What do you mean by Futures and Options?
Futures known as derivatives are nothing but financial instruments, that allow you to purchase or sell any securities or commodities in the future at a specific price. Whereas, an Option is also a derivative that grants you a right to purchase or sell in the future at a specified price.
As per a report published by SEBI, the total number of individuals involved in F&O trading has increased by over 500% as compared to FY 2019, which shows a drastic increase over the past few years. But, many of us struggle while reporting the income in the ITR and claiming the losses.
So we decided to ease some of this pain by explaining the tax implications on F&O in a simple manner as possible:
- Trading in Futures and Options is reported as Business Income and is taxed at normal slab rates depending on the regime you opted.
- Since F&O Trading is a non-speculative business, losses incurred can be adjusted against other business income as well as other income heads except salary.
- In case your losses are not adjusted in the same year, you can carry forward these losses for next 8 financial years and set off the same against business income.
- If you’re reporting F&O trading business, you’re required to file ITR-3.
Let’s go through some instances to better understand F&O taxation:
For example, one of my friends who was engaged in the business of trading in F&O, for the FY 2022-23, had a total income from F&O trading of ₹7,00,000. He had incurred some expenses like Internet Expenses of ₹10,000, a Subscription to a trading magazine of ₹8,000, mobile expenses of ₹ 5,000, he paid rent for the office he used for trading purposes amounting to ₹1,20,000. He also had some salary income amounting to ₹5,00,000.
Let’s see how will his income get taxed in case he opted for New Regime:
Let’s understand one more situation considering losses. For example, an individual is trading in F&O and has incurred a loss of ₹10,00,000. He was also involved in clothing business out of which he made profits of ₹ 4,00,000. He also had some LTCG amounting to ₹3,15,000. Calculate Tax Liability assuming he is paying taxes as per the Old Regime.
Solution: Calculation of Tax Liability:
Losses from Futures and Options trading are set off against Profits from Clothing business. The remaining loss is adjusted interhead against Income from Capital Gains. The unadjusted loss of ₹2,85,000 is eligible for carry forward upto 8 years.
Read more about How to calculate F&O Turnover.
Have questions? Shoot ‘em up.