(FO) Income Tax, also known as Futures and Options Income Tax, is essential as income from F and O is taxable as per the Income Tax Act.

What are Futures and Options, (F and O)?

Future and Options are financial derivatives which allow traders to speculate on the price movements of an underlying without owning it.

The Future in F and O obligates the buyer to purchase an underlying asset and the seller delivers it at a predetermined price and date. On the other hand, Options in F and O obligate the buyer that he has the right but not an obligation to buy or sell an underlying asset at a predetermined price and date. However, the seller will honour the transaction if the buyer chooses to exercise his option.

How to report F and O trading for tax purposes?

The income from F and O trading is taxable in the hands of the trader. Further, the income from F and O is classified as non-speculative business income. Therefore, the reporting of income is as the Profits Gains from Business Profession. It is essential to maintain proper books of accounts for recording the F and O. These transactions can include purchases, sales, expenses or any other financial details.

How is FO trading taxed in India?

In India, F and O trading is taxed as per the Income Tax Slab of the trader. Having said that, there are different income tax slab rates for different levels of income under the Old Tax Regime and the New Tax Regime. These slab rates are as follows:

Income Tax Slab Rates under the Old Tax Regime and New Tax Regime:

Which ITR Form to File While Reporting F and O Income?

As already stated above, income from Future and Options trading is a non-speculative income. However, the ITR form to be filed for income from F and O income depends upon the level of trading and tenure of holding the shares as well as gains or losses from these shares.

If you’re a regular trader who is involved in trading significantly in Future Options, then you must report your earnings under the head Profits Gains from Business Profession by filing the ITR–3 form.

However, if you do not get involved much in trading Futures and Options, then you must report your earnings by filing the ITR-2 form.

In case, the trading in F and O is less than Rs. 2 crores, then the calculation of tax earnings can be done on a presumptive basis, @6% of turnover (or 8% of turnover, there is no use of an electronic clearing system). Accordingly, you can use form ITR-4 to file your Income Tax Return.

Who is Eligible for an F and O Trading Tax Audit, and Under What Circumstances?

Before we discuss the eligibility for F and O Trading tax audit, we need to know the provisions that deal with tax audit:

Firstly, as per Section 44AB, if the total turnover of a person carrying on business exceeds Rs. 10 crores, they are required to have their accounts audited.

Note:
 The threshold of Rs. 1 crore will not apply in the case of F and O trading as 95% or more of the transactions are digital.

The audit for income from F and O trading depends upon the annual turnover of the trader.

Secondly, as per Section 44AD — an individual or entity with a turnover of up to Rs. 2 crores has the discretion to declare their taxable income on a presumptive basis at 6% of his total turnover. If the individual opts for this Scheme, then he will have to continue with it for 5 consecutive years. If the individual opts out of this scheme and declares income or losses less than 6%, then a tax audit will be mandatory.

Now, comes the eligibility for the F and O Trading Tax Audit part:

The tax audit for F and O trading depends upon the annual turnover of the trader. For better understanding, we have divided the turnover of traders into three parts:

1. Turnover is less than Rs. 2 crores

If the profit from F and O trading is equal to or greater than 6% of the annual turnover, then a tax audit is not mandatory. However, if the loss or profit from F and O trading is less than 6% of the annual turnover or the trader does not wish to opt for a presumptive taxation scheme in any of the immediate 5 years, then a tax audit will be applicable.

2. Turnover is between Rs. 2 crores and Rs. 10 crores

If the annual turnover of the trader is between Rs. 2 crores to Rs. 10 crores and more than 95% of transactions are digital, then there is no requirement for tax audit even if there is profit or loss. Otherwise, the provisions as per point no. 1 will be applicable.

3. The turnover is more than Rs. 10 crores

Tax audit is applicable if the turnover is more than Rs. 10 crores. This is irrespective of the profits or losses.

How to deal with F and O Trading losses?

If you have incurred any losses due to F and O trading, then you carry forward it against your income for 8 years by filing your Income Tax Return within the due date. However, the loss adjustment can only be against the non-speculative losses since income is F and O trading is non-speculative income.