Know the Tax on Futures and Options

Know the Tax on Futures and Options

15 February, 2023

If you have even the slightest experience with the stock market, you must have heard of Futures and Options trading. While Futures obligate you to buy or sell an underlying stock on a specific date as per a pre-decided price, Options give you the right but not the obligation to purchase or sell assets at a specific price on a particular date. Today, Futures and Options are popular trading Options for many; however, tax implications are attached. Continue reading to learn more about the tax on Futures and Options trading.

How is Income from Derivatives Classified?

Futures and Options are broadly known as derivatives, and the income from such instruments is treated as business income. Thus, as per the Income Tax Act, you must report income earned from Futures and Options as that associated with a business or profession, regardless of the frequency or volume of transactions.

Furthermore, income earned from the business is divided into two categories; speculative income and non-speculative income. Since Futures and Options are used to hedge and take/give delivery of underlying contracts, associated income falls under the non-speculative business category.

How to Calculate the Total Turnover?

Every Futures and Options trade involves issuing contract notes that specify the value of derivatives you purchase or sell. However, when it comes to accounting, only the difference between the two is considered.

How to Claim Expenses from Futures and Options Trading?

When the income from Futures and Options is classified as business income, the maintenance of the books of account and tax audit becomes applicable. You can claim deductions for expenses incurred while carrying out Futures and Options trades such as Demat charges, electricity costs, etc.

What are the Audit Requirements While you are Trading in Futures and Options?

If you are trading in Futures and Options, you should get your accounts audited if your turnover is more than ₹10 crore. You can also apply a presumptive taxation scheme if your turnover does not exceed ₹2 crore and declare that your taxable income is at 6% of the total Futures and Options turnover.

A tax audit is mandatory if you opt for a presumptive taxation scheme and declare an income lower than the presumptive income and total taxable income (after including income from other heads) Is more than the maximum amount not subject to tax, i.e. ₹ 2.5 lakh.

Do note that if you suffer a net loss while trading in Futures and Options, the loss will be considered a non-speculative business loss. You can adjust it against income from other businesses or rental earnings. You can carry the unadjusted business loss forward by eight subsequent years and set it off against business income.

What is the Applicable Income Tax Return (ITR) Form for Futures and Options?

When it comes to the taxation of Futures and Options, you must file ITR-3. However, if you have followed a presumptive tax scheme and have declared profits at 6% of the total turnover, then you will have to file ITR-4. However, which ITR form you will have to file will also depend on the other sources of income.

Now that you are aware of the rule related to income tax on Futures trading and Options trading, you can begin investing without any worry. To make your investment journey smoother, you can rely on the Demat Account offered at HDFC Bank. You can open one in less than 10 minutes without submitting any paperwork and enjoy free Demat AMC for the first year. Choose the HDFC Bank Demat Account and HDFC Securities Trading Account & trade in futures and options at just Rs 20 per order.

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Read more about currency derivates here.

*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.

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