• New rules lower F&O turnover, reducing the need for tax audits by only considering positive and negative trade differences.
• F&O income is treated as non-speculative business income and must be reported in the ITR-3 form under business income.
• F&O traders must maintain detailed records and can claim business-related expenses, with careful documentation required for deductions.

For a long time, traders in the F&O segment were only subject to a tax audit when their total turnover exceeded Rs. 10 crore. However, there was a recent amendment to the formula that computes the trading turnover. While the earlier method calculated the options premium as part of the turnover, only the positive and negative differences are now considered. The previous computational method was vulnerable to inflated numbers, often making tax audits necessary. With the implementation of the new F&O trading income tax rules, the F&O turnover would consistently be comparatively lower, reducing instances of a tax audit.

In this article, we will discuss the new F&O trading income tax rules, the essentials of F&O trading income tax and reporting, the calculation of F&O turnover, and the best tax regime for F&O traders. This will be useful to all traders in the F&O segment, especially if you are facing challenges understanding the implications of tax reporting.

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Recently, the Finance Minister of India, Ms. Nirmala Sitharaman, proposed increasing the Securities Transaction Tax (STT) on F&O from 0.02% to 0.1% to expand the tax base. The FM also recommended taxing the income that individuals receive from share buybacks.

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For traders in the F&O segment, it is vital to include information on their trades in tax returns. Declaring all income sources is important and cannot be overlooked simply because of a lack of awareness. Failure to disclose may result in a notice from the Income Tax department. There are even benefits to disclosing losses from the trades; thus, reporting is essential.

From the taxation perspective, all proceeds (profits and losses) from F&O trading are categorised as part of the non-speculative business income of a trader. This provision is laid out in the Income Tax Act’s Section 43(5). The broader header for F&O trading income tax is Business Income, which, in turn, falls under the Profits and Gains from Business and Profession (PGBP).

Also read: SEBI

The profits and losses from F&O trades must be reported in ITR-3 form. This is because the F&O income is accounted as business income falling under the category of PGBP.

There are several kinds of traders in the financial market who often engage in other kinds of trading, such as intra-day, short-term, or long-term investments. The taxation laws on all these are slightly different from one another and from the F&O trading income tax.

In intraday trading, one of the most popular trading methods, it is important that it should be considered a different business with its returns separately calculated. Besides this, your returns may be categorised as capital gains or business income in short-term, high-frequency, and large-volume trading. Also, gains from your long-term equity investments may be categorised as long-term capital gains.

When your trading is categorised as a business, a few more criteria apply to you. For instance, if you are an individual running a company, you are required to maintain records if your income is more than Rs. 2.5 lakh or if the business turnover is more than Rs. 25 lakh in at least one of the last three years.

For F&O traders, it is vital to maintain statements of trades, expense receipts, and statements of bank accounts.

Also read: Forfeited share

The absolute turnover for F&O trading income tax can be calculated as the sum of negative and positive differences.

Absolute profit = F&O trading turnover

Business expenses can be subtracted from the income earned through F&O trades when filing the F&O trading income tax. You can also claim the expenses even if you have a loss.

It is also crucial to only claim expenses in F&O trading income tax that are exclusively and directly related to your company. These can include brokerage commissions, fees, subscriptions to informative channels, phone bills, internet prices, and consultancy services.

As an F&O trader, it is important to maintain a robust record of bills and receipts for F&O trading income tax. Do note that if your expenses are higher than Rs. 10,000, deductions may not be allowed. If the expenses are both professional and personal, it may be best to split the cumulative amount and claim a portion that is reasonable.

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The option to file F&O trading income tax with the new tax regime is available for traders in this segment. The provisions are defined in the Income Tax Act’s Section 115BAC. The following pointers concerning the new tax regime can help you decide if you want to file under it:

• The new slab rates are used to calculate the tax liability
• Claiming deduction as per Chapter VI-A is not allowed
• Traders have the option to make a one-time switch back from the old tax regime to the new one.

Conclusion

The recent changes in F&O trading income tax rules, including the revised turnover calculation and increased Securities Transaction Tax, have significant implications for traders. Understanding these updates is crucial for minimising tax liabilities, ensuring accurate reporting, and making informed decisions about tax regimes. Proper record-keeping and adherence to reporting requirements are essential for compliance and enjoying potential tax benefits.