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Income Tax On Transactions Of Future And Options

Taxation of shares & securities is considered one of the most complicated & confusing topics for most of the taxpayers. In this article, we are going to understand the income tax treatment of Future and Options.

In the taxation of shares and securities, income earned from trading in Futures and Options is to be compulsorily treated as Business income. The profits & losses arising from Future & Options are assessed under the head “Income from Business or Profession“.

Why is Future & Options considered as Business income?

Section 43(5) of the Income Tax Act, 1961 clearly states that any transaction that takes place during Future & Options trading is to be considered as the non-speculative transaction. Hence, its treated as normal business income.
Since it is non-speculative business, the taxpayer can claim any losses from F&O can be set off against any other income other than salary. It can also be set off against any income earned from speculative business. but vice-versa is not possible. We can not set offa speculative loss against non-speculative income.
Losses of F&O, if not fully set off can be carried forward for 8 Assessment Years.
 
Turnover calculation of Futures & Options:
The turnover calculation is one of the most important aspects to determine if the person is required to maintain books of account and to get them audited by Chartered Accountant as per section 44 AB of Income-tax Act, 1961. 

A) Turnover calculation of Futures – Total of the positive and negative difference of sale value and buy value.

Let's see the following example to get a clear idea about the computation of turnover in case of Futures.

a>Trade details – Sale value of Future contract is Rs. 20,000 and Buy value is Rs. 10,000 in this case turnover will be the difference of sale value and buy value that is Rs. 20,000 -
Rs.10,000 = Rs.10,000/-

b> Trade details - Sale value of Future contract is Rs. 10,000 and buy value is Rs. 20,000 . Here taxpayer has incurred a loss of Rs.10,000/- but for the turnover purpose, it will be still considered turnover of Rs.10,000/- though, taxpayer has actually incurred loss.           

From the above examples, we can say that we need to consider negative differences same as we consider the positive differences for calculation of turnover.

B) Turnover calculation of Options –  like Futures , Options turnover is also calculated in the same manner ie. Total of positive and negative difference of sale value and buy value. but one more value is added to the calculation that is sale value.

Example : Trade details – Sale value of Future contract is Rs. 20,000 and Buy value is Rs.10,000. In this case, turnover will be the difference of sale value and buy value plus sale value of contract that is Rs. 20,000-Rs.10,000+ Rs. 20,000 = Rs. 30,000/-


Tax Audit Applicability- Tax audit is required to be done if any one of the conditions is satisfied by the F&O trader:
a) If turnover of the business exceeds Rs.1 crore  or

b) A person is covered under the presumptive scheme of taxation under section 44AD but offers profit from business lower than 6% or 8% as the case may be and his income exceeds maximum amount not chargeable to tax.

(Under the presumptive scheme, minimum 6% profit for Non-Cash turnover and 8% profit for Cash turnover is required to be considered)






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