|Taxation of F & O transactions|
TAX TALK-23.10.2017-THE HITAVADA
CA. NARESH JAKHOTIA
The most crucial point arises with regard to the determination of the “Turnover” in the case of F & O. The total of profit and loss (i.e., positive and negative figure) shall be taken as turnover. It makes no difference whether the difference is positive or negative for computing turnover. Aggregate o the differences, whether positive or negative is considered as “turnover”.
Taxation of F & O transactions
One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute- William Feather
Many people believe that share trading & commodity transaction is one of the simplest ways of making money in the stock market. Obviously, it is imperative to understand the tax implication on such transactions.
i] If shares are purchased on a particular day and sold next day or afterwards then it is not treated as ‘Speculative business'.
ii] Income from delivery based transactions could either be categorized under the head “Income from Business” or under the head “Income from Capital Gain” depending upon various factors. The prominent factors that play an important role in determining whether it is a business assets or capital assets are:
(a) Volume/Nature of transactions. (b) Intention/Logic behind investments. (c) Holding period of shares (d) Investment of own funds or a borrowed fund. (e) Other business activities of the assessee. Etc.
[Share trading would be categorized as business if there are high & frequent transactions or if it is the main activities of the taxpayer or if trading is done with a view to earn instant profit etc. The correct categorization of share trading activity is important to arrive at the correct tax liability and to comply with the audit & other provision].
ii] If treated as capital gain & the sale transaction is done through stock exchange then (a) Long Term Capital Gain would be exempt whereas (b) short term capital gain would be taxable @ 15%.
iv] If treated as business income then entire income would be taxable like other regular income of the taxpayer and tax liability would be in accordance with the applicable tax slab.
v] If share trading activity is considered as business then tax audit would be mandatory for individual / HUF if (a) the turnover exceeds Rs. 2 Crore or (b) if the turnover is less 2 Crore & income offered for taxation is less than 8% of turnover or if there is a loss.
3. Income from Future & Options (Derivative) Transactions:
i] Transactions in derivatives are specifically excluded from the category of “Speculative transaction” if the transaction is carried out (a) on a recognised stock exchange (b) the securities transaction tax is paid and (c) trade is supported by contract note. Profit/Loss in derivatives (futures and options) is treated as non-speculative business even though delivery is not there in such transactions.
ii] Profit/loss from such transactions will be considered as normal business income & loss.
iii] No special tax rate (like 15%) is applicable for taxing profit from derivatives transactions & tax rate shall at normal rates applicable to an Individual.
iv]Unabsorbed non-speculative business loss can be carried forward for eight years to be set off against business income of subsequent years.
v] Applicability of Audit in case of derivative (F&O) Trading:
Taxpayer should carefully note that tax audit provision (as per section 44AB) will be applicable to the transactions in F&O also as income from derivative trading is considered as normal business income. To be more precise, if turnover of an individual/HUF from derivative transactions exceeds Rs. 2 Crore, taxpayer would be required to get the accounts audited. In case turnover is less than 2 cr, tax audit (u/s 44AB r/w section 44AD) will be mandatory if the net profit from such transactions is less than 8% of the turnover. Interestingly, in case of Loss from derivative trading, since profit (Loss in the present case) is less than 8% of the turnover, Tax Audit will be applicable. The most crucial point arises with regard to the determination of the “Turnover” in the case of F & O. The total of profit and loss shall be taken as turnover. Aggregate of the differences, whether positive or negative is considered as “turnover”. It makes no difference whether the difference is positive or negative for computing turnover. While arriving at the taxable profit, all the expenses incurred for earning income like telephone, mobile, conveyance, depreciation on assets used for the purpose of business etc would be admissible as deduction.
4. ITR return filing for person with F & O Income:
Since income from F&O trading is to be treated as business income, individual with F&O income/loss has to file return in ITR 3 or 4, as the case may be. Filing of the return within due date is mandatory if the taxpayer intends to carry for such loss for set off against its income in subsequent years.
[The author is a practicing Chartered Accountant from Nagpur. Readers may send their direct tax related queries at
SSRPN & Co
10, Laxmi Vyankatesh Apartment
C.A. Road, Telephone Exch. Square
or email it at email@example.com].