All about Taxability of F&O transactions
Published: Nov 14, 2018
TAXPAYERS who deal in F&O tend to miss the reporting of F&O transactions in tax return. While this could be due to ignorance but it is important that all the transactions are reported in the Income tax return. Otherwise, when the taxpayers receives a notice, it will be difficult to explain the ignorance and this may entail tax, interest and penalty.
Business Income - Speculative or Non Speculative
Business income can be classified as speculative and non-speculative income for tax purpose. As per Section 43(5) of Income Tax Act 1961 (Act), speculative transactions mean a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is ultimately settled otherwise than by the actual delivery. However, the above definition excludes a transaction which is electronically carried out in respect of trading in derivates on a recognized stock exchange.
Thus, it can be concluded that Speculative business income includes any income from intraday equity trading. Whereas Non-speculative business income includes any Income from trading in F&O and other business. Hence, trading in F&O is considered as non-speculative as these instruments are used for hedging and also for taking/giving delivery of underlying contract.
Claiming of expense
When any transaction is reported under the head Profit and Gains from Business or Profession (PGBP) then the related expense can be claimed as expenditure and the net profit is subject to Income Tax. Here the next question could be what expenses can be claimed as allowable expenditure. Section 37(1) of the Act, among other provisions, provides that any expenditure which is not a capital expenditure/ personal expenditure and which is wholly expended for the purpose of the business will be allowed as expenditure for computing income from PGBP e.g. in the case of F&O business, one can take a stand that all the expenses incurred towards Brokerage, telephone and internet bills staff salaries etc which is incurred for conducting the F&O business can be claimed as allowable expenditure. However, it is important to note that all the expenses which are claimed as allowable should be substantiated with supporting bills. Further, any expense for more than Rs 10,000 in cash, may not be allowed irrespective it is incurred for business purpose.
Calculation of turnover
For every trade, contract notes are issued which show the value of assets bought or sold. While for computing the turnover only the difference between is used. For example:
Mr A bought one lot of ICICI Bank at 1 lakhs and sold it for 1.75 lakhs (Profit = Rs 75,000)
Mr A bought one lot of Yes Bank at 3.12 lakhs and sold it for 3.00 lakhs (Loss= Rs 12,000)
The turnover shall be calculated as Rs 75,000 + Rs 12,000 = Rs. 87,000. Also, any premium received when you're writing an option must be added to the turnover value.
Loss from F&O Transactions
Loss arising out of F&O transactions can be set off with any other business income or with income under any other head of income except salaries. Further if the loss is not set off in full in the same year then the same can be carried forward for set off with business income for next 8 years. However, to carry forward the loss the return of income should be filed before the due date.
Audit of Books of accounts1
When the turnover from F&O business exceeds Rs 1 crore the accounts need to be audited by a Chartered Accountant in practice.
Further as per Section 44AD where the turnover of the tax payer's business is Rs 2 crores or less then the tax payer can opt to compute tax on 8%2 of the total turnover. If the tax payer declares profit which is less than 8% or 6% as applicable (and other income is above taxable limit) then the accounts are mandatorily required to be audited by a Chartered Accountant in practice.
Consequences of non-compliance
Among other penalties for concealment or furnishing of inaccurate particulars of income, following are the penalty applicable in case of non maintainance of books of accounts and for not getting books of accounts audited:
- For non-maintaining proper books of accounts the tax officer may levy a penalty of3 Rs. 25,000.
- For not getting the books of accounts audited then penalty to the extent of 4 1.5 % of the turnover but not exceeding Rs. 1.5 lakhs may be levied.
(The views expressed are strictly personal)
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1 Section 44AB
2 6% where the turnover is received in account payee cheque/ draft or ECS
3 Section 271A
4 Section 271B
