Futures and Option – Taxation

In the quest of alternate source of income, individuals tend to enter into derivative markets.  The most favorable option is futures and options.  It becomes crucial to understand the income-tax laws pertaining to income earned from trading in futures and options. 

Gains or losses from trading in futures and options are taxed under the head income from business and profession and it is important to declare the income in the tax returns as non-speculative business income.  The tax payer may claim all eligible business expenses while filing the tax returns.  ITR 3 would have to be filed.

Tax Audit under section 44AD of the income-tax

Tax audit under the income tax act, 1961 would be applicable if the turnover exceeds INR 2 crore or tax payer has incurred losses.  In this context, it becomes important to understand the definition of turnover.  Turnover for F&O is as stated below:

  • Turnover of Futures = Absolute Profit
  • Turnover of Options = Absolute Profit + Premium on Sale of Options

Absolute profit is aggregate of profits and losses.  For example, if Mr. A earns a profit of INR 25,000 on August 20 and incurs a loss on INR 15,000 on August 25, the turnover would be INR 25,000+15000= INR 40,000. 

On the applicability of tax audit, the tax payer is required to prepare financial statements, prepare and file tax audit report in form 3CD.   The tax payer can carry forward and set off losses against future profits of both speculative and non-speculative business for a period of 8 years, if tax audit under section 44AD is conducted. 

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