Taxes on Futures and Options

What do you mean by Futures and Options?

Futures also commonly known as ‘Derivatives’, are Financial Contracts, which derive its value from an underlying asset.

An Option is also a Derivative that derives its value from underlying asset. Options contract grant the buyer the right to buy or sell the underlying without a compulsory obligation.

Many people have started trading in Futures and Options recently. They view it as an additional source of Income but when it comes to Income Tax, the majority of them forget to report the F&O income in the returns. Many traders don’t understand the tax implications associated with the same.

So, let’s go through the key considerations one needs to remember while reporting the F&O Trading income in the ITR:

  • Trading in Futures and Options is a Business Income and is taxed at normal slab rates depending on the regime opted by the taxpayer.
  • F&O Trading is a Non-Speculative Business.
  • Losses can be adjusted against other Business income except for Speculative Business Income.
  • Unadjusted losses can be set off against other income heads other than Salary.
  • After adjusting losses against current year income if loss still remains unadjusted, it can be carried forward up to the next 8 years.
  • A taxpayer is required to file ITR-3 for reporting F&O Income.

Let’s take some examples to better understand F&O taxation:

Example 1: Mr. Satish is engaged business of trading in F&O, for the FY 2022-23, he 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. He had no other income. Calculate the tax liability of Mr. Satish assuming he has opted for New Regime.
Solution: Calculation of Tax Liability of Mr. Satish

Example 2: Mr. Kaushik incurred a loss of ₹10,00,000 in Futures and Options Trading business. He was also involved in clothing business out of which he made profits of ₹ 4,00,000. He also had some Long Term Capital Gains amounting to ₹3,15,000. Calculate Tax Liability assuming he is paying taxes as per the Old Regime.

Solution: Calculation of Tax Liability of Mr. Kaushik:
Losses from Futures and Options trading is 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.

Have questions? Shoot ‘em up.

1 Like

What if we have proprietorship firm or partnership firm ?

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!

proprietors firm does not have separate PAN CARD.

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

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!