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Taxation of Income and Loss Arising From Trading of Futures and Options

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Taxation of Income and Loss Arising From Trading of Futures and Options

Both incomes and losses that arise from trading of futures and options has to be treated as a business income or loss and requires filing of returns using the ITR-4 tax form. Taxable income after deductions is also taxed.

Section 43(5) of the Income Tax Act states that any transactions that take place during Futures and Options trading are to be deemed non speculative transactions.

This means than any profits gleaned from such trading would be taxed in the same manner as income or profits acquired from the carrying on of any other kind of business.

Therefore the taxpayer can claim deductions on tax for any expenses he may have incurred while trading in Futures and Options such as telephone bills, electricity bills, internet bills etc

ITR for profit or loss arising from futures and options

Any income or loss that arises from the trading of Futures and Options is to be treated and considered as business income or business loss. As such, the ITR-4 tax form would be required by the taxpayer to file his or her returns. 

Ramifications of Treating Income from Futures and Options as Business Income

 

Should any income or profits arising from the trading of Futures and Options be treated as business income then the following ramifications come into play:

  • Any expenditure relating to administration is considered to be deductible
  • Securities Transaction Tax or STT will be deemed to be deductible as well
  • Any loss arising from trading of Futures and Options can be offset against any income arising from the taxpayer’s residential property, any other business as well as any other source barring the taxpayer’s regular salary

.

  • Any losses that have not been absorbed can be offset against any income the taxpayer receives from any other business, and can be carried ahead for a maximum period of 8 years
  • A tax audit will be mandatory if the turnover or income arising from trading of Futures and Options is above and beyond Rs 1 crore

Illustration

Turnover can be determined by looking at the following example:

Mr Patel is a Futures and Options trader and has incurred a profit and loss from the following transactions:

  • He acquires futures in Company X, which are worth Rs 10 lakhs, eventually selling them for Rs 11 lakhs. This sale resulted in him earning a profit of Rs 1 lakh.
  • He acquires futures in Company Y, which are worth Rs 5 lakhs, eventually selling them for Rs 4.5 lakhs. This sale resulted in him suffering a loss of Rs 50,000
  • Total amount of profit earned = Rs 100,000 – Rs 50,000 = Rs 50,000
  • Total turnover will be the combination of profit and loss = Rs 100,000 + Rs 50,000 = Rs 1,50,000

How Losses Arising From Trading In Futures and Options Are Treated

Any loss that has been incurred from the trading of Futures and Options is treated in the following manner:

  • All losses that an individual incurs through Futures and Options trading is permitted to be offset against any income he or she earns from house property income, Business income and other sources, with the exception of income earned through salary.
  • Losses incurred through Futures and Options trading can be carried ahead to subsequent years and offset against any income that the individual may receive during this time.
  • For any loss incurred through Futures and Options trading that an individual wishes to carry forward or offset, he or she is required to provide full disclosure of such losses in his or her Income Tax Returns, and these tax returns will be required to be filed prior to the prescribed filing date.

Conclusion:-

Income earned from future and option is treated as business and profession income and for the purpose of calculation of turnover as per the above method.

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