• Jain Anurag
  • 03 May, 2022

Taxation of F & O ( Future and Option ) Transactions

Futures and Options are the major types of stock derivatives trading in a share market. These are contracts signed by two parties for trading a stock asset at a predetermined price on a future date. Such contracts try to hedge the market risks involved in the stock market trading by locking in the price beforehand.
Future and Option in the share market are contracts that derive their price from an underlying asset (known as underlying), such as shares, stock market indices, commodities, ETFs, etc. Future and Option basics provide individuals to reduce their future risk on their investment through pre-determined prices. However, since the direction of the price movement cannot be predicted, it can cause substantial profits or losses if a market prediction is inaccurate. Typically, individuals well versed with the operations of the stock market primarily participate in such trades.
Section 43(5) of the Income Tax Act has excluded the transactions in F & O Market from being treated as Speculative Transactions. Even though these transactions are non-delivery-based transactions, these transactions would still be treated as Non-Speculative. As such transactions in the F & O Market on the Stock Markets would be treated as Non-Speculative Transactions, they would be taxed just like any other business income. The expenses
incurred for the purpose of Business like Telephone Expenses, Internet Expenses, Electricity Expenses, etc. would also be allowed to be claimed in the Income Tax Return. The tax on the balance taxable income arising on the sale of F & O Transactions would be levied as per the applicable income tax slab rates.

Computation of turnover in case of F & O transactions 

The following is taken into account for the computation of turnover:

  • Profits from the trade
  • Loss from the trade
  • Premium received from the sale of Options
  • In the case of Reverse Trade, the difference should also be added

Turnover can be determined by looking at the following example:

Mr. X is a Futures and Options trader and has incurred a profit and loss from the following 2 transactions:

  1. He acquires Futures in Company A, which are worth Rs.20 lakhs, eventually selling
    them for Rs. 22 lakhs. This sale resulted in him earning a profit of Rs. 2 lakh
  2. He acquires Futures in Company B, which are worth Rs. 10 lakhs, eventually selling
    them for Rs. 9 lakhs. This sale resulted in him suffering a loss of Rs. 1,00,000

Therefore, based on the above transactions, the total turnover can be calculated as follows:

Example 1: Total amount of profit earned = 2,00,000 – 1,00,000 = 1,00,000
Total turnover will be the combination of both profit and loss = 2,00,000 + 1,00,000 = 3,00,000

Example 2: Mr X buys 200 Options at Rs. 20 and sells at Rs. 30.
Firstly, the favourable difference or profit of 2000 (10 x 200) is the turnover. But premium
received on sale also has to be considered turnover, which is 30 x 200 = 6000. So total
turnover on this Options trade = 2000 + 6000 = 8000.

Example 3: Trade 1: 1000 Options bought at 100 and sold at 50. Trade 2: 1000 Options
bought at 50 and sold at 30.

Trade 1
Loss = 50,000 (1,000 x 50)
Selling value of Options = 1000 x 50 = 50,000
Turnover = 1,00,000

Trade 2
Loss = 20,000 (1000 x 20)
Selling value of Options = 1000 x 30 = 30,000
Turnover = 50,000
Total turnover = Turnover of Trade 1 + Trade2 = 1,50,000

When Tax audit required in the case of  F & O Transaction?

If the turnover is more than ₹ 1 Crore or if the Profit disclosed is less than 8% of the turnover from such transactions (6%, if all trades are digital), then the taxpayer would also be required to get the Tax Audit conducted under Section 44AB. This Tax Audit would be required to be conducted by a practicing Chartered Accountant for each year for which the turnover exceeds ₹ 1 Crore or the Profit disclosed is less than 8% or 6% as the case may be.

Treatment of loss arising in F & O Transactions

As the transactions entered into in the F & O Market are treated as Non-Speculative Transactions, the loss arising out of these Transactions would be allowed to be set off against all other incomes except Salary Income.

If the Loss is not set off against the incomes of the same Financial Year, then such loss can be carried forward and set off against the future incomes. However, for the loss to be carried forward and set off, the loss should be disclosed in the Income Tax Return and the Income Tax Return should be filed before the due date of filing of the Return.

If the Loss is not disclosed in the Income Tax Return or the Income Tax Return is not filed before the due date, then the loss would not be allowed to be carried forward. Loss claimed in Income Tax Return filed after the due date of filing of the Return as Belated Return is also not allowed to be carried forward.

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