Trading in Futures and Options (F&O) in the stock market can be highly rewarding but at the same time extremely risky. In F&O trading, two parties have to enter a derivative contract in which they agree to buy or sell an underlying asset (shares or commodities) at a pre-determined price and date. As one party in the contract expects the price to rise and the other to fall, only one of the two parties makes a profit while the other bears the loss.
Taxation of income or loss from F&O trading is also extremely tricky. Since there have been many new entrants in F&O trading in the last two years, tax experts suggest it is important for such traders to properly understand F&O taxation. Here are a few points you should know clear all doubts regarding the taxation of income or losses from F&O trading:
File ITR even if you have made a loss
According to tax experts, an F&O trader must file an income tax return irrespective of profit or loss.
“Yes, in case of a loss, you may not need to pay tax, but still you have to file an income tax return. It has two benefits. First, you can carry forward the loss to next year and secondly, you can save a penalty up to Rs 10,000 for non-filing of ITR,” says Sujit Bangar, Founder of TaxBuddy.com.
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Income treated as normal business income
Income earned in F&O trading is treated as normal business income. Therefore, a basic exemption limit is available to individuals.
“As an individual, you can claim all eligible tax saving deductions under Section 80C in respect of income from F&O, just like any other normal business income,’ says Bangar.
File ITR to carry forward losses
In case you have made only losses from F&O trading, you need not do an audit as long as your F&O turnover is less than the prescribed limit. However, the expert suggests that you should file ITR before the due date so that you can carry forward this loss for future years.
Misconception: Audit required if turnover is more than Rs 1 crore
There is a common misconception about the requirement of audit in F&O transactions. The general rule says that an audit is needed if turnover is more than Rs 1 crore.
However, for AY 2021-22, the turnover limit has been increased to Rs 10 crore if all transactions are through the banking channel.
“We all know in F&O, all transactions are through banking channels and so an audit won’t be needed till turnover is less than Rs 10 cr. It’s very important to note this,” says Bangar.
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How to compute turnover
Traders are often confused about how to compute the turnover in the case of F&O transactions. The common misconception is to consider total transaction value as turnover. But this is not so.
According to Bangar, the absolute value of profit and loss is counted as turnover.
“For example, you have entered into two transactions through a banking channel. One transaction ended up with a loss of Rs 50 Lakh and another transaction with a profit of Rs 75 Lakh. The sum of the absolute value of loss and profit here is Rs 50 lakh + Rs 75 lakh = Rs 125 crore. So turnover would be Rs 1.25 crore. Since this amount is less than Rs 10 cr and there are no any cash expenses, we can conclude that an audit is not required,” says Bangar.