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A Deep Dive Into F&O Trading Income Tax

14 Sep 2023

Before you embark on your investment journey, taxes are a critical aspect that demands your attention. Understanding the intricacies of taxation is paramount, as it directly influences the returns you earn from your investments. Failing to grasp the tax implications can significantly impact your overall gains. This article will look into a specific area of taxation - income tax related to Futures and Options (F&O) trading. By comprehending the nuances of F&O trading income tax, you can invest your money with greater clarity and make informed decisions that align with your financial objectives.

How is F&O trading taxed in India?

Income from F&O trading is treated as taxable income under the provisions of the Income Tax Act, of 1961. It is important to note that while equity intraday income is considered speculative, F&O income is treated as non-speculative, often used for hedging purposes. Consequently, any income generated from F&O trading is classified as business income. 

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Profits from F&O trading are added to your total income and taxed based on the applicable slabs per the prevailing income tax rates in the country. On the other hand, losses can be offset against other business income or carried forward for up to eight assessment years for future set-off against F&O profits. Remember that while you can adjust losses against other sources of income like rentals or capital gains, they cannot be adjusted against salary income.

How to report F&O trading for tax purposes?

If you are engaged in F&O trading in India, understanding how to report your income is crucial. First, it is imperative to maintain proper books of accounts to record F&O transactions, including purchases, sales, expenses, and other financial details.

You are legally mandated to truthfully report your F&O trading activities in your Income Tax Return (ITR). Generally, you can use ITR-3 or ITR-4 (Presumptive Income) forms for reporting business income from F&O trading. To ensure accuracy, you must provide detailed and precise information about your turnover, profit and loss, expenses, and other relevant aspects within the respective sections of the ITR forms. You can consult a tax professional for more information and assistance if necessary.

You can deduct your business expenses from your F&O trading income, even when you have encountered losses. However, these expenses must be directly associated with your business activities, such as brokerage fees, telephone and internet costs, consultant fees, employee salaries, etc. Additionally, you must maintain a record of all receipts and bills when claiming deductions.

Tax audit 

As per Section 44AB of the Income Tax Act, a tax audit may be necessary if your F&O trading turnover surpasses the specified threshold. The applicability of tax audit in F&O trading hinges on the trading turnover and the corresponding profit or loss. Here is how this works:

  • For a trading turnover up to Rs 2 crore, a tax audit becomes applicable if the profit or loss from F&O is less than 6% of the turnover, the presumptive taxation scheme was declined in any of the immediate five previous years, and the total income exceeds the basic exemption limit under Section 44AB(e). Conversely, a tax audit is not required if the profit is equal to or greater than 6% of the turnover. 
  • For a trading turnover between Rs 2 crore and Rs 10 crore, a tax audit is unnecessary if most transactions (over 95%) are digital, regardless of profit or loss under Section 44AB. 
  • A tax audit is mandatory for a trading turnover exceeding INR 10 crore, irrespective of the profit or loss under Section 44AB(a).

It is important to note that only a qualified chartered accountant must conduct the audit and submit the report alongside your tax return.

To sum it up

The impact of taxes on your investment returns can be substantial. This makes it imperative to have a firm understanding of the associated rules and regulations. Ignoring the intricacies of taxes could lead to missed opportunities or unexpected setbacks. By understanding the rules of F&O trading income tax, you can arm yourself with the knowledge to plan ahead and make informed choices and strategic decisions.


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