Options (F&O) - Understand the outcomes
in F& O segment is very common now. Many individuals
& enjoy trading in F&O. Making profit/ losses by
futures & options brings some tax requirements as well. Lets
discuss the outcomes of trading in futures & options from
tax point of view.
Profits/losses from derivatives and F&O
treated as Non speculative Business Profits/losses:
in F&O segment is different then investing in shares &
funds. F&O transactions are completed without delivery of
securities. Anyone trading in F&O is treated as trader and profits
on such transactions is to be
treated as business profits.
CBDT by its notification on 25/01/2006
made it clear that
derivatives transactions will be treated as non speculative
. Any profit/loss on F&O
treated as non speculative business
profit/loss; taxable under the head profits and gains of Business or
Profession and all formalities, rules, laws applicable to business
& profession will also be applicable.
Assessment Year 2020-21 ITR 3 is the applicable Income Tax Return Form:
There is a simple understanding that salaried
person shall file ITR-1 or ITR-2,
this is not the case when you are having profit/loss from
F&O trading. F&O gains/losses being treated as business
income; brings ITR 3 into play. So if you have F&O
you should file ITR 3 for the Assessment Year 2020-21.
As Department updates the Income Tax Return forms every year, the ITR
form number may change in respective assessment year. So it is
important to know that the return form to be filed for respective
year, in case of profit/loss from F&O trading, shall be the return
form which is applicable to individuals having income from business
of Tax Audit:
44AB of the Income Tax Act covers provisions relating to Tax Audit.
Accordingly Tax Audit in case of derivatives and F&O trading will
be required in following situations.
- If there is
profit in F&O transactions and total turnover of such
trading exceeds ₹ 1.00 crore (₹ 5.00 crore if Cash receipts & payments do not exceed 5% of total Turnover & Total Payments); Tax Audit u/s 44AB will be required.
We can also say that Tax
is required if you have turnover exceeding ₹ 1.00 crore/ ₹ 5.00 crore(as applicable), or profit
declared is less then 6% of total
turnover and total income exceeds the basic exemtion limit.
- When there is profit and such profit is less then 6%
total turnover of such F&O trading; Section 44AD comes into play.
Accordingly Tax Audit u/s44AB will be required if total income (income
from all sources) exceeds the basic exemption limit.
As per section
44AD of the Income Tax Act
Business having total
turnover/sales/gross receipts of less then ₹
2.00 crore shall disclose
atleast 6% of their total turnover as their net business
If net business income disclosed is less then 6% of total turnover and
whose total income exceeds the maximum amount which is not chargeable
to income tax (ie. basic exemption limit)
maintenance of books of accounts u/s 44AA & Tax Audit u/s 44AB
in detail about Section 44AD-Presumptive taxation scheme
off & carry forward of Loss in F&O
from F&O trading are treated as non speculation business loss.
These can be set off against any income other than salary with in the
same financial year.
- If complete F&O loss could not be set
off in one year it can be carried forward & set off in next
to Calculate F&O turnover
carry forward the loss, Income tax return must be filed with in the due
date. A loss can not be carried forward by filing a belated
calculation turnover in derivatives & F&O transactions is
different. Its not calculated in the manner in which other business
turnovers are calculated. It is to be determined as follows:
- The aggregate of favourable and unfavourable
differences (ie. profits and losses) shall be
taken as turnover.
- Premium received on sale of Options is also to be
here to know in detail about calculation of F&O turnover with
- In respect of any reverse trades entered, the
should also form part of the turnover.
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