F&O Trading Taxation: Business Income, Turnover and ITR Filing for Options Traders

Key Takeaways

1. Income from F&O trading is generally treated as non-speculative business income and taxed at your applicable slab rate.
2. Turnover for F&O trading is generally calculated using the absolute values of favourable and unfavourable differences from trades, along with the applicable treatment of option premiums. It is not simply the full contract value.
3. A tax audit may apply depending on your turnover, the share of cash transactions and the tax scheme you choose.
4. While F&O losses are normally eligible to be carried forward for up to eight years, this can be eliminated if your ITR filing gets late. This may change as per regulatory changes.
5. F&O traders reporting income under business and profession generally use ITR-3, subject to the applicable return-filing rules and their individual circumstances.

Many options traders track every rupee of profit and loss during the year. Then tax season arrives, and the questions start. Is this capital gain or business income? Which form should I use?

The tax treatment of F&O trading differs  from that of buying and holding stocks. Understanding the basic rules can help you report your income correctly while filing your return. 

Through this blog, you can understand how F&O income is taxed, how turnover is worked out and when an audit may apply.

How Is F&O Trading Income Taxed?

Under the Income Tax Act, income from F&O trading on a recognised stock exchange is generally treated as non-speculative business income. This applies to both futures and options, whether on stock or index contracts.

F&O profits are generally reported as business income rather than capital gains. The taxable income is included in your total income and taxed according to the applicable tax rules and tax regime.

Intraday stock trading is different. It is generally treated as speculative business income, with its own set-off rules.

Here's a simple way to compare the two:

How Is Turnover Calculated for Options Traders?

For F&O trading, turnover for tax audit purposes  is not simply the full value of contracts traded. It is generally calculated using the absolute values of favourable and unfavourable differences from transactions, along with the applicable treatment of option premiums. The calculation should follow the relevant ICAI guidance.

Assume these three trades have the following profit and loss differences, and no additional adjustment is required for option premiums:

• Transaction 1 : Profit of Rs. 12,000
• Transaction 2 : Loss of Rs. 8,000
• Transaction 3 : Profit of Rs. 5,000

The turnover for this simplified example would be ₹25,000 (₹12,000 + ₹8,000 + ₹5,000). The net gain would be ₹9,000 (₹12,000 − ₹8,000 + ₹5,000).

When Does a Tax Audit Apply?

A tax audit depends on your turnover and how you choose to declare income.

• Under the regular tax-audit provisions, a tax audit generally applies when business turnover exceeds ₹1 crore, subject to the applicable conditions and exceptions.
• The turnover threshold can increase to ₹10 crore when cash receipts and cash payments each do not exceed 5% of the relevant totals. Whether this threshold applies depends on your actual transactions and the applicable rules.
• Special rules may apply if you use a presumptive taxation scheme and later declare income below the prescribed amount. The audit requirement depends on the scheme, your eligibility and the applicable conditions.

If your case is close to any of these limits, speak with a chartered accountant.

What Expenses Can Options Traders Claim?

Since F&O income is generally treated as business income, eligible expenses incurred for the trading activity may be deductible, subject to the applicable tax rules and supporting records.

• Brokerage and exchange transaction charges
• Securities Transaction Tax (STT) paid on F&O trades
• Internet bills and research tool subscriptions used for trading
• Depreciation on a laptop or computer used for trading
• Keep invoices for every expense you claim.

Common Doubts About F&O Trading Taxation

Can F&O losses be set off against salary income?

No. A non-speculative business loss from F&O trading generally cannot be set off against salary income. It may be set off against eligible income under other heads in the same year, subject to the applicable rules. Any eligible unadjusted losses can be carried forward for up to eight years and set off against business income.

Do I need to file an ITR if I made a loss in F&O trading?

If you want to carry forward an eligible F&O business loss, you generally need to file your return by the applicable due date. A late return may affect your ability to carry forward the loss. Whether you must file a return also depends on your circumstances and the applicable rules.

Is advance tax applicable on F&O profits?

Advance tax generally applies if your estimated tax payable for the year is ₹10,000 or more, subject to the applicable rules and exceptions. Missing or delaying required installments may result in interest.

What is the due date for ITR filing?

The due date for ITR filing depends on your taxpayer category and whether a tax audit applies. July 31 is a general due date for many non-audit individual cases, while October 31 is a general due date for many audit cases. These dates may change through official extensions, so check the Income Tax Department portal for the relevant tax year.

How mastertrust Helps With F&O Trading and Tax Records

mastertrust offers a trading and demat account on mastertrust.co.in that lets you trade futures and options on stocks and indices from one platform.

You can use the available  contract notes, ledger and profit and loss statements from the mastertrust platform. You or your chartered accountant can use these records when calculating turnover, reviewing eligible expenses and completing your ITR filing.

If you are new to derivatives, you can read about how futures and options work. You can also go through our guide on the new tax regime vs old tax regime before choosing a regime.

Final Thoughts

Income from F&O trading is generally treated as non-speculative business income. Turnover for tax-audit purposes is calculated using the applicable rules for profits, losses and option premiums, while the appropriate ITR form depends on your circumstances and the applicable filing requirements.

Keep your records in order, pay advance tax where it applies, and complete your ITR filing on time to protect your loss carry-forward.

Frequently Asked Questions (FAQ)

1. Is F&O trading income treated as capital gains?

No. Income from F&O trading is generally treated as non-speculative business income and taxed at your slab rate.

2. Which ITR form should options traders use?

F&O traders reporting income under business and profession generally use ITR-3, subject to the applicable return-filing rules and their individual circumstances.

3. How is option turnover calculated?

Options turnover is generally calculated using the absolute values of favourable and unfavourable differences, along with the applicable treatment of option premiums, in accordance with the relevant ICAI guidance.

4. Can I claim brokerage as an expense?

Yes. Brokerage, exchange charges and STT paid on F&O trades can generally be claimed, subject to applicable rules.

5. What happens if I miss the ITR filing due date with an F&O loss?

No, you lose the ability to carry forward F&O losses if you file your ITR after the due date.

6. Where can I get my F&O profit and loss statement?

You can download your profit and loss statement and contract notes from the mastertrust platform for your ITR filing.