Essential 2024 F&O Trading Tax Insights Every Indian Investor Must Know

F&O trading is a hot topic amongst the various investing options in India. Besides potential for great returns, it also includes a bunch of rules and regulations.

Income from F&O trading in India is considered business income. In simple words, whether one is an individual or a company, profit or losses from trading of F&Os would be considered as business income. Of course, all this comes with its own set of responsibilities.

Thus, an F&O trader must be well aware of the tax implications of trades. The following blog shall walk you through the key points one should understand for the 2024 financial year.

How is income from F&O trading taxed?

The trading in F&O has been classified as business income and hence attracts tax under "PGBP". This is the way it would be classified:

Rates of tax: In the case of individuals, the income would be taxed at applicable slab rates, and in the case of companies, it would be at prescribed rates.

Deductions: Related expenses directly linked to the trading could be reduced. This would include brokerage, internet charges, and other related expenses.

Loss Carried Forward: In case of any loss from F&O trading, you can carry it forward for a period of eight years. This much amount can be set off against future profits, which will help reduce your taxable income.

Why it is Important to Maintain Records?

Since the F&O trading is treated as a business, you are required to maintain detailed records of all your transactions. This will include invoices, receipts, and any other documentations that may approve your income and expenses. Proper record-keeping is very important and not just for filing tax returns, but in case of any tax audit.

Audit Requirements for F&O Traders

Further, if your gross turnover from F&O trading is more than Rs 1 crore, or if your profits are less than 6% of your turnover, you may have to get your accounts audited. Such audit shall be done by a chartered accountant and a report has to be filed along with your income tax return.

While filing an income tax return as an F&O trader, there are a few more steps to be followed compared to that of a salaried individual. Now, some of the key things to remember would be as follows:

Form ITR-3: Being a person or a Hindu Undivided Family involved in F&O trading, you will have to file the returns using Form ITR-3.

Balance Sheet & P&L: The balance sheet along with the profit & loss account has to be filed at the return time. This has to be done by everybody, whether salaried, professional, or others, and whether F&O trading is the sole income source or not.

Therefore, if the total liability of tax for the entire year crosses Rs 10,000, then assesses would have to pay advance tax. Hence, F&O traders will have to assess their aggregate income that is created at the end of the year and pay taxes in partial during the year to avoid penalties.

Updated Turnover Calculation Formula.

The turnover was calculated in a manner where the premium of options inflated the figures; F&O traders were forced into a tax audit in previous years because their turnover crossed Rs 10 crore. Thankfully, this formula has been changed. Now, only positive and negative differences are counted, and therefore, much lower turnover figures will be shown by F&O transactions.

Budget 2024 Update: Increased STT on F&O Trades

Current Finance Minister N. Sitharaman, in her budget, proposed increasing STT in F&O trades to 0.02% for futures and 0.1% for options as a measure to deepen the tax base. Further, it is also proposed to tax income received from share buybacks in the hands of recipients.

How to Report Gains and Losses from F&O Trades in Your ITR

You need to declare all of your F&O trades in your ITR. Yes, even those trades that are resulting in a loss. Now, the tax department can get all the details of your stock market transactions. Not disclosing your trades will land you in a notice.

Why losses need to be reported: In case one has incurred some of the losses from trading in F&O, he may carry such losses forward for eight years. This would set off future profits, thus reducing the tax liability.

Head of Income: How to report F&O trading as business income

Income or loss from trading in F&O falls within the ambit of non-speculative business income as contained under Section 43(5) of the Income Tax Act. Therefore, the same has to be declared under the head "Profits & Gains from Business or Profession" in your ITR.

Which ITR Form Should You Use?

Since income from F&O is business income, you need to declare it using the ITR-3 form. This form is used by individuals and Hindu Undivided Families who have business or professional income to report. In case you use tax filing platforms like Cleartax, the system will automatically pick up the correct form based on details of your income.

Taxation of Other Investments

The taxation rules also vary if you are into any of the following types of trading or investments, whether it be intra-day trading or long-term investments. They are taxed differently:

Intra-day Trading: Considered speculative business income, it is to be kept separate from F&O income.

Short-Term Trading: Business income or capital gains can be assessed according to volume and frequency.

Long-Term Investments: Gains from long-term equity investments get counted as capital gains.

How to Calculate F&O Turnover?

The absolute sum of differences F&O turnover is calculated. This marks a big change over the previous method where premiums of options used to be added, usually inflating the turnover figures.

Example:

X buys 100 units of Futures at Rs 200 and sells at Rs 210. They also buys 200 units of options at Rs 300 and sells at Rs 290.

Calculation of Turnover:

Futures: (210 – 200) * 100 = Rs 1,000

Options: (290 – 300) * 200 = Rs 2,000. Since it is negative ignore

Total Turnover : Rs 3,000

F&O Losses

In case of losses from F&O trading, it is always important to file an ITR if the losses have to be carried forward and set off against future income. Note that losses from F&O trading are considered non-speculative in nature and, hence, can be carried forward for eight years.

Can F&O Traders Claim Expenses?

Yes, all business expenses directly related to trading in F&O can be claimed as deductions. These include brokerage, subscription money, internet charges, and other associated expenses.

However, ensure proper records are maintained and payment is made digitally since cash expenditure over Rs 10,000 is likely to be disallowed.

Conclusion

Mastering the taxes as an F&O trader is definitely a big task, but knowing its rules shall definitely save you from probable penalties and help in optimizing tax liabilities. Keep these guidelines in mind while filing your returns for 2024. Consider consulting a tax professional if needed.

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