This post is written by CA Karan Batra, who is the Founder and CEO of Chartered Club. He can be reached at email@example.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:-
- Normal system of computation i.e. Income = Sales – Purchase – Other Expenses – Depreciation
- 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:-
- Subscription plan for receiving stock market tips: Rs. 3,000
- Telephone and internet expenses: Rs. 20,000
- Salary paid to employee(s): Rs. 2,00,000
- Fee paid to CA for tax return filing: Rs. 10,000
- 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:-
- 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.
- 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.
19 thoughts on “Computation of Tax on Gains from Futures & Options (F&O) Trading”
Hello Karan,kindly tell me one thing..To carry forward the loss from futures , is tax audit required??
I have few queries listed as below:-
1) I bought a nifty future whose price is 800000 but I am only paying the margin amount lets say 65000 and I sold it at 807000 and made a profit of 7000 and I bought a future of company X whose value is 750000 but I am paying only 50000 as margin amount and I sold it at 745000 and made a loss of 5000. What will be my turnover in this case then?
2) Now as I checked in my profit and loss sheet, which I downloaded from my account on my broker’s website, although, I am paying only margin amount but in total purchase and sale, the whole price of future is considered. And hence I I check my total traded value for the whole year, it goes in crores but my net profit is only a few thousands. How it will affect my tax filing?
3) The tax will be calculated on turnover or the net profit?
While calculating turnover for Futures, do we need to take into account daily MTM between buy and sale dates. E.g
Bought 150 Nifty Future on 6-Aug @ 10,000
Sold 150 Nifty Future on 10-Aug @10,100
Turnover = 150*100 = 15,000
Do we also include daily MTM which gets debited/ credited to us on 7th Aug to 9th Aug on account of changes in NIFTY closing price on respective dates.
Date || Nifty Closing || MTM
7-Aug || 10050 || 7,500/-
8-Aug || 9950 || -15,000/-
9-Aug || 10060 || 16,500/-
I am a salaried individual. I have some losses from F&O trading, can this be reported under Income from BUsiness / Profession and set off against Interest income under Other sources.
this is best advice for taxation
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
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.
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?
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.
I have similar case.To carry forward losses in FnO ,is it mandatary to get audit done.
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.
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.
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.
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.
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.
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.
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%.
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?
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.