business or business loss. As such transactions in the F&O Market will be treated as non-speculative services in terms of Section 43 (5), and they will be taxed like any other business income. Expenses incurred for the Business will also be allowed to be claimed in return for income tax. Taxes from the sale of F&O Transactions will be levied under the applicable income tax rates.