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Futures & Options (F&O) trading & Income tax return
Some transactions are easy to execute but difficult to comply while filing the income tax return. F & O transactions are one such transaction.
Confusion prevails as far as return filing is concerned if the person is dealing in future & options. The issue is further complicated when it is reviewed with regard to applicability of Audit in case of loss from F&O Trading and with regard to Calculation of turnover in case of F&O Trading.
Treatment of profit & loss from F&O transactions, allow ability of Expenses against F&O Income, requirements of maintenance of Books of Accounts in case of F&O Trading, Carry forward & and set off of Loss from F&O transactions are other issues which one need to examine at the time of filing ITR. Let us discuss more about it:
The treatment of profit/loss from F&O Trading in the income Tax Return?
- One important & relevant part of Section 43(5) of the Income Tax Act-1961 reads as under:
“Speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts:Provided that for the purposes of this clause—(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange; 76[or]
[(e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association [, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]]
shall not be deemed to be a speculative transaction.
[Explanation 1].—For the purposes of [clause (d)], the expressions—
(i) “eligible transaction” means any transaction,—
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and
(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;
(ii) “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;
[Explanation 2.—For the purposes of clause (e), the expressions—
(i) “commodity derivative” shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013;
Above reference will make it absolutely clear that trading in derivatives including commodity derivatives on a recognized stock exchange is not at all considered as a speculative transaction and hence it cannot be speculative business. In short, since these are not considered as speculative business, income from such transactions can be considered as normal business income and loss from such transactions will be considered as normal business loss.
- Income from derivative trading is considered as normal business income and so regular rules as applicable to tax audit as stated in section 44AB will be applicable in case of F&O trading also.
- Under the normal rule, the applicability of tax audit will be as follows in case of F&O Trading:
In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. 1 crore.
a) If the turnover from such trading in case of Individaul, HUF, firm, AOP, exceeds Rs. 1 crore but less than 2 crore then the audit can be avoided if we can show the profit at minimum 8% (8% need to be replaced by 6%, if transactions are done in digital mode).
b) Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 8% (8% need to be replaced by 6%, if transactions are done in digital mode) of the turnover from such transactions.
c) If the turnover is more than 2 crore then audit u/s 44AB will be applicable irrespective of Profit or Loss from the transactions.
4. It may be noted that in case of Loss from F&O Trading, profit (Loss in the present case) is less than 8% (6%, for digital transactions) of the turnover. So, Tax Audit will be applicable u/s 44AB read with section 44AD.
- Calculation of turnover in case of F&O Trading is very important. It is one of the important factors for every taxpayer for the income tax purpose. Turnover in such a case has to be calculated as under:
a) The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
b) Premium received on sale of options is to be included in turnover.
c) In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.
In such a case, it makes no difference whether the difference is positive or negative. All the differences need to be aggregated , ignoring the sign of positive or negative for calculating turnover.
- Treatment for Expenses against F&O Income is another important issue that needs consideration.
Expenses could be petrol, salary, conveyance, mobile, stationery, etc. It can be claimed as deduction as business expenses. Further, depreciation on assets used for the business or profession can also be claimed as deduction.
- Often questions are asked regarding Maintenance of Books of Accounts in case of F&O Trading. It may be noted that since income from F&O Trading is considered as normal business income, normal provisions for maintenance of Books of accounts as contained in section 44AA of the Income Tax Act’1961 will be applicable. As per section 44AA:
a) If there is loss in F&O trading or the Net profit is less than 8% (6%, for digital transactions) of the turnover or the turnover exceeds Rs. 1 crore, then provisions of Tax Audit are applicable and so for tax audit, maintenance of books of account are mandatory.
b) if there is a profit in F&O and the profit is 8% (6%, for digital transactions) or more of total turnover , then only the income has to be declared as business income and accordingly ITR has to be filed. There will be no need to maintain books of accounts.
- As far as filing of Income Tax Return for F&O trading income is concerned, it may be noted that since income from F&O trading is to be treated as business income, individual filing return with F&O trading income has to file ITR in form ITR 4. Other taxpayers will be required to file the return in the form as may be applicable to them. Further, depending on the requirement to get the accounts audited as per section 44AB & 44AD, the due date for filing the return of income will be different.
- The benefit of Carry forward & and set off of Loss from F&O transactions will also be there as is normally available to the taxpayers. If there is a loss in F&O and you are claiming the same in the Income Tax return then one has to file the ITR before the due date to carry forward the loss and set off from income in future. As per CIT v/s DLF Commercial Developers Ltd, section 43(5) defining speculative transactions is only for the purpose defining terms used in section 28 to 41.Section 43(5) has no application over section 73.