In recent years, there has been a marked increase in derivatives trading, with many new traders opting for trading in futures and options. In fact, many people have started identifying the earning opportunities offered by futures and options trading and are turning trading into their full-time profession along with their regular jobs.
Published on 01 March 2023
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However, one aspect that can be a little overwhelming for taxpayers is the taxation process. In this article, we will talk about the income tax implications for futures trading and options trading.
But first, let us understand what futures and options are in the stock market.
What are Futures?
Futures are derivatives contracts where the buyer is obliged to buy an asset, or the seller is obliged to sell an asset at a set price and date in the future. Futures trading is used to speculate on the direction that the price of the underlying asset can take.
What are Options?
Options are derivatives contracts where the buyer of the contract pays a premium to avail of the rights extended by the contract. There are two types of options trading contracts:
Call Options that allow the buyer of the contract to buy the underlying asset at a set date and price.
Put Options that allow the buyer of the contract to buy the underlying asset at a set date and price.
Futures and Options Taxation
Any income earned via Futures and Options trading attracts tax. However, the taxation process can seem overwhelming to new traders.
The first thing you need to remember is that income from futures trading and options trading is categorized as business income unless you are only entering into two or three trades in a year. Business income allows you to deduct expenses from the income and file returns accordingly. Further, you can segregate this income into speculative and non-speculative income. Also Read: F&O Stock List with Lot Size
Understanding Profits and Losses under Section 43(5)
As per Section 43(5), futures and options transactions are considered to be non-speculative in nature. In other words, profits made from futures and options trading are taxed similar to the earnings from other business activities. Therefore, you can deduct expenses from your income to determine taxable income.
If you suffer losses in non-speculative futures trading or options trading, then you can adjust these losses against income from other sources like rent, interest, etc. You can also carry forward the losses and adjust them against non-speculative income for up to eight years.
Treating F&O Trading Income as Business Income
On treating F&O income as business income, the following points must be kept in mind:
Any expense incurred around administration can be deducted as Expense from Income
Securities Transaction Tax or STT will be deemed as a deductible too
Losses from futures and options trading can be adjusted against income from other sources to arrive at the net taxable income
The losses that have not been adjusted can be carried forward for up to eight years
If the income from futures and options is more than ₹1 crore, then you need to get your accounts audited by a certified chartered accountant.
If you treat your income from F&O trading as capital gain, then STT will be deemed as a deductible, and any loss will be categorized as short-term capital loss.
To calculate the F&O turnover, you need to take the following aspects into consideration:
Total favourable and unfavourable trades
Total premiums received due to the sale of Options
Difference in reverse trades
Filing Returns for Futures and Options Trading Income
If you are treating F&O trading income as business income, then you need to fill Form ITR3. If you are selecting the pre-emptive scheme of tax, then you need to fill Form ITR4. For F&O income being treated as capital gains, Form ITR2 needs to be filled.
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Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
If you have recently started trading in the stock market, the chances are that you have understood its basics by now. Trading in the stock market basically includes buying and selling the shares listed on the stock exchanges (National Stock Exchange and Bombay Stock Exchange) to generate profits.
If you are treating the F&O income as business income, then you need to fill Form ITR3
If you are selecting the pre-emptive scheme of tax, then you need to fill Form ITR4
If you are treating the F&O income as capital gains, then you need to fill Form ITR2
If you book losses in futures and options trading, then you can adjust the losses against income made from other sources like interest, rent, etc. You can also carry forward the losses for up to eight years and adjust them against non-speculative income earned.
To calculate the futures and options turnover for income tax purposes, you need to take the following aspects into consideration:
Total favourable trades
Total unfavourable trades
Total premiums received from selling Options
The total difference in reverse trades that you may have incurred
If you categorize your futures and options income as business income, then you can claim deductions on the following expenses:
Office rent
Internet charges
Phone charges
Travel expenses, etc.
Related Articles
How to Trade in Futures and Options?
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
If you have recently started trading in the stock market, the chances are that you have understood its basics by now. Trading in the stock market basically includes buying and selling the shares listed on the stock exchanges (National Stock Exchange and Bombay Stock Exchange) to generate profits.
If you are treating the F&O income as business income, then you need to fill Form ITR3
If you are selecting the pre-emptive scheme of tax, then you need to fill Form ITR4
If you are treating the F&O income as capital gains, then you need to fill Form ITR2
If you book losses in futures and options trading, then you can adjust the losses against income made from other sources like interest, rent, etc. You can also carry forward the losses for up to eight years and adjust them against non-speculative income earned.
To calculate the futures and options turnover for income tax purposes, you need to take the following aspects into consideration:
Total favourable trades
Total unfavourable trades
Total premiums received from selling Options
The total difference in reverse trades that you may have incurred
If you categorize your futures and options income as business income, then you can claim deductions on the following expenses:
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