Income Tax on F&O Trading in India

F&O trading in India is growing rapidly every year. Many people earn good profits in it, but when it comes to tax, confusion begins. After all, how is income tax levied on f&o trading in India? Is your f&o trading income tax different or is it levied at normal slab rates? Can tax on F&O profit be reduced? In this blog, we will understand these questions in simple language and learn how to avoid penalty and notice by paying tax in the right manner.

Understanding F&O Trading and Why Tax Treatment is Different

Futures & Options i.e. F&O trading is the most active part of the stock market. Here most people trade to earn short-term profits or for hedging. For this reason, its tax treatment is considered different from delivery-based shares.

Capital Gains vs Business Income

The income from delivery shares is called Capital Gains. But the profit or loss from F&O always comes under the category of Business Income. This means that your tax on F&O profit will be taxed at slab rates like normal business income.

Reason for different tax treatment

Why does the tax department consider F&O different? Because it involves high leverage, frequent trading and more speculative intent. Therefore, it is considered a business activity and not an investment.

Why correct reporting is important

If you misclassify F&O income, the risk of notice or penalty may increase. Therefore, every trader should properly understand and follow the rules of tax on F&O.

Income Tax Classification of F&O Trading

According to tax rules, the profit or loss from F&O is not considered a part of any investment. It is directly counted under business income. That is, whether you are a retail trader or a professional, your income will be considered taxable under the Business Head.

Linking with salary or other income

F&O profit or loss is counted along with your rest of the income. If you have income from fixed salary, house rent or other sources, then the taxable amount will be decided by adding everything. This is the reason why f&o trading income tax affects your overall tax liability.

Effect of slab rate

There is no separate fixed rate on F&O income. It is taxed according to your income tax slab. That is, the higher your overall income, the higher will be your F&O tax rate.

Understand with an example

Suppose your annual salary is ₹10 lakh and you earned a profit of ₹3 lakh from F&O. In such a case, your total taxable income will be considered as ₹13 lakh and tax will be levied on it according to your F&O tax rate i.e. slab-rate.

Read Also: How to Calculate F&O Turnover for Trading?

Tax Rates on F&O Trading

Futures & Options trading taxation comes under Income Tax Act, Section 44AB. The tax rate depends on your chosen regime (old or new).

F&O Tax in Old Regime

Total Income (Old Regime)	Tax Rate
Up to ₹2.5 lakh	Nil
₹2.5 lakh – ₹5 lakh	5%
₹5 lakh – ₹10 lakh	20%
Above ₹10 lakh	30%

F&O Tax in New Regime

The new regime has more slabs but deductions are not allowed (except some selected ones and the standard deduction).

Total Income (Old Regime)	Tax Rate
Up to ₹3 lakh	Nil
₹3 lakh – ₹6 lakh	5%
₹6 lakh – ₹9 lakh	10%
₹9 lakh – ₹12 lakh	15%
₹12 lakh – ₹15 lakh	20%
Above ₹15 lakh	30%

F&O Loss Adjustment Rules

Losses are common in futures and options (F&O) trading. But there are some clear rules in the Income Tax Act for how to adjust these losses.

With which income sources F&O losses cannot be adjusted?

You cannot set-off these losses with every type of income. Especially adjustment is prohibited in these cases:

• Salary income : Loss cannot be added to job salary.
• Lottery winnings / gambling income :  No adjustment is possible with these irregular sources.
• Speculation income :  F&O loss cannot be set-off with income from speculation like intraday equity trading.

Against which incomes can losses be adjusted?

F&O losses are allowed to be adjusted against some specific incomes:

• Business income :  If you have any other business income, then the loss can be deducted.
• Capital gains :  These losses can be adjusted against gains from Speculative Income, property or gold.
• Other income (excluding salary/speculation) :  like rental income, interest income etc.

Carry Forward Rule (8 Years Benefit)

If you are unable to adjust your entire F&O loss in any year, it does not expire automatically. According to tax rules:

• You can carry forward the loss for the next 8 years.
• But there is a condition that it is mandatory to file ITR on time. If the due date is missed, you will lose the option of carry forward.
• In the subsequent years, these losses can be adjusted only with business income, not with capital gains or other incomes.

Turnover in F&O Trading – Why It Matters for Taxation

To understand taxation in F&O (Futures & Options), it is important to first know the correct calculation of turnover. Many traders only look at net profit or loss, but the method of calculation in the Income Tax Department is different.

How is turnover calculated?

Difference Method is adopted to calculate turnover in F&O.

In this, all your profits and losses have to be added in absolute value.

Example:

• If you made a profit of ₹1.5 lakh and suffered a loss of ₹2 lakh,
• Then Turnover = ₹1.5 lakh + ₹2 lakh = ₹3.5 lakh

(Here the net loss is ₹50,000, but turnover will be calculated separately as ₹3.5 lakh).

Importance of turnover : To determine the need for audit: If the turnover is above the limit, then tax audit becomes mandatory under section 44AB.

This calculation is also considered as the basis for checking eligibility under Presumptive Taxation (section 44AD).Adopting the wrong method can lead to mismatch in ITR and increase the risk of Income Tax Notice.

Read Also: Budget 2024: F&O Trading Gets More Expensive?

Loss Treatment in F&O Trading

Loss in F&O (Futures & Options) trading is also considered a business loss. According to tax rules, it is very important to report such loss correctly and take advantage of it.

Set-off Rules

• You can set-off the loss incurred in F&O against business or professional income.
• Note, it cannot be set-off against salary income.

Carry Forward Rules

• If the loss is not fully adjusted in the current year, then you can carry it forward for up to 8 years.
• Going forward, this loss will be set-off only against business income.

Why is it important to file ITR on time?

If you do not file ITR on time, then you may lose the benefit of carry forward. Timely reporting can significantly reduce the tax burden in the coming years.

Example: Suppose a trader suffered a loss of ₹ 4 lakh in a year. If he reports it correctly, he can use this loss in the coming years to reduce his taxable profit and save lakhs of rupees in tax.

Audit Requirements for F&O Traders

Under the Income Tax Act, F&O trading requires a tax audit under certain circumstances:

• If the trading turnover is more than ₹10 crore.
• If the turnover is above ₹1 crore but the declared profit is less than the prescribed limit.
• If you opt for presumptive taxation (Section 44AD/44ADA), and your profit comes out to be less than 6%/8% of the turnover.

Common situation of retail traders

Most retail F&O traders have a large turnover but very low profits or losses. In such cases, they often become subject to audit.

Why professional help is important

It is very important to take the help of a qualified chartered accountant (CA) to ensure proper compliance in case of an audit. This not only ensures compliance with the rules, but also prevents penalties or notices in the future.

ITR Filing Process for F&O Traders

F&O trading is considered as business income in income tax. Hence, it is very important for such traders to choose the right ITR form.

• Right ITR Form: Individuals should generally fill ITR-3 as it can report business income and loss.
• Presumptive Scheme: Some traders may want to choose ITR-4 (Section 44AD) for easier processing. However, F&O trading can be included in it only if the declared profit is more than 6%/8%. Otherwise, an audit will be mandatory.
• Need for Bookkeeping: Only brokerage statements or reports are not enough. Traders should prepare the correct Profit & Loss Account and Balance Sheet.
• Reconciliation: There is mismatch in the auto-generated data of brokers, hence it is very important to do reconciliation and keep all the records matched.

Conclusion

It is not enough to just see profits in F&O trading, it is equally important to keep a proper account of tax. Filling the correct ITR form, filing returns on time and maintaining basic records—all these small steps save a big hassle in the future. In simple words, proper tax planning makes your trading more secure.

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