Taxation of F & O transactions


Taxation of F & O transactions

Query 1]

  1. I am trading in equities; both delivery as well as non delivery based & make short term capital gain (STCG). Whether it will be treated as “Income from Business” or any other category of income? What would be tax treatment? [Col Sisir Kumar Misra, Indian Army]
  2. I have incurred the loss in share trading. Whether still I will be required to carry out the audit? [Kishor Gupta, Lordganj, Jabalpur]
  3. I am engaged in the future & option in shares. Whether audit is compulsory even if I have incurred loss in the activities? I am not having any other income except interest on FDR to the tune of Rs. 1,02,583/- on which TDS of Rs. 10,260/- is done by the bank & SB A/c interest of Rs. 16,253/- I have to file the income tax return for claiming income tax refund. Which ITR form need to be used for filing it?  [rao******]


One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute- William Feather

Many people believe that share trading & commodity transaction is one of the simplest ways of making money in the stock market. Obviously, it is imperative to understand the tax implication on such transactions.

  1. Income from Intra-day Share Trading:
    i] As per Section 43(5) of the Income Tax Act, 1961 speculative transaction means a transaction in which a contract for the purchase or sale of any commodity (including shares) is settled otherwise than by the actual delivery/transfer of the commodity or script.
    ii] In intra-day trading, there is no actual delivery as the shares are bought & sold from the trading account on the same date and do not find place in the de-mat account at all.
    iii] Income from intra-day trading in shares is treated as “Speculative Income” & is taxable under the head “Income from business & profession”.
    iv] Tax on profit from intra-day trading in shares has to be computed as per applicable normal tax slab of an individual. In short, no special tax rate (like 15% for STCG) is there for taxing speculative profit & the tax liability would depend on total income & applicable tax slab.
    v] If there is unabsorbed speculative business loss, then such loss can be carried forward for set off against the subsequent year’s income from speculation business only. Such loss cannot be carried forward for more than four assessment years (AY) immediately succeeding the AY for which the loss was first computed. Speculation losses can be set off only against speculation gains and not against any other head of income or non-speculation business income.
    [As per Section 70 of the IT Act, inter-source adjustment is possible in the same head of income except in respect of (a) loss from speculative business (b) loss from specified business u/s 35 AD of the IT Act, (c) Long-term capital loss, and (d) loss from activity of owing and maintaining race horses].
  2. Income from delivery based Share Trading:
    i] If shares are purchased on a particular day and sold next day or afterwards then it is not treated as ‘Speculative business’.
    ii] Income from delivery based transactions could either be categorized under the head “Income from Business” or under the head “Income from Capital Gain” depending upon various factors. The prominent factors that play an important role in determining whether it is a business assets or capital assets are:
    (a) Volume/Nature of transactions. (b) Intention/Logic behind investments. (c) Holding period of shares (d) Investment of own funds or a borrowed fund. (e) Other business activities of the assessee. Etc.
    [Share trading would be categorized as business if there are high & frequent transactions or if it is the main activities of the taxpayer or if trading is done with a view to earn instant profit etc. The correct categorization of share trading activity is important to arrive at the correct tax liability and to comply with the audit & other provision].
    ii] If treated as capital gain & the sale transaction is done through stock exchange then (a) Long Term Capital Gain would be exempt whereas (b) short term capital gain would be taxable @ 15%.
    iv] If treated as business income then entire income would be taxable like other regular income of the taxpayer and tax liability would be in accordance with the applicable tax slab.
    v] If share trading activity is considered as business then tax audit would be mandatory for individual / HUF if (a) the turnover exceeds Rs. 2 Crore or (b) if the turnover is less 2 Crore & income offered for taxation is less than 8% of turnover or if there is a loss.[button color=”” size=”” type=”” target=”” link=””]The most crucial point arises with regard to the determination of the “Turnover” in the case of F & O. The total of profit and loss (i.e., positive and negative figure) shall be taken as turnover. It makes no difference whether the difference is positive or negative for computing turnover. Aggregate o the differences, whether positive or negative is considered as “turnover”.[/button]
  3. Income from Future & Options (Derivative) Transactions:
    i] Transactions in derivatives are specifically excluded from the category of “Speculative transaction” if the transaction is carried out (a) on a recognised stock exchange (b) the securities transaction tax is paid and (c) trade is supported by contract note. Profit/Loss in derivatives (futures and options) is treated as non-speculative business even though delivery is not there in such transactions.
    ii] Profit/loss from such transactions will be considered as normal business income & loss.
    iii] No special tax rate (like 15%) is applicable for taxing profit from derivatives transactions & tax rate shall at normal rates applicable to an Individual.
    iv]Unabsorbed non-speculative business loss can be carried forward for eight years to be set off against business income of subsequent years.

    v] Applicability of Audit in case of derivative (F&O) Trading:
    Taxpayer should carefully note that tax audit provision (as per section 44AB) will be applicable to the transactions in F&O also as income from derivative trading is considered as normal business income. To be more precise, if turnover of an individual/HUF from derivative transactions exceeds Rs. 2 Crore, taxpayer would be required to get the accounts audited. In case turnover is less than 2 cr, tax audit (u/s 44AB r/w section 44AD) will be mandatory if the net profit from such transactions is less than 8% of the turnover. Interestingly, in case of Loss from derivative trading, since profit (Loss in the present case) is less than 8% of the turnover, Tax Audit will be applicable. The most crucial point arises with regard to the determination of the “Turnover” in the case of F & O. The total of profit and loss shall be taken as turnover. Aggregate of the differences, whether positive or negative is considered as “turnover”. It makes no difference whether the difference is positive or negative for computing turnover. While arriving at the taxable profit, all the expenses incurred for earning income like telephone, mobile, conveyance, depreciation on assets used for the purpose of business etc would be admissible as deduction.
  4. ITR return filing for person with F & O Income:
    Since income from F&O trading is to be treated as business income, individual with F&O income/loss has to file return in ITR 3 or 4, as the case may be. Filing of the return within due date is mandatory if the taxpayer intends to carry for such loss for set off against its income in subsequent years.


Taxation of F & O transactions