Computation of Tax on Gains from Futures & Options (F&O) Trading

by Shiv Kukreja on July 4, 2018

in Tax

This post is written by CA Karan Batra, who is the Founder and CEO of Chartered Club. He can be reached at mrkaranbatra@gmail.com

The Gains from trading in Future and Options (F&O) are not considered as Capital Gains but are considered as Business Income. These gains are considered as non-speculative business gains and therefore income tax on these gains is levied as per the income tax slab rates.

To levy income tax – the first thing which is required to be done is computation of income. Once the income is computed, the tax would be levied on the income so computed. The lower the income, the lower is the tax payable and the higher the income, the higher is the tax payable.

There are 2 ways to compute the Income from F&O Trading:-

  1. Normal system of computation i.e. Income = Sales – Purchase – Other Expenses – Depreciation
  2. Presumptive system of computation i.e. Income = Assumed percentage of Sales

These 2 systems have been explained below in detail.

Normal System of Taxation

Under the normal system of taxation, the income is computed as per the following formula:

Income = Sales – Purchase – Other Expenses – Depreciation

This can be explained with the help of an example.

Example: During the complete year 2017-18, Mr. A traded in Nifty several times. His total purchases were worth Rs. 70 lakhs and Sales were 80 lakhs. Apart from these, he also incurred several expenses related to his business which are:-

  1. Subscription plan for receiving stock market tips: Rs. 3,000
  2. Telephone and internet expenses: Rs. 20,000
  3. Salary paid to employee(s): Rs. 2,00,000
  4. Fee paid to CA for tax return filing: Rs. 10,000
  5. Other business expenses: Rs. 15,000

Therefore, his total other expenses are Rs. 2,48,000 (Rs. 2,00,000 + Rs. 20,000 + Rs. 3,000 + Rs. 10,000 + Rs. 15,000)

In addition, the depreciation on assets during the year was Rs. 1,25,000

In this case, the Income of Mr. A would be as follows:-

Income = Rs. 80,00,000 – Rs. 70,00,000 – Rs. 2,48,000 – Rs. 1,25,000

               Rs. 6,27,000

Under this system, the income is computed on actual basis and the taxpayer is required to maintain a record and invoice for each and every expense which he has made. Moreover, he is also required to maintain all the books of accounts, Profit & Loss A/c. as well as the Balance Sheet.

It gets very difficult for a small business owner to maintain so many records and to keep a copy of all the invoices.

Therefore, for small traders – there is another option wherein no records are required to be maintained and the tax is to be paid on an assumed basis. This scheme is called Presumptive Tax and is explained below.

Presumptive Scheme of Taxation – Section 44AD

Under the Presumptive scheme of taxation, the law gives the small traders an option to declare his income as a percentage of total turnover.

The law says that the small trader can disclose his income at any level above 6% of Turnover. The small trader would be required to disclose his total turnover and the income which he would like to disclose (Min 6%). Earlier the minimum required to be disclosed was 8% but this was reduced to 6% from Financial Year 2016-17 onwards. As the payment is always received in bank in case of F&O Transactions, they can disclose the income as 6% of Turnover.

In case the small trader feels that his income is less than 6%, he would be required to shift to the Normal Scheme of Taxation and prepare all books of accounts and keep copies of all invoices.

The presumptive scheme of tax is only applicable to traders whose annual turnover is less than Rs. 2 Crores.

However, in case of F&O Trading, as the value of contracts traded is huge – the manner of computation is a bit different and the same has been explained below.

Computation of Turnover in case of F&O Transactions

In case of F&O transactions, the total of all contracts sold would not be considered as the total turnover.

In case of F&O transactions – the turnover would be computed by taking into account the total of all favourable and unfavourable trades. This can be explained with the help of the following example:-

Mr. B enters into the following 2 transactions during the year:-

  1. Purchased 1 Lot of Nifty for Rs. 8,00,000 and sells the same for Rs. 8,50,000, thereby earning a profit of Rs. 50,000.
  2. Purchased 1 Lot of Reliance Industries for Rs. 9,50,000 and sold for Rs. 9,40,000, thereby incurring a loss of Rs. 10,000.

In the above case, the total turnover would be considered as Rs. 60,000.

Which of the above 2 systems is better?

The normal scheme of taxation may turn out to be better in some cases whereas Presumptive Scheme of taxation may turn out to be better in other cases.

