Filing of income tax returns with regards to any income earned from the trading in Futures and Options is by and large confusing for most taxpayers. Most Futures and Options transactions are quite huge and take place on a regular basis with low profits generated. Due to the high number of transactions taking place for large amounts, the levying of income tax on the profit or loss obtained via these transactions is treated differently as compared to the profit or loss arising out of any other form of business. Keeping this in mind, income arising from the trading of Futures and Options could be treated either as business income or as capital gains.
Income Tax Return Form To Be Filed For Profit Or Loss Arising From Futures and Options:
Any income or loss that arises from the trading of Futures and Options is to be treated and considered as business income or business loss. As such, the ITR-4 tax form would be required by the taxpayer to file his or her returns. Any taxable income that has been acquired from the trading of Futures and Options after any deductions have taken place is taxed as per prescribed income tax slab rates.
Benefits Under Section 43(5):
Section 43(5) of the Income Tax Act states that any transactions that take place during Futures and Options trading are to be deemed non speculative transactions. This means than any profits gleaned from such trading would be taxed in the same manner as income or profits acquired from the carrying on of any other kind of business. Therefore the taxpayer can claim deductions on tax for any expenses he may have incurred while trading in Futures and Options such as telephone bills, electricity bills, internet bills etc
Ramifications of Treating Income From Futures and Options As Business Income:
Should any income or profits arising from the trading of Futures and Options be treated as business income then the following ramifications come into play:
- Any expenditure relating to administration is considered to be deductible
- Securities Transaction Tax or STT will be deemed to be deductible as well
- Any loss arising from trading of Futures and Options can be offset against any income arising from the taxpayer’s residential property, any other business as well as any other source barring the taxpayer’s regular salary.
- Any losses that have not been absorbed can be offset against any income the taxpayer receives from any other business, and can be carried ahead for a maximum period of 8 years
- A tax audit will be mandatory if the turnover or income arising from trading of Futures and Options is above and beyond Rs 1 crore
Ramifications of Treating Income From Futures and Options As Capital Gains:
Should any income or profits arising from the trading of Futures and Options be treated as capital gains then the following ramifications come into play:
- Any income will be considered to be short-term income or profit and will be taxed according to regular income tax slab rates
- Securities Transaction Tax or STT will be not be deemed to be deductible, unlike any expenditure arising out of trading of Futures and Options
- Any loss will be treated as short term capital loss, which can be offset against any capital gains acquired by the taxpayer through other sources. This loss can be carried ahead for a maximum period of 8 years
How Is Turnover Determined With Regards To Futures and Options:
In order to determine the total turnover derived from the trading of Futures and Options, it is necessary to take into consideration the following factors:
- The sum total of any favourable trades as well as unfavourable trades
- Any premium that has been obtained following the sale of options is also to be considered
- Any difference arising in relation to any reverse trades that may have been entered into
It is important to determine turnover in order to conduct tax audit on the final amount as per Section 44AB of the Income Tax Act, 1961. Tax audits, however, are only applicable in instances where the total turnover determined over the course of a fiscal year is more than Rs 1 crore
Turnover can be determined by looking at the following example:
Mr Patel is a Futures and Options trader and has incurred a profit and loss from the following transactions:
- He acquires futures in Company X, which are worth Rs 10 lakhs, eventually selling them for Rs 11 lakhs. This sale resulted in him earning a profit of Rs 1 lakh
- He acquires futures in Company Y, which are worth Rs 5 lakhs, eventually selling them for Rs 4.5 lakhs. This sale resulted in him suffering a loss of Rs 50,000
Therefore, based on the transactions outlined above, the total turnover can be calculated as follows:
- Total amount of profit earned = Rs 100,000 - Rs 50,000 = Rs 50,000
- Total turnover will be the combination of profit and loss = Rs 100,000 + Rs 50,000 = Rs 1,50,000
How Losses Arising From Trading In Futures and Options Are Treated:
Any loss that has been incurred from the trading of Futures and Options is treated in the following manner:
- All losses that an individual incurs through Futures and Options trading is permitted to be offset against any income he or she earns from other business sources, with the exception of income earned through salary. This is because any transactions that take place in relation to Futures and Options are deemed to be non speculative in nature.
- Losses incurred through Futures and Options trading can be carried ahead to subsequent years and offset against any income that the individual may receive during this time. However, this can only take place if the individual in question does not offset his or her losses against any income received from other sources during the relevant financial year.
- For any loss incurred through Futures and Options trading that an individual wishes to carry forward or offset, he or she is required to provide full disclosure of such losses in his or her Income Tax Returns, and these tax returns will be required to be filed prior to the prescribed filing date.
- In case such disclosure of loss is not provided by the individual in his or her income tax returns, then the individual in question will not be permitted to carry forward the loss to subsequent years.
- Any losses claimed by the individual in his or her Income Tax Returns that have been filed following the expiry of the prescribed filing date, will not be permitted to be carried forward to subsequent years.
How Income Or Profit Acquired From Trading In Futures and Options Treated With Regards To A Tax Audit?
Any income or profit arising from the trade of Futures and Options in the market is to be treated in the following way for the purpose of a tax audit:
- Regular provisions as outlined in the Income Tax Act will be applicable to any income or profit acquired from the trade of Futures and Options, since this income will be considered to be income received from regular business
- As per Section 44A of the Income Tax Act, the individual in question will have to prepare and maintain regular books of accounts showing the particulars of all transactions that have taken place due to trading
- As per Section 44AB, if the total turnover of the trader over the course of a fiscal year is above Rs 1 crore, then the trader will be required to be subjected to a tax audit as per the provisions outlined in this section of the Income Tax Act
- If the trader discloses income or profit that is lower than 8% of the total turnover over the course of a fiscal year, then the trader will be required to be subjected to a tax audit as per the provisions outlined in section 44AB of the Income Tax Act
Expenses That Can Be Claimed When Filing Income Tax Returns On Income From Futures and Options:
Taxpayers who regularly carry out transactions with regards to Futures and Options trading are permitted to claim tax deductions on the following expenses, since these can be deemed to be expenses arising from the conducting of business:
- Postage charges or fees
- Travel and conveyance expenditure
- Telephone or fax expenses
- Internet related expenses
- Depreciation on any asset that has been used by the trader for business purposes