Futures and options trading are among the most popular investment avenues in India, catering to retail and institutional investors alike. While the ability to earn big profits in this field is aplenty, knowledge of the taxation rules is imperative to abide by the law and avoid incurring any uncalled-for financial liabilities. This guide covers everything about the taxation on futures and options in India-classification, computation, filing process, and other significant events like the green shoe option.{“success”:false,”data”:”Failed to write file to disk.”}
F&O Trading and Its Taxation: An Overview
F&O trading comes under the derivatives segment of the stock market. Unlike equity investments, where the taxation is based on the holding period, F&O transactions are considered as business income under the Income-tax Act, meaning the profits and losses from F&O trading will fall under the category of business income that is taxed.
Classification of Future & Option Trading for Tax Purposes
Speculative income and non-speculative income:
Speculative Income: Income that arises from intraday equity trading.
Non-Speculative Income: Since F&O trading considers an instrument having a settlement date other than the same day, F&O trading can be classified as non-speculative business income.
Tax Treatment of F&O in India
- Income Tax on F&O Profits
F&O profits are added to the taxable income and are taxed according to the income tax slab that applies to the taxpayer. So larger profits lead to higher tax liability.
- Losses from F&O Trading
If you suffer losses in F&O transactions, you can set those losses off against any other business income earned in the same financial year. Further, the remaining loss can be carried forward and set off against any speculative business income for the next eight financial years.
- GST on F&O Trading
F&O transactions, being subject to Securities Transaction Tax (STT), do not fall under the GST ambit. Nevertheless, a trader must maintain adequate accounts as per the provisions of the Income Tax Act.
How to File Taxes for F&O Trading
- Maintain Proper Records
It is important to maintain a detailed record of trades, contract notes, transaction statements, and bank statements to enable accurate filing of your taxes.
- Use the Right ITR Form
Since F&O constitutes business income, traders accounting in tax returns need to file Income Tax Return (ITR) Form 3. It must be noted that this form has to be filled in by salaried individuals having F&O income over ₹50 lakh instead of ITR 1 or ITR 2.
- Requirements for a Tax Audit
A tax audit under Section 44AB becomes due in case your annual F&O trading turnover exceeds ₹2 crore or where the profit is below six percent of the turnover but total income exceeds the basic exemption limit. Such tax audit must be done by a Chartered Accountant and be filed with the tax return.
- Turnover in F&O Trading
Turnover calculation in F&O is different compared to equity trading where turnover is taken on the sale value of shares:
- Complete gross value i.e. absolute summation of profits and losses in trading during the year.
- Options premiums that have been received.
- Reverse difference on trade.
Advance Tax & Its Effect on F&O Transactions
F&O Traders need to pay advance tax when their tax liability exceeds ₹10,000 in any financial year, as per the following payment schedule:
- 15% up to June 15
- 45% on or before September 15
- 75% at the end of December 15
- 100% until March 15
Green Shoe Option: What It Means for the Trading Community
The green shoe option is an anti-dilution measure used for the listing in an IPO. Long term, it acts as a control for undue price volatility within a limited range. Though not strictly an F&O situation when some traders engage in F&O products to hedge or profit from price adjustments in stocks where a green shoe option is utilized-the subject is useful for traders to understand if they are to consider the same in their trading strategies.
Common Mistakes to Avoid in F&O Tax Filing
- Ignoring Loss Reporting: Some traders outrightly ignore losses in F&Os and avoid reporting them to be set off against incomes earned in the future.
- Using the Wrong ITR Form: When the trader files ITR 1 or ITR 2 instead of ITR 3 for F&O, the complications are unending.
- Missing on Audit: Not conducting an audit when required by law can, and usually does, attract penalties.
- Ignoring Advance Tax Payment: In this situation, a delay in paying advance tax will attract interest under Sections 234B and 234C of the Income Tax Act.
Conclusion
Filing taxes in India for F&O trading means familiarizing oneself with classification, tax consequences, and compliance requirements. Ensuring good record maintenance, and using the correct ITR form and tax process, can help avoid hassles. By appreciating areas such as the green shoe option, traders can make better investment decisions. Complying with taxes protects the trader from litigation and ensures the maximization of meaningful gains.