F&O trading holds immense potential for taxpayers in India, but navigating its tax implications is crucial.
Here’s a breakdown of key points every trader should know:
- Taxation as Non-Speculative Business Income: Income from F&O trading falls under non-speculative business income and is taxed at normal slab rates.
- Reporting in ITR-3 Form: F&O traders must report income or loss under ‘Profits and Gains from Business and Profession’ in the ITR-3 form.
- Auditing and Bookkeeping: Proper books of accounts and audits are mandatory if turnover exceeds Rs. 2 crore or in case of losses for carry-forward.
- Calculation of Turnover: Turnover includes the sum of absolute profit from futures and absolute profit plus premium from options.
- Claiming Business Expenses: F&O traders can deduct business-related expenses like brokerage, internet charges, and software expenses.
- Loss Set-Off and Carry Forward: Losses can be set off against other income in the same year or carried forward for up to 8 years.
Taxation as Non-Speculative Business Income
Income from F&O trading is categorised as non-speculative business income, subject to taxation at the normal slab rates applicable to the taxpayer. The tax rates vary depending on income levels and residential status. For instance, an individual below 60 years of age has the following tax rates for the financial year 2023-24:
Income Slab Tax Rate
Up to Rs. 2.5 lakh Nil
Rs. 2.5 lakh to Rs. 5 lakh 5%
Rs. 5 lakh to Rs. 10 lakh 20%
Above Rs. 10 lakh 30%
Additionally, surcharge and cess apply. The surcharge varies from 10% to 37%, depending on income, while the cess is 4% of the total income tax and surcharge.
Reporting in ITR-3 Form
F&O traders must report income or loss under ‘Profits and Gains from Business and Profession’ in the ITR-3 form. This form is applicable for individuals and HUFs- Hindu Undivided Families with income from business/ profession. The relevant section for F&O trading is Schedule BP, specifically Part A1, as non-speculative income falls under this category.
Auditing and Bookkeeping
Maintaining accurate books of accounts is mandatory for F&O traders, with audits required if turnover exceeds Rs. 2 crore or in the case of losses for carry-forward. These books should encompass details of contracts, purchases, sales, deliveries, settlements, income, and expenses related to F&O trading.
Audit reports, submitted in Form 3CA or Form 3CB along with Form 3CD, are mandatory under section 44AB of the Income Tax Act. The submission is done electronically via the income tax e-filing portal before the due date, typically September 30 of the assessment year.
Calculation of Turnover
Turnover from F&O trading is the sum of absolute profit from futures and absolute profit plus premium from options. Absolute profit is the positive or negative difference between the purchase & sale price of a contract, while premium is the amount paid or received for buying or selling an option contract.
Claiming Business Expenses
F&O traders can deduct business-related expenses such as brokerage, internet charges, and software expenses, provided these are incurred exclusively for the purpose of F&O trading and are supported by proper documentation.
Common expenses include brokerage and commission, internet and telephone charges, software and hardware expenses, depreciation, interest on borrowed capital, fees to professionals, and subscription fees.
Loss Set-Off and Carry Forward
Losses from F&O trading can be set off against other income in the same year, except for salary. If not fully set off, these losses can be carried forward for up to 8 years and offset against non-speculative business income in subsequent years.
To avail of the benefits of loss set-off and carry forward, traders must file their income tax return on or before the due date and adhere to all relevant regulations.
Closing Thoughts
While F&O trading offers substantial income opportunities, meticulous planning and adherence to tax laws are paramount. Traders must maintain accurate records, track transactions, and ensure timely filing to sidestep penalties or notices from tax authorities.