Futures and Options, or simply F&O trading, has emerged as one of the most popular ways of derivative trading in India. It helps you hedge your positions, speculate on the movement of the market, and manage risks quite efficiently. However, while the possibility of profit is huge, it basically means that the taxation rules related to F&O trading are very important to understand to avoid any kind of compliance issues with the Income Tax Department. Besides that, this article basically touches upon the most important aspects of taxation of F&O trading in India and pinpoints the different treatments of profit and loss under various acts of tax laws of India.

What is F&O Trading?

Wondering what is F&O trading ? F&O trading is actually buying and selling of derivatives, which are essentially contracts deriving their value from a fundamental asset such as stocks, indices, or commodities. This requirement was felt in view of the fact that this market includes a lot of complex strategies and market movements. However, like all forms of trading, the money made by F&O trading does not go scot-free; it is responsible for taxation; thus, traders should know about this in order to accommodate the provisions of the Indian Income Tax Act.

Classification of Profit derived from F&O trading

Income from F&O trading in India is treated as a business income according to the Income Tax Act. It is treated as business income whether the trades are frequent or occasional. As it falls within the ambit of business income, a trader has to maintain adequate books of accounts and may be liable for tax audit if his total turnover exceeds the prescribed limits. Understanding the classification of this income helps explain the applicability on tax rates and the requirement to maintain records for filing returns.

Tax Rates on F&O Trading Income

Since F&O trading income is treated as a business income, it is taxed as per the trader's income slab:

• People Under 60 Years of Age:

• Up to Rs. 2.5 lakh: No tax
• Rs. 2.5 lakh to Rs. 5 lakh: 5%
• Rs. 5 lakhs to Rs. 10 lakhs: 20%
• Above Rs. 10 lakh: 30%

• Senior Citizens (60-80 Years): Exemption up to Rs. 3 lakh, other slabs same as above.
• Super Senior Citizens: Above 80 Years: Exemption up to Rs. 5 lakh.

Also, there is an additional cess of 4% on the total tax payable for health and education.

Treatment of Losses in F&O Trading

Losses from F&O trading can be adjusted against other income, hence a tax benefit. How losses can be set off is as follows:

• Business Loss: Losses derived from F&O trading are considered business losses and can thus be set off against other incomes, excluding salary. For example, if you incur a loss from F&O trading, then the same can be adjusted against rental income, interest income, or other business income.
• Carry Forward of Losses: In case these losses cannot be set off in the same assessment year, then the same can be carried forward up to 8 years. Such losses, however, are allowed to be set off only against future business income.

Preferably, the return of income should be filed well before the due date so that the losses can be carried forward. A belated return may result in the loss of opportunity for carrying forward the loss.

Advance Tax Liability for F&O Traders

F&O traders are also required to pay advance tax if their estimated tax liability is Rs. 10,000 or more in a financial year. Advance tax is to be paid in four instalments during the year:

• That would be 15% by June 15th.
• 45% by Sept. 15
• 75% no later than December 15
• 100% by March 15

If advance tax is not paid in time, it may attract interest penalties under Sections 234B and 234C of the Income Tax Act. Hence, it is very important for the traders to estimate their taxable income arising from F&O trading and pay the same in time to avoid penalties.

Conclusion

The taxation rules for F&O trading in India need to be identified for regulation and efficient tax planning. The trader should understand how F&O trading income would be classified; the requirements concerning recording; and how a tax audit is required. Keeping track of the profit and loss and advance tax will help a trader efficiently manage his tax liabilities while focusing on trading strategies. Designed to help you arrive at better judgment and insight, thereby keeping F&O trading activities in proper alignment with the tax laws of India, are aware of the following rules.