Taxes on Futures and Options

Income Tax Income from Business or Profession
1

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:
image

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:
image

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.

1 Like
2

What if we have proprietorship firm or partnership firm ?

3

Hi @Private,

If you have proprietorship firm or partnership firm involved in F&O trading business, the losses can be adjusted against any other business income except speculative business income.

Hope this clarifies!

4

proprietors firm does not have separate PAN CARD.

Can Individual deduct loss from Proprietor firm against his income from F&O ?

5

Hi @Private,

Proprietors firm has the same PAN as its owner’s. It does not have a separate PAN.

Yes, an individual can adjust loss from proprietor firm against his F&O income.

Hope this clarifies!

6

I have a few questions

  1. You have mentioned Internet Expenses, Subscription to a trading magazine, mobile expenses etc. What are the other expenses we can show to set off out FnO income? If you can provide a list that would be great.

  2. Can Mr Satish opt for 44AD? If the answer is yes please answer the following questions.

  3. If Mr Satish wants to go for presumptive taxation (44AD) then how much he has to pay in what month? Suppose his income is erratic over the course of the year (some months he incurs losses/ some months he gains) how will 15%, 45%, and 100% income be calculated?

  4. What is the deadline to choose if he wants to opt for 44AD or not?

7

Hi @Vivek_Kumar_Singh

Here are answers to your various queries.

  1. Read about the Expenses a Trader Can Claim in ITR - Learn by Quicko
  2. Yes, Mr. Satish can opt for presumptive taxation since FnO is a business income.
  3. Advance tax liability can be paid in one installment (not quarterly) if opted for presumptive taxation on or before 15 March of the financial year.
  4. Presumptive taxation can be opted for while filing the return.

Hope this helps.

8

Where does the law stand on company formation for the business of F&O. Last I heard its a thin line. You need to register as an NFBC. I have a P&L of >70L, what do I register as to reduce tax liability.

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Hi @dhruvp2

From a taxation perspective, trading in F&O as an individual or a company would have different implications.

As an individual, trading in F&O will be taxed as business income. The applicable tax rate would depend on your total taxable income and the tax slab you fall under. The maximum tax rate would be 30% + cess.

Additionally from a compliance point of view, there is no requirement of filing any forms except ITR. Tax Audit would be only applicable if turnover exceeds 10 crores.

And if you choose to trade in F&O as a company, firstly, doing only trading as a private limited company is not permitted. If you wish to engage in trading activities, you would be required to obtain an NBFC (Non-Banking Financial Company) license, which is regulated by RBI.

And the taxes would be levied as per the corporate tax rate of flat 25%. Additionally, companies are required to pay dividend distribution tax at a rate of 15%, which is applicable when dividends are distributed to shareholders.

For a company, the below compliances are mandatory irrespective of turnover and profits,

  1. Appointment of auditor
  2. Statutory audit
  3. Filing of MCA forms like AOC-4 MGT-7, etc.
10

Hi,
Why have you mentioned that tax audit is mandatory if one has to carry forward losses? Isn’t it not applicable for these situations:

  1. Turnover less than 2 Cr. Incurred loss. Total income less than 2.5 lakhs
  2. Turnover 2-10 Cr. Incurred losses.
11

Hi @Shyam_Abhinandan_AOA

Yes, it is correctly mentioned by you, that, in both scenarios audit is not applicable.

12

I have FnO loss of 62k and STCG of 87k, but in ITR filling, only FnO loss of 31k is being set off against this STCG and remaining taxable STCG is 55k. Why not complete FnO loss is set off and the remaining taxable STCG is 87k minus 62k= 24k?

13

Hi @RD_Prajapati

Can you please Submit a ticket : Help Center so that our team can have a deeper look into your income situation entered on Quicko and answer your question accordingly?

14

In Zerodha futurs and option trading, under turnover breakdown, options turnover is given as 26 lak, but total of sell value is 1.5 crore. which is actual turnover?

15

Hi @Bhagya_S

The turnover you get in the “Tradewise Exit” sheet is the actual turnover from Zerodha.

16

Hello I am a salaried professional , who also does Equity trading. While doing equity trading , I have small term capital gain. Question is : While doing equity trading , I have incurred the below expenses:

  1. House rent
  2. Petrol expense
  3. Internet and telephone expense
  4. Laptop repairs

I would be filing my ITR using ITR -3 . Please guide me on how to claim these expense in the form ?

Lots of thanks to each and every one on helping me . Hearty naamaste :slight_smile:

17

Hi @Saroj

If you have trading income (intraday or F&O) it is considered a business income. You can claim all the expenses which have been incurred for the purpose of your trading business.
Here’s how you can Add Business & Profession Income : Help Center and expenses on Quicko while filing ITR 3.

Also, here’s a read on Expenses a Trader Can Claim in ITR - Learn by Quicko.

Hope this helps.

18

Hello
I need clarifications on few things

  1. I have a business(no gst)
  2. Loss from F & O
  3. Should i take F & O Turnover as same as Sale value?
    4.Should I show Loss from F & O under other operative Income?
19

Hi @Varsha

Please read about Trading Turnover Calculation for Trading Income - Learn by Quicko.
F&O loss is a non-speculative business loss.