Futures and Options Trading: Turnover, Tax Audit, ITR Filing
Futures and options trading is a type of financial trading which allows individuals to partake in negotiations without owning a physical asset, such as shares, currencies or commodities. If done correctly, the return on investment can be high, however, it presents a risk as well. Since this form of trading counts as an income tax must be paid to stay compliant with regulations and to avoid penalties in addition to having proper books and audit done for the company.
Reports filed under F&O Trading Tax regulations qualify such trading as business undertakings, hence taxes on profit and loss for this would be under “business income”. It is important to mention that every transaction in shares cannot simply be looked at the same way. For instance, though any gains obtained from F&O trading are accounted for under “business income”, other share dealing transactions gains such as investments may be classified under “capital gains” in accordance with the individual’s accounting records.
Reporting F&O Trading Income in the Income Tax Return (ITR)
F&O income needs to be reported in the ITR to be tax compliant. The following are the steps for reporting:
1. Choose the Appropriate ITR Form
Since F&O income is business income, it has to be reported on ITR-3 form. This is the form that specifically applies to those whose incomes are from business or professional activities.
2. Compute F&O Trading Turnover
Turnover is the total of all absolute values of all gains and losses from F&O trades in the financial year. For instance, if one trade had incurred a loss of Rs. 5,000 and the other had made a profit of Rs. 12,000, then the total turnover will be Rs. 17,000, which is the sum of Rs. 5,000 and Rs. 12,000.
3. Claim Eligible Business Expenses
It is possible that the trader might reduce taxable income if some of the business expenses like brokerage charges, internet costs, trading software subscriptions, consultancy fees, or any other costs directly related to the business could be deducted from income.
4. Set Off F&O Losses
The F&O trading losses can be set off against any income except salary. Thus, if a trader earns Rs. 5 lakh in rental income and incurs a loss of Rs. 1.5 lakh in F&O, the taxable income will be Rs. 3.5 lakh. The unused losses can be carried forward for eight assessment years in case they are reported in ITR.
Tax Audit Requirements for F&O Trading
It will depend upon the turnover and profit. Applicability of tax audit for F&O trading is as under:
1. Turnover up to Rs. 1 Crore
If 95% or more of the transactions are digital, no tax audit is required, profit or loss, no bar.
2. Turnover up to Rs. 2 Crore
No Tax Audit is required but the taxpayer is eligible to opt for the presumptive taxation scheme.
3. Turnover between Rs. 2 Crore and Rs. 10 Crore
If 95% or more of the transactions are digital, no tax audit is required, profit or loss, no bar.
4. Turnover above Rs. 10 Crore
Tax audit is mandatorily required under Section 44AB(a) irrespective of profit or loss.
Accounting Record Maintenance
As the F&O trading is treated as business, so records have to be maintained. A person will get the condition valid if his income exceeds Rs. 2.5 lakh or if his turnover crosses Rs. 25 lakh in any one of the preceding three years. The trader would have to prepare trading statements and receipt of his expenses, statements of bank accounts for record.
The Revised Securities Transaction Tax (STT) Rules
Effective from October 1, 2024, STT on all F&O trades is increased as below:-
- Futures in Securities: STT on sale increased to 0.02% from 0.0125%.
- Options in Securities: STT on sale increased to 0.1% from 0.0625%.
Other Investment Activities With Different Tax Implications
There are other investment and trading activities that have undergone different tax treatments:
- Intra-Day Trading: Proceeds or losses from intra-day trading are invariably treated as speculative business and must, therefore be disclosed as an independent flow of F&O income.
- Short-Term Trading: Income from short term equity trading is likely to qualify as business income or capital gains depending on volume and frequency of trades made
- Long-term Investments: Essentially, profit/loss from long-term investments shall be capital gains.
F&O trading offers traders lucrative opportunities but involves complex tax implications. Proper reporting of income, claiming of deductions, and maintenance of records are essential to comply with regulations. With changes in STT rules and specific audit requirements, traders must remain informed and diligent to effectively manage tax liabilities and avoid penalties.
