How to Report F&O Trading in Your Income Tax Return Online | Espresso

Futures and Options Trading Income Tax

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.

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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:

  1. Call Options that allow the buyer of the contract to buy the underlying asset at a set date and price.
  2. 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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Frequently Asked Questions

  • 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:

  1. Total favourable trades
  2. Total unfavourable trades
  3. Total premiums received from selling Options
  4. 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.