For years, F&O traders have faced the challenge of meeting tax audit requirements due to the high turnover thresholds. With recent updates in the calculation of Trading Turnover, these thresholds have changed, offering some relief. This post will break down the essentials of F&O taxation, covering everything from turnover calculation to audit applicability, so you can stay compliant and avoid penalties.
Budget 2024 Update
The Union Budget 2024 has introduced an increase in the Securities Transaction Tax (STT) on Futures and Options:
- Futures: STT increased to 0.02%
- Options: STT increased to 0.1%
This increase in STT is aimed at deepening the tax base. Additionally, there’s a proposed tax on income received from share buybacks.
Reporting F&O Trades in Your ITR
F&O traders must report their gains or losses in their Income Tax Return (ITR). Failing to disclose these transactions can lead to receiving a notice from the tax department, as they now have access to stock market transaction data.
If you've incurred a loss in F&O trading, reporting it can provide tax benefits, including carrying forward the losses to offset future income.
Income Head: Reporting F&O Trading as Business Income
As per Section 43(5) of the Income Tax Act, income or loss from F&O is classified as non-speculative business income. Therefore, it must be reported under the Profits & Gains from Business and Profession (PGBP) head.
Which ITR to File for Reporting F&O Income?
F&O income should be reported in ITR-3, which is designated for individuals with business income. If you’re using a tax filing service, the appropriate form will often be auto-selected based on your income details.
Taxability of Other Investments
- Intra-day Trading: Classified as a speculative business and must be reported separately from F&O trading.
- Short-Term Trading in Equity: Can be treated as either business income or capital gains depending on the frequency and volume of trades.
- Long-Term Equity Investments: Treated as capital gains.
Should F&O Traders Maintain Accounting Records?
F&O trading is considered a business, so maintaining proper accounting records is essential if:
- Your income exceeds Rs 2.5 lakhs, or
- Turnover exceeds Rs 25 lakhs in any of the three preceding years.
Keep your trading statements, expense receipts, and bank account statements organized, as these will suffice for most accounting needs.
Tax Audit Applicability for F&O Trading
Tax audit applicability depends on the turnover and other conditions. Here's a detailed breakdown:
| Turnover Range | Profit Condition | Tax Audit Applicability | Section Reference |
|---|---|---|---|
| Up to Rs 2 Cr | Profit < 6% | Applicable if opted out of presumptive scheme in last 5 years and total income > exemption limit | 44AB(e) |
| Up to Rs 2 Cr | Profit ≥ 6% | Not Applicable | 44AD(1) |
| Rs 2 Cr - Rs 10 Cr | Digital transactions > 95% | Not Applicable | 44AB(a) |
| Over Rs 10 Cr | Any | Applicable irrespective of profit or loss | 44AB(a) |
How to Calculate F&O Turnover?
Turnover is calculated based on the absolute profit, which is the sum of positive and negative differences:
| Particulars | Calculation | Amount |
|---|---|---|
| Futures | (Sell Price - Buy Price) * Quantity | 1000 |
| Options | (Sell Price - Buy Price) * Quantity | -2000 (negative ignored) |
| Total Turnover (Absolute Profit) | 1000 |
Note: The calculation for options turnover has been updated. Previously, turnover included "Absolute Profit + Premium on Sale of Options." Now, it only considers positive and negative differences.
Illustration Example:
Let's consider an example with Ashu:
Ashu's Scenario:
- Salary Income: Rs 15 lakhs
- Trading Turnover: Rs 30 lakhs
- Loss from F&O: Rs 3 lakhs
- Brokerage and other expenses: Rs 1,35,400
| Expense | Amount |
|---|---|
| Brokerage Enrollment Charges | Rs 5,000 |
| Brokerage Charges Paid | Rs 98,000 |
| Telephone Expenses | Rs 18,000 |
| Internet Costs | Rs 14,400 |
| Total Expenses | Rs 1,35,400 |
| Income/Expense Head | Amount |
|---|---|
| Salary Income | Rs 15 lakhs |
| Rental Income | Rs 3.5 lakhs |
| Interest Income | Rs 80,000 |
| Loss from F&O Trading | Rs 4,35,400 (including expenses) |
| Total Taxable Income | Rs 15 lakhs (after adjusting non-speculative loss) |
| Loss to be Carried Forward | Rs 5,400 (-4,35,400 + 3,50,000 + 80,000) |
Caution: Business losses cannot be adjusted against salary income. In this scenario, since Ashu's total income exceeds the basic exemption limit and his declared business loss is lower than the presumptive rate, a tax audit is mandatory.
Key Points for F&O Traders
- Advance Tax: Pay advance tax if your expected income exceeds Rs 10,000.
- Expenses Deduction: Only claim expenses directly related to your trading business.
- New Tax Regime: F&O traders may opt for the new tax regime under Section 115BAC but cannot claim deductions under Chapter VI-A.
Final Notes
Properly reporting F&O trades and ensuring compliance with tax audit requirements can save you from penalties and help optimize your tax liabilities. Keep track of your turnover and profit margins, maintain accurate records, and consult with a tax professional if needed to navigate the complexities of F&O taxation.
