TAXATION OF FUTURE AND OPTIONS TRADERS

TURNOVER, TAXATION & RETURN FILING OF F&O TRADERS

Lockdown triggered an influx of new investors to trading (trading in equity, futures and options on Stocks, Currencies and Commodities).

The daily average trading volume is around 8.5 million, representing an increase of 80% from the previous level

Unfortunately, there are many traders who do not know about how to tax these transactions

In this article we are talking about turnover taxation and return filing of traders who trades in F&O, if you are a trader in F&O and facing difficulties to understand how to tax and file return to income tax authorities of their trading transactions, read on.

You must declare your gains (losses) from trading in F&O

Taxpayers, particularly salaried individuals who involved in trading, make the error of failing to mention these in their tax returns.

While this may occur due to a lack of knowledge, you must record all of your sources of income.

The tax authorities may send you a notice for non-compliance. And, as we’ll see below, declaring losses has tax advantages!

Carry forward business loss

You can carry forward any business loss incurred if you file your income tax returns on time by July 31st for non-audit cases and October 31st for audit cases.

Speculative losses can be carried forward for a period of four years and offset only against speculative gains made during that time.

Non-speculative losses can be offset against any other business income in the same year, except salary income. As a result, they can be set-off against bank interest, rental income, and capital gains, but only in the same year.

You can carry forward non-speculative losses for up to 8 succeeding years; however, keep in mind that carried forward non-speculative losses can only be offset against non-speculative gains made in that period.

Non – speculative Business income

Section 43(5) of the Income Tax Act of 1961 classifies income from trading futures and options on recognised exchanges (stock, commodity) as non-speculative business income.

Because business income does not have a fixed tax rate, you must add non-speculative business income to all other sources of income and pay taxes according to the slab that applies to you.

Assume that a trader/retailer earns Rs 6,00,000 from F&O trading. In addition, assume he makes Rs.19,00,000/- from his retail company. As a result, his total income for the year is Rs 25,00,000 (Rs 6,00,000 + Rs 19,00,000), and his tax liability is as follows:

SL NO SLAB TAXABLE AMOUNT TAX RATES TAX AMOUNT
1 0 TO 2,50,000 2,50,000 0% NIL
2 2,50,000 TO 5,00,000 2,50,000 5% 12,500
3 5,00,000 TO 10,00,000 5,00,000 20% 1,00,000
4 10,00,000 TO 25,00,000 15,00,000 30% 4,50,000
TOTAL 5,62,500

 ITR FORMS

Income from trading futures and options classified as non-speculative business income as discussed above, necessitate filing an ITR 3 or ITR 4, which would necessitate the assistance of a CA. This can be a significant additional time and cost, particularly for salaried individuals who may have previously relied on the simple ITR 1 or ITR 2 forms.

TURNOVER

The turnover in the case of futures and options is computed in the following manner.

According to Paragraph 5 of the ICAI’s Guidance Note on Tax Audit.

  1. a) Turnover is calculated as the sum of favourable and unfavourable differences.
  2. b) The premium collected on option sales is also factored into turnover.
  3. c) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover

Examples of computation of turnover of F&O

Symbol

 

Quantity

 

Buy Value

 

Sell Value

 

Realized P&L

 

Turnover
Nifty 15000 CE 50

(1 lot)

6000 10500 4500 15000
SBI 400 PE 1500

(1 lot)

30000 45000 15000 60000
Infosys 1500 PE 600

(1 lot)

12000 3000 (9000) 12000
Bank Nifty 35000 FUT 1500 30000 45000 15000 15000
Bank Nifty 34000 FUT 1000 25000 20000 (5000) 5000
TOTAL         107000

 

AUDIT AND RETURN FILING

We know that most taxpayers must file their returns by July 31st, but those who are audited must file their returns by October 31st.

As per section 44AB of the Act, An assessee whose turnover exceeds 1 crore during previous year is subject to the audit, Vide Finance Act, 2021, the limit has been increased to 10 crores w.e.f. FY 2020 – 21, provided the following conditions are fulfilled:

– aggregate of all amounts received including the amount received for sales, turnover, gross receipts during the previous year, in cash, does not exceed 5% of total amounts received; and

– aggregate of all payments made including the amount incurred for expenditure, in cash, during the previous year does not exceed 5% of the total payments made.

Tax audits under Section 44AB are also required for taxpayers whose turnover during previous year does not exceed 2 crore and who choose the presumptive scheme of taxation but declare an income that is lower than 8%/6% of turnover and that exceeds the maximum amount not chargeable to tax, which is Rs 2.5 lakhs (after setting off F & O losses or other business losses if any). That means if your total income (Salary + Business income + capital gain) is less than Rs 2.5lakhs (minimum tax slab), you have no tax liability, and hence audit not required. But it is advisable if losses are substantial to file the return with an audit.

Trading as a business income under section 44AD is producing a lot of problems for the retail trading community. The difference between turnover in a regular firm and turnover when trading on the markets is huge. Unlike in a regular firm, where a fixed margin is guaranteed every time, a transaction is made, there is no such guarantee in the trading sector. This section is an unnecessary burden that indirectly gets most small retail traders to have their books audited.

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