F&O transaction revenue is subject to income slab taxation, with rates ranging from 5% to 30%. It is considered business income. F&O Trading Income Tax gains may also be deducted against losses from other commercial operations under the current categorization.
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F&O Trading Income Tax
According to a report citing sources today, the government was thinking of several measures to deter retail involvement in the futures and options (F&O) market, such as shifting F&O’s classification in the Union Budget 2024–2025 from “business income” to “speculative income.”
F&O trading is the practice of trading derivative contracts, such as futures and options, of an underlying asset at a predetermined price. A money, commodity, or stock share might be the underlying asset. As a result, F&O Trading Income Tax might include equities, commodity, or currency trading, often known as forex trading.
According to Dasgupta, if the next Budget treats F&O transactions as speculative income, they would be subject to a straight 30% income tax (plus 4% cess) rather than the appropriate slabs of 5%, 20%, or 30% on various income slabs.
F&O Turnover Calculation
You may roll over your F&O losses to the next fiscal year if they surpass your total profits in that particular fiscal year. You may deduct these losses from your future F&O profits, which will reduce your tax liability in those years.
- Turnover For Futures & Options Trading = Absolute Profit
The total of both positive and negative changes is known as absolute turnover. The methods for calculating trading turnover are the trade-wise method or scrip-wise technique.
For instance, on May 5, 2023, Rahul purchased 200 Heremotoco Futures contracts for Rs. 100. On August 5, 2023, he sold these contracts for Rs. 90. On 07/09/2023, Rahul purchased 150 more Nifty Futures contracts for Rs. 45. On December 9, 2023, he sells these futures for Rs. 50.
- Loss From Trade 1 = (90-100) * 200 = Rs. -2,000
- Profit From Trade 2 = (50-45) * 150 = Rs. 750
- Absolute Profit = 2000+750 = Rs.2,750
These also apply to individuals who operate their businesses, such as F&O trading. But, maintaining your books will be easier. It will usually be enough to save your bank account statements, expenditure receipts, and trade statements.
Tax Audit Applicability For F&O Traders
The relevance of tax audits to F&O traders is examined below, considering their turnover. We may infer from the tax laws above that there are only two situations in which a tax audit will be necessary: 1 and 3.
Trading Turnover Up to INR 2 Cr
- A tax audit will be conducted if the profit or loss from F&O is less than 6% of trading turnover, you have opted out of the presumptive taxation system in any of the five years before, and your total income is more than the basic exemption level [Section 44AB(e)].
- However, a Tax Audit is not necessary if the taxpayer’s profit is at least 6% of the Trading Turnover.
Trading Turnover between Rs 2 Cr And Rs 10 Cr
- An audit of taxes is not necessary if the trading turnover is between Rs 2 Cr and Rs 10 Cr and over 95% of the transactions are done digitally, whether or not there is a profit or loss. (Part 44AB)
Trading Turnover of More than INR 10 Cr
- Profit or loss is irrelevant when it comes to tax audits [Section 44AB(a)].
Benefits Of Declaring Your F&O Loss
There are several benefits to declaring your F&O loss when filing your income tax return. These benefits include:
- Deduction for taxes: Displaying the loss has the primary benefit of allowing you to subtract it from any additional income you make. All income, except your salary, might be reduced by a loss on a F&O transaction. This may include income from any source, including a job, a company, or a residence. It reduces your overall tax obligation. This might assist you in lowering your tax obligation.
- Carry Forward: You may roll over your F&O losses to next fiscal years if they surpass your total profits in that particular fiscal year. You may deduct these losses from your future F&O profits, which will reduce your tax liability in those years.
- Tax conformity: By declaring F&O losses, you may be confident that your financial operations are recorded correctly and that you are in compliance with income tax laws. Penalties and potential legal repercussions might arise from concealing losses.
- Audit Requirement: Including F&O losses in your tax return can help you stay out of trouble with the IRS. Certain taxpayers whose turnover or gross revenues above a certain level are compelled to undergo tax audits. If you disclose your losses correctly, you could stay below that threshold.
- Future Reference Documentation: Accurately reporting your F&O losses provides you with a record of your financial dealings, which might come in handy for loan applications or other financial planning in the future.
- Adjustment for F&O Gains: Declaring the losses enables you to balance them against the profits, reducing your total tax burden on F&O transactions, if you have both gains and losses in the same fiscal year.
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