How is Futures and Options (F&O) trading income taxed for residents and NRIs in India?

Nearly 93% of Futures and Options (F&O) traders incurred an average loss of ₹2 lakh each in FY23 and FY24, according to SEBI. Many of these traders assume that since they have incurred losses, it is not necessary to report their F&O transactions in their Income Tax Return (ITR).

Do you also think so?

If yes, you are mistaken!

Let us shed some light on the income tax provisions related to futures and options (F&O) trading in India.

This article serves as a reference guide for everything you need to know about tax implications on your F&O trades, appropriate ITR forms, calculation of turnover, tax audit requirements, and more.

Understanding F&O taxation in India

According to Section 43(5) of the Income Tax Act, 1961, transactions in F&O trading are categorised as non-speculative business income. Therefore, while filing your return, it is necessary to declare profits and losses from F&O trading as ‘business income’ under the head — Profits and Gains from Business and Profession (PGBP).

Your profits from F&O trading are added to your total income and taxed based on the applicable income tax slab rates. For NRIs, it is taxed at the slab rates applicable to their total taxable income in India.

While income-tax provisions related to paying taxes on F&O profits are quite straightforward, the rules get a bit tricky when it comes to losses.

Many taxpayers believe that only profits from F&O trading should be reported in the ITR, as it is taxed. But the fact is, even losses from F&O trading should be reported in your ITR. Declaring your F&O trading losses has several benefits.

How, you ask?

Reporting F&O trading losses helps you reduce your tax liability. It allows you to set off losses against other business income or carry forward losses for up to eight years for future set off against F&O profits. But the catch here is—you can adjust losses against all other sources of income, such as business income, capital gains, rental income, interest income, or other sources, except salary income.

Let us understand this with the help of an example.

Let’s say you earn a salary income of ₹5 lakh, interest income of ₹1 lakh, and a rental income of ₹2.5 lakh in FY 2024-25. In the same year, you incur F&O loss of ₹4 lakh. Now, as per income tax rules, you can set off a ₹3.5 lakh loss in the current year against your interest income and rental income (but not against your salary income). This means your taxable income for FY 2024-25 will be ₹5 lakh after the adjustment. Since you could not fully set off your F&O losses in the current year, you can carry forward the remaining ₹50,000 loss to the next year, for up to eight assessment years.

Note: If you fail to declare your F&O profit or loss in your ITR, you may get a notice from the Income Tax department.

Which ITR to file for reporting F&O income?

As income from F&O trading is treated as business income, you need to file ITR-3 form (which is designated for individuals and HUF having income exceeding ₹50 lakh from business or profession) or ITR-4 form (which is designated for individuals and HUF having income up to ₹50 lakh from presumptive business or profession).

To ensure accuracy while filing your return, you must provide proper information about your profit and loss, turnover, expenses and other information as necessary in the respective sections of the ITR forms.

Can an F&O trader claim business expenses?

Since F&O trading is treated as a business, an F&O trader can claim various expenses incurred for trading activities as a deduction from total income.

The expenses that can be claimed as a deduction are brokerage fees, internet costs, telephone bills, trading software subscriptions, trading journal subscriptions, consultancy charges paid to financial advisors, and salaries paid for business assistance.

Few things to note:

• Ensure these expenses are directly and exclusively related to your trading activities.
• Maintain proper receipts and bills to claim expenses as deductions and to avoid scrutiny from tax authorities.
• For expenses exceeding ₹10,000 in cash, you may not be eligible to claim a deduction.
• You can claim expenses even if you have incurred a trading loss.

Do F&O traders need to maintain accounting records?

Yes, F&O traders are mandatorily required to maintain accounting records if:

• Their income exceeds ₹2.5 lakh, or
• Their turnover exceeds ₹25 lakh in any of the three preceding years or the first year in case of a new business.

Hence, you must keep your F&O trading statements, bank statements and expense receipts handy since your profit and loss account (P&L) and balance sheet will be prepared based on these documents.

Is a tax audit required for F&O traders?

A tax audit under Section 44AB of the Income Tax Act is required for F&O traders if certain turnover conditions are met.

Now that you know the importance of turnover in determining the audit requirement, let us understand how to calculate F&O trading turnover.

How to calculate turnover in F&O trading?

Turnover calculation for F&O trading is different from regular stock market investments. The turnover in F&O trading is not based on the total contract value but on the absolute profit and loss value.

Absolute turnover refers to the sum of absolute profits and losses from all F&O trades during the financial year.

Let us understand this with the help of an example.

You buy 100 lots of futures at ₹200 and sell at ₹210, making a profit of ₹1000. You also buy 200 lots of options at ₹300 and sell at ₹290, making a loss of ₹2000.

Now, your total turnover would be = ₹3,000 (₹1,000 + ₹2,000)

Advance tax liability for F&O traders

If your total tax liability exceeds ₹10,000, you will have to pay advance tax in four quarterly installments as per the table below.

If you have opted for presumptive taxation, you must pay the entire amount of advance tax in a single installment on or before March 15. Failure to pay advance tax results in interest penalties under Sections 234B and 234C.

F&O trading tax implications for residents and NRIs can be complex. But this guide serves as a good base for most scenarios. If you still find it difficult to assess how your F&O income will be taxed, you may consult a tax professional.

But if you prefer the DIY route, just keep these key aspects in mind, and you should be good to go. Categorise F&O gains or losses as non-speculative business income. File your tax return using the appropriate ITR-3 or ITR-4 form. Maintain proper records of all expenses and turnover calculations.