Income Tax on Options Trading

Income Tax on Options Trading

Trading in futures and options on stocks, currencies, and commodities is often taxed. However, many small traders must declare their losses from F&O trading during ITR filing due to a lack of awareness and understanding of tax charges, so traders can better utilise their trade. Let's take a look at the key factors to remember when it comes to income tax on options trading.

What is Derivatives Turnover? 

Turnover is determined as the sum of the positive and negative figures for the Futures section. It doesn't matter if the difference is favorable or negative. These data are added together, and the turnover is computed. Premium is to be included in turnover when it comes to Options.

Consider the examples below:

  • If a client purchased and sold one lot of RIL Futures and made a profit of Rs.1,25,000.
  • If a client purchased and sold one lot of TCS Futures, the loss would be Rs.25,000.
  • If the client purchased one lot of INFY 1400 CE at a premium of Rs.15,000.
  • If the customer sold one lot of ITC 450 PE for a premium of Rs.32,000.
  • The entire turnover is computed as Rs.125000 (profit in RIL) + 25,000 (loss in TCS) + buy premium of INFY CE Rs.15,000 + sold ITC PE premium of Rs.32,000.
ContractBuy RateQtyBuy ValueSell RateQtySell ValueTurnover
RIL10002502500001500250375000125000
TCS

2000

125

250000

1800

125

225000

-25000

INFY 1400 CE

50

300

15000

-

-

-

-15000

ITC 450 PE

-

-

-

10

3200

32000

32000

Total Turnover

-

-

-

-

-

-

1,97,000

Disclaimer: The information provided above is for general informational purposes only and should not be considered as tax advice or a substitute for professional guidance.

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Table of Content

  1. What is Derivatives Turnover? 
  2. Tax Advantages Include the Ability to Set Off and Carry Forward Losses
  3. How Do You Claim Expenses from Futures and Options Trading?
  4. Audit Requirements While You are Trading in Futures and Options 
  5. How to Calculate the Total Turnover?

Tax Advantages Include the Ability to Set Off and Carry Forward Losses

One of the most essential reasons people should engage in futures and options trading is to recover losses. 

If the firm loses money, you may always modify it for profits from other sources, such as rental revenue, interest income, and so on, minus any wage income.

Unadjusted losses can be carried forward for an additional eight years. They can, however, only be adjusted from non-speculative income in the future (F&O trading loss is considered non-speculative, whereas intraday stock trading loss is deemed speculative).

How Do You Claim Expenses from Futures and Options Trading?

One of the most advantageous aspects of filing income tax returns as a company is that you may claim business expenses. Brokerage, broker's commission, subscription cost, telephone cost, interest expenditures, consultant fees, salaries of personnel supporting the firm, and so on are some of the expenses. These expenses are deductible when determining taxable income. However, keeping accurate records of all spending and bills is vital. Furthermore, any cash costs above Rs.10,000 are typically not permitted.

Audit Requirements While You are Trading in Futures and Options 

Tax audits for futures and options (F&O) are relevant in the following two cases:

1. The turnover exceeds Rs.10 crores (the audit application threshold was raised from Rs.5 crores to Rs.10 crores in Budget 2021). Because 95% of transactions are done digitally, the F&O threshold of Rs.10 crores applies. As a result, the conventional audit threshold of Rs.1 crore does not apply to F&O.

2. An audit is required only if a taxpayer declared income at a presumptive rate (Section 44AD) in any of the previous five years but wishes to declare losses or income at a rate less than the presumptive rate in the current year, provided his total income exceeds the basic exemption limit.

How to Calculate the Total Turnover?

A simple approach calculates the overall turnover for futures and options trades. It entails summing the absolute values of all positive and negative discrepancies between these derivatives' selling and purchase prices. The absolute difference of each deal, regardless of whether it resulted in a gain or loss, is added together to establish the entire turnover. 

This total turnover statistic is critical for tax and regulatory compliance since it provides a full perspective of the volume and value of transactions conducted over time. It aids in financial reporting and compliance with relevant rules by analyzing the amount of trading operations done in futures and options markets.

Conclusion
To prevent penalties and notifications from the IT department, if you are an intraday trader, declare all your gains and losses when completing your income tax returns. If determining your tax liability becomes complicated, seek the advice of an experienced Chartered Accountant. Remember, it's also essential to choose a reliable stock market app and simultaneously check your income tax on options trading before making any trading decisions.

FAQs on Income Tax on Options Trading

Trading in Futures and Options requires auditing accounts for over Rs.10 crore turnovers and applying a presumptive taxation scheme under Rs.2 crore, with taxable income at 6% of total turnover.

An equity option's short-term capital gain or loss is taxed as income. Gains and losses are taxed as capital gains if they are long-term.

According to the Revenue Tax Act, you must record futures and options revenue as income from a company or profession, regardless of the frequency or number of transactions.

Frequent options traders may be classified as securities traders for tax purposes, potentially allowing deductions of trading-related expenses as business expenses. However, meeting these criteria can be rigorous and require detailed record-keeping.

It's highly advisable to consult a tax professional or accountant with experience in securities and options trading. Tax laws can be complex and subject to change, and a professional can help ensure compliance and optimise your tax situation based on your trading activities.