Therefore, it is very difficult to state which option is better. The trader should himself assess as to which system is better for him.

In case you have any query regarding the tax treatment of F&O trading, or you have any special case of F&O trading gain/loss, please share it share. It might help other investors or tax-payers to get their issues resolved.

{ 15 comments… read them below or add one }

pankaj July 5, 2018 at 10:54 AM

1. How is turnover calculated for Options Trading – is it same as futures, p/l to be added.
2. Also, what is tax treatment of long-dated options as in if one is to buy NIFTY CE 20JUN2020 today and hold it till expiry, how is tax calculated?
3. Commodity & Currency trading too is picking up what are tax treatments in such activity?

Reply

Karan Batra July 11, 2018 at 5:34 PM

1. Options turnover is calculated in the same manner as Futures
2. Same as explained above i.e. turnover would be calculated when the long dated option is sold.
3. Futures and Options of Commodity and Currency would also be calculated in the same manner.

Reply

S.K. July 5, 2018 at 9:15 PM

Please explain clearly STCG & LTCG on these Company NCDs versus Taxation comparison on Tax-Free Bonds. Please explain which of the two Investment Instruments are more tax-friendly to investors?

Thank you for your assistance & extremely grateful for your ever helpful write-ups/articles.

Reply

S.K. July 5, 2018 at 9:20 PM

Just wish to add, I am reqiwsting information only on the STCG & LTCG aspects of taxation of Company NCDs versus Tax Free Bonds.

Thank you again.

Reply

Karan Batra July 11, 2018 at 5:44 PM

Hi S.K.

The capital gains for both Company NCDs and Tax-Free Bonds is the same. It is dependent on the period of holding where if it is sold before 1 year then STCG/L arises and if sold after 1-year LTCG/L arises.

In Tax-Free Bonds, the interest earned is completely tax-free whereas in Company NCDs the interest is taxable. This is the only major difference from the tax point of view.

Reply

S.K. July 11, 2018 at 8:36 PM

Sir, your response doesn’t appear to be accurate. I am told the tax percentage is different for STCG & LTCG of Tax Free Bonds versus ordinary NCDs. Could you please reconfirm & oblige.

Reply

Shiv Kukreja July 14, 2018 at 1:06 AM

Hi S.K.,
Karan is correct, the STCG and LTCG tax treatment is the same for Tax-Free Bonds versus NCDs. LTCG is taxed at 10% of the gain for listed tax-free bonds as well as listed NCDs, whereas STCG is taxed as per your tax slab.

Reply

S.K. July 14, 2018 at 6:40 PM

Thanks Mr. Shiv for responding.
I understand, for TAX FREE BONDS, LTCG occurs after 1 year of holding period & tax is not taxable after 1 year holding & for NCDs LTCG occurs after 3 years of holding period & Taxation rate @? Sorry, I am somewhat confused…. Request your clarification please.

Reply

Shiv Kukreja July 15, 2018 at 12:18 AM

For both listed tax-free bonds & listed NCDs, long term is more than 1 year. Tax-Free Bonds too are taxable after 1 year of holding, as is the case with NCDs. NCDs LTCG does not occur after 3 years. It too happens after 1 year of holding. LTCG tax rate for both is 10%.

Reply

Surana July 6, 2018 at 7:08 AM

I am salaried person.

I have incurred loss in F&O trading and minor gain in short term trading.

How can i adjust my F&O loss. Can I carry forward it?

kindly advise

Reply

Karan Batra July 11, 2018 at 12:41 AM

F&O Loss can only be set-off against F&O Income.

In your case – you can carry forward the loss to the future years and set-off in future.

Reply

Amit July 13, 2018 at 1:34 PM

I have similar case.To carry forward losses in FnO ,is it mandatary to get audit done.

Reply

Swati Singh July 20, 2018 at 1:11 PM

Thanks for the informative article.
Can you please also inform the business code to be used in FY 2017-2018 for F&O trader? The codes are changed and there is no clarity on this.
Thanks in advance.
Swati

Reply

PAWAN August 6, 2018 at 12:33 PM

SIR ,
in the first case if sales was 1.5 cr , whether tax audit was required, in the first case total of favourable and unfavourable is not the turnover

Reply

farhan August 6, 2018 at 1:39 PM

this is best advice for taxation

Reply

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