TAX ON F&O TRADING- INCOME TAX APPLICABLE ON F&O TURNOVER

Are you trading in Futures and Options (F&O) or plan to start trading in them? If the answer is yes, you must understand the tax implications associated with F&O trading in India. You may make X% profits, but the net profit (minus tax) may be lower.

Unless you know the tax implications, you will not know your net returns and cannot conclude if you are doing well in F&O trading. On that note, let us discuss everything you need to know related to taxation in F&O.

What is turnover in F&O?

Turnover in F&O refers to the total value of all executed trades within a specific period in the F&O segment of the stock market. It represents the combined value of both buying and selling transactions for futures and options contracts - it could be a positive or negative value. These values are aggregated, and the turnover is calculated. With respect to Options, Premium is to be included in turnover.

Let us take an example to understand F&O Turnover

Assume you make the following F&O trades:

Futures Contract Trades

• Buy Nifty Future at Rs 10,000 and sell at Rs 10,200 (1 lot = 75 units).
• Buy Bank Nifty Future at Rs 20,000 and sell at Rs 19,500 (1 lot = 25 units).

Options Contract Trades

• Buy 1 lot of Nifty Call Option at a premium of Rs 100 and sell at a premium of Rs 120 (1 lot = 75 units).
• Write (sell) 1 lot of Nifty Put Option at a premium of Rs 80 and buy it back at a premium of Rs 60 (1 lot = 75 units).

Here is the calculation of turnover for Futures Contracts:

Nifty Future Trade

• Buy Price: Rs 10,000
• Sell Price: Rs 10,200
• Lot Size: 75
• Profit: (10,200 - 10,000) * 75 = Rs 15,000

Bank Nifty Future Trade

• Buy Price: Rs 20,000
• Sell Price: Rs 19,500
• Lot Size: 25
• Loss: (20,000 - 19,500) * 25 = Rs 12,500

Here is the calculation of turnover for Options Contracts:

Nifty Call Option Trade

• Buy Premium: Rs 100
• Sell Premium: Rs 120
• Lot Size: 75
• Profit: (120 - 100) * 75 = Rs 1,500

Nifty Put Option Trade

• Write Premium: Rs 80
• Buy Back Premium: Rs 60
• Lot Size: 75
• Profit: (80 - 60) * 75 = Rs 1,500

Final turnover calculation for Futures Contracts Turnover is calculated as the sum of absolute profits and losses.

• Nifty Future Profit: Rs 15,000
• Bank Nifty Future Loss: Rs 12,500
• Futures Turnover: Rs 15,000 + Rs 12,500 = Rs 27,500

For Options Contracts Turnover, turnover includes the absolute value of premiums received and paid.

• Nifty Call Options Profit: Rs 1,500
• Nifty Put Option Profit: Rs 1,500
• Premiums Received and Paid:
• Nifty Call Option: Rs120 * 75 = Rs 9,000
• Nifty Put Option: Rs 80 * 75 = Rs 6,000
• Options Turnover: Rs 9,000 (received) + Rs 6,000 (written) = Rs 15,000

How tax is calculated in F&O?

All the transactions in F&O should be treated as business activity. Therefore, any profit and loss on these transactions will fall under business income. There is no provision under the income stipulating that all share transactions can either be treated as business activities or investments, and one does not have both options.

You can show capital gains, whether long-term or short-term, under the head capital gains while showing the profits and loss under F&O as business income simultaneously. To claim the profits and losses on your share transactions as capital gains, you need to classify your investments in shares as investments instead of showing them as stock in trade in the books of accounts maintained. We will look at the losses from F&O in more detail later.

F&O Trading P&L Statement in ICICI Direct

To view your P&L statement in ICICI Direct, login to your account and follow the below path:

Portfolio --> Statements & Reports --> P&L Statements --> F&O --> Select year --> View

Documents Required for Tax Filling

If you are into F&O and want to file tax, here is the list of documents you need to have:

• Form 16
• Form 26AS
• Tax Credit Statement
• Trading account statement
• Turnover report
• Profit & loss
• Transaction statement
• Bank statement if the interest received is above Rs 10,000/-
• Gross receipts
• Income and Expense statements

When is F&O Tax Audit Required?

Tax Audit in the case of F&O is applicable in the below two scenarios:

1. The turnover is more than Rs 10 crore (audit applicability increased from Rs 5 crore to Rs 10 crore in Budget 2021). The threshold of Rs 10 crore is applicable for F&O as 95% of the transactions are through digital mode. Hence, the standard audit threshold of Rs 1 crore is not applicable in the case of F&O.
2. The audit is required if a taxpayer has declared income at a presumptive rate (Section 44AD) in any of the previous five years but wants to declare losses or income at less than the presumptive rate in the current year, provided his total income in the current year exceeds the basic exemption limit.

Treatment of Losses in F&O

If you are an F&O trader, this section will be useful for you. You must know how you can use your losses in F&O. Here are two ways:

• Offsetting Profits: F&O losses can be used to offset profits generated from other F&O trades within the same financial year. It helps reduce your overall taxable income and potentially lower your tax liability.
• Carry Forward: If your F&O losses exceed your F&O profits in a particular year, you can carry forward the unabsorbed losses for up to eight subsequent financial years. It allows you to utilize these losses against future F&O profits, potentially reducing your tax burden in those years.

Can Advance Tax be Paid in F&O Trading?

The assessment of income of a year can be made only after the year has passed, advance tax is pre-payment of your tax liability in the year it is earned. If the tax liability is more than Rs 10,000 in a financial year, then advance tax needs to be paid by the assessee.  

The dates are June 15, September 15, December 15, and March 15 are the dates to pay advance tax.

Expenses treatment against F&O Income?

Expenses like brokerage, broker’s commission, subscriptions to journals related to trading, telephone bills, internet costs, consultant charges if you took an advice from a professional who charged you, or salary of a person you hired to help with your business can all be claimed.

How can tax be saved in F&O trading?

We have already discussed ways to save tax - offsetting profits and carrying forward losses. Here are some other ways:

• Maintain meticulous records: Keep detailed records of all your F&O trades, including contract details (symbol, expiry date, strike price), entry/exit prices, brokerage charges, and profit/loss for each trade. This will simplify tax calculations and filing.
• Supporting Documents: Collect contract notes and trading statements from your broker. These documents provide essential information for substantiating your F&O activity and claimed losses during tax filing.
• Hedging Strategies: Explore hedging strategies using F&O contracts to protect your portfolio from price fluctuations in underlying assets. In some cases, the tax implications of losses incurred while hedging might be more favorable compared to regular F&O trading losses. However, consulting a tax professional for specific hedging strategies is recommended.
• Estimate Income and Losses: Track your income from all sources (salary, rentals, etc.) and your F&O trading activity. It will help you make informed estimates for advance tax payments throughout the year, potentially minimizing underpayment penalties.

Can clients use ICICIdirect P&L statement for income tax return?

Yes, clients can download statement for financial year & total is given in the statement, so client can use ICICIdirect P&L to file tax return.

Does ICICIdirect provide a transaction statement?

Yes, client can download the statement from path after logging in to ICICIdirect > Portfolio > Statements & Reports > Transaction statement > Derivatives > View.