Introduction:
Futures and options are derivative financial instruments that derive their value from an underlying asset such as stocks, indices, currencies, or commodities. These instruments are popular among investors and traders for hedging, speculation, and portfolio diversification. Talking in layman’s terms you may think FNO i.e. Futures and Options trading like a betting thing but with critical analysis and exquisite knowledge of the trade. You basically bet on the direction in which market will go by studying the factors responsible to it.
Capital gains arise from the sale or transfer of capital assets such as stocks, real estate, mutual funds, etc. The profit or loss is determined by the difference between the purchase price (cost) and the sale price. Whereas, F&O trading involves entering into contracts to buy or sell financial instruments at a future date (futures) or the right to buy or sell the underlying asset at a predetermined price (options). Profits or losses in F&O trading are determined by price movements in the underlying asset. Capital gains are reported under the head “Income from capital gains” only where as Profits or losses from FNO are treated and reported under “Profits and Gains from Business or Professions”.
Reporting in Income Tax Return:
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 is necessary to declare profit/loss from F&O as Business Income under the head Profits & Gains from Business and Profession.
Since FNO income falls under the head PGBP, one has to select ITR-3 for filing the income tax return.
The most important thing in reporting of FNO trades is calculation of turnover. Turnover decides applicability of tax audit for the FNO trader.
Turnover under FNO:
To calculate turnover under FNO, you need to have Statement of Account for trades in FNO in your hands.
Turnover in FNO is the absolute profit.
Absolute profit is determined by ignoring the negative factor of the net result of the trade. Let us understand this in a simple way.
In first transaction A buys 100 units of options at Rs.300 and sells at Rs.290.
In another transaction A buys 100 units of options at Rs.200 and sells at Rs.250.
Now the calculation of turnover will be like following:
| Particulars | Transaction | Gain/(Loss) |
| Option 1 | (290-300)*100 | (1000) ignore negative sign |
| Option 2 | (250-200)*100 | 5000 |
| Turnover/Absolute Profit | 6000 |
Calculation of turnover is important to determine tax audit applicability whereas only the actual profit is considered as income for calculating tax liability. In the above example, Rs.4,000 will be the actual profit which is subject to taxation.
Tax Audit Applicability:
Tax audit provisions are applicable to FNO trading as those are applicable to other businesses as pe Section 44AB of the income tax Act, 1961.
If trading turnover is upto Rs.2 Cr.
- If the loss or profit from F&O is less than 6% of the Trading Turnover and we have opted out of the presumptive taxation scheme in any of the immediate 5 previous years, and our total income exceeds the basic exemption limit, then Tax Audit will be applicable [Section 44AB(e)]
- However, if the taxpayer has a profit equal to or greater than 6% of the Trading Turnover, then Tax Audit is not applicable.
If trading turnover is more than Rs.2 Cr. Upto Rs. 10 Cr
- If the Trading Turnover is between the range of Rs 2 Cr upto Rs 10 Cr and more than 95% transactions are carried out electronically, then tax Audit is not applicable, regardless of whether there is a profit or loss. (Section 44AB)
If trading turnover is more than Rs. 10 Cr
- Tax Audit is applicable irrespective of the profit or loss as per Section 44AB(a).
Maintaining books of accounts for an FNO trader is dealt as per the provisions of Section 44AA.
New Tax Regime for FNO Traders:
All the provisions that apply to a normal tax payer having income from PGBP opting for new tax regime also applies to FNO trader as well. He may not be able to claim deductions or carry forward losses. It will also be prohibited to set off brought forward losses. A form 10IE will have to be filed to determine the old or new tax regime option.
Conclusion:
Taxpayers must properly report their F&O losses in their income tax return to avoid potential discrepancies and penalties. Accurate calculations are necessary to report all the transactions in FNO as one may make mistake in calculations of FNO turnover. Audit and Accounts maintaining becomes an important aspect of an FNO traders compliances as per the applicable provisions. Since, the FNO is treated as a normal non-speculative business the tax rates that are applicable to income from FNO are based on the slab rates. Most importantly one must be able to bifurcate between intra-day FNO trading and normal or delivery based FNO trading as computation for all of these differs in significant way.
About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.