Introduction
F&O (Futures and Options) trading can be complex, especially when it comes to taxes. In recent years, the rules for calculating turnover from F&O trades have changed, making it easier for traders to understand their tax obligations. Whether you’re new to F&O trading or just looking for clarity on the latest tax laws, this guide will simplify the key points.
What’s New in F&O Taxation?
Previously, the turnover from F&O trades included the option premium, which often inflated figures, leading to mandatory tax audits for traders whose turnover exceeded Rs 10 crore. Now, only the differences between buying and selling prices are considered, which means lower turnover figures and fewer audits.
Reporting F&O Income in Your ITR
If you’re involved in F&O trading, it’s crucial to report this in your Income Tax Return (ITR). Even if you’ve made losses, reporting them can help you carry them forward to offset future gains. F&O income is considered non-speculative business income, so it should be reported under the “Profits & Gains from Business and Profession” (PGBP) head in ITR-3.
Which ITR Form Should You Use?
For F&O income, you need to file ITR-3, as it is the designated form for business income. This form allows you to report both profits and losses from your trades.
Taxability of Other Investments
Apart from F&O trading, if you’re also involved in intraday trading or long-term investments, the tax rules are different. Intraday trading is treated as speculative business income, while long-term investments are subject to capital gains tax. It’s essential to understand these distinctions to file your taxes correctly.
Do F&O Traders Need to Keep Accounting Records?
If your income exceeds Rs 2.5 lakhs or your turnover exceeds Rs 25 lakhs, you must maintain accounting records. This means keeping trading statements, expense receipts, and bank statements. However, bookkeeping for F&O trading is relatively straightforward.
When is a Tax Audit Required?
A tax audit is required if your F&O trading turnover exceeds Rs 10 crore. However, if your turnover is between Rs 2 crore and Rs 10 crore, and over 95% of your transactions are digital, a tax audit is not necessary.
Further, in case the profit from F&O is less than 6% of turnover then tax audit under Income Tax Act, 1961 would be applicable.
Also, in case there is a loss from F&O then tax audit under Income Tax Act, 1961 would be applicable.
Calculating F&O Turnover
Your F&O turnover is calculated based on the absolute profit or loss from your trades. For example, if you bought and sold options with small losses and gains, only the difference between these transactions is considered in the turnover.
Can You Claim Business Expenses?
Yes, F&O traders can claim expenses related to their trading activities, such as brokerage fees, internet bills, and professional advice. These expenses can be deducted from your F&O income, reducing your overall tax liability. Just ensure you keep proper records and avoid cash transactions exceeding Rs 10,000, as these may not be eligible for deduction.
Should F&O Traders Choose the New Tax Regime?
Under the new tax regime (Section 115BAC), F&O traders can pay taxes based on new lower slab rates. However, you won’t be able to claim deductions like 80C, 80D, etc. Consider your overall financial situation before making this choice, as you can switch back to the old regime only once in your lifetime.
Conclusion
Navigating F&O taxation doesn’t have to be complicated. By understanding the basics and keeping accurate records, you can ensure compliance and make the most of any tax benefits.