Taxation on F&O

May_27_Bloga_Tax_Blog

 

Most of the Indian Taxpayers irrespective of their earnings through business, jobs, services, indulge in Share trading because it is the quickest way of earning handsome money. It is therefore, necessary to know the taxation on the earning from share trading. But, before going into the taxation part, first it is important to understand what type of share trading activity you are indulging in, whether it is Taxable as Business Income or not.

Income from Futures & Options (F&O) is treated as an income from business and profession under income tax act, 1961. Thus, any profit or loss arising from Futures & Options will be assessed under the head of Income from Business and Profession irrespective of assessee being engaged in any other business or not. Since F&O income is treated as Normal Business Income not speculative income, Rate of Tax shall be same as normal rates applicable to an Individual.

Till assessment year 2005-06, the Income Tax Act, 1961 did not have any special provisions dealing with taxation of derivatives transactions in general, and dealing with futures and options in particular, though derivatives contracts have been traded on Indian stock exchanges since 2000. The Finance Act 2005 has amended the provision to section 43(5), with effect from Assessment Year 2006-07, to provide that derivatives trading transactions would not be regarded as speculative transactions, subject to the fulfilment of certain conditions.

Whether Always Taxable as Business Income

The most common issue that arises in taxation of derivatives transactions is that of whether derivatives transactions are always to be regarded as business transactions.

It is true that in most cases, derivatives transactions would be regarded as business transactions on account of the following factors:

  1. The purpose behind entering into most derivatives transactions is to profit from short-term fluctuations in market prices.
  2. The period of any derivatives transaction cannot exceed 3 months, and such transactions are invariably short-term transactions.
  3. Often, the sheer volume of trades in derivatives transactions entered into by a person on an ongoing basis indicates that it amounts to a business.
  4. Many people who trade in derivatives may be associated with the stock market in some way or the other – they may be stock brokers or their employees, or regular day traders. For such people, derivatives trading are an extension of their normal business activities.

However, the issue of whether an activity amounts to a business or not depends upon various factors, and is not decided just because of the existence or absence of any one circumstance. There can be situations where derivatives transactions may not amount to a business. For instance, derivatives transactions may be carried on by an investor to hedge his investment portfolio. In such a case, the mere fact that the investor had to square up his derivatives position every 3 months and take up a fresh position, or pay mark-to-market on a daily basis, would not detract from the fact that the prime purpose of such transactions was to preserve the value of the investment portfolio.

Another common practice in the stock markets is arbitrage between the cash market and the futures market. It is a well known fact that the difference in prices between the futures market and the cash market is primarily dictated by the short-term interest rates, and such difference is normally equivalent to the interest that one would earn on short term lending. Therefore, a person having surplus funds may buy shares in the cash market, while simultaneously selling an equal amount of futures of the same share in the futures market. He would take delivery of the shares bought in the cash market.  On maturity of the futures, the shares bought in the cash market would be sold in the cash market. Since the futures would be squared off at the cash market price, the profit on the transaction would normally consist mainly of the difference between the initial purchase price in the cash market and the initial sale price in the futures market, with small adjustments for expenses such as brokerage, securities transaction tax, service tax and the market spread between the buying and selling quotes in the cash market.

Are such arbitrage transactions business transactions, or are they really in the nature of interest seeking transactions? If one looks at the substance of these transactions, they are not motivated by a desire to earn profits, but just to avail of the benefit of the short term interest rates. There just two legs of the transaction – the purchase and futures sale, and the expiry of futures and cash sale. The income element in the transactions is determined right at the outset, and does not fluctuate to any material extent, even if there is substantial volatility in the market.

It may be however noted that other factors, such as frequency of transactions, nature of other business carried on, etc., would also determine whether such transactions are business transactions or not.

If not Business Income, under which Head Taxable

The question arises that in a situation where derivatives transactions are not business transactions, under which head of income should such transactions be considered?

The answer to this question would partly depend upon the substance of the transactions. If the transactions are in the nature of interest-seeking transactions, then going by the substance of the transactions, the income from such transactions may be considered as interest.

But if the transactions are in the nature of hedging of investments, how would they be taxed? A derivative, being a security and a right under a contract, is certainly a valuable right, which is capable of being assigned. The right under the derivatives contract can therefore certainly be regarded as property, and therefore as a capital asset.

The issue which arises is – is there a transfer of the capital asset? When the transaction is squared up by an opposite corresponding transaction, there is certainly a transfer. But in cases where the squaring up is on expiry of the contract, can a transfer be said to have taken place? Considering the definition of “transfer” in section 2(47), the expiry of such a contract can possibly be regarded as an extinguishment of the rights in the asset. As held by the Supreme Court in the case of CIT vs. Grace Collis 248 ITR 323, the definition of “transfer” in section 2(47) clearly contemplates the extinguishment of the rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer itself. A view is therefore possible that on expiry of the derivatives, there is a transfer of the capital asset. The gains or losses arising from such derivatives would accordingly be taxable under the head “Capital Gains”.

Though such income would be taxable under the head “Capital Gains”, and the derivatives transactions would be subject to Securities Transaction tax, such gains would not be entitled to the concessional tax treatment for short-term capital gains under section 111A, since the benefit of that section is available only to equity shares in a company or a unit of an equity oriented mutual fund.

If derivatives transactions are business transactions, the question then arises as to what constitutes the turnover in derivatives transactions for the purposes of section 44AB or for other purposes?

In the case of futures, the purchases of futures are not recorded as a purchase in the books of account, nor are the sale of futures recognized as a sale. Only the initial margin and mark-to-market margins are recorded as and when paid, and the profit or loss on the futures transaction is recorded as an income/expense on squaring up of the transaction or on expiry of the futures contract.

The margin paid is certainly not the turnover, and neither can the futures sale be regarded as a sale in the light of such accounting treatment. At best, only the difference (profit or loss on the futures transaction) can be regarded as turnover.

The question then is – should one net off the profits and losses and is only the net profit or loss to be regarded as the turnover? This does not appear to be proper, as the net profit or loss would not reflect a measure of the actual volume of transactions. It should be the gross differences which would constitute turnover, and not the net differences. The scrip wise gross differences for each maturity should be determined, the negative signs of the losses within scrip of each maturity ignored and such losses grossed up with the gains to compute the turnover.

In the case of options, only the premium and margins paid is reflected in the books of account at the inception of and during the currency of the option. The strike prices of the margins do not get reflected in the books of account, except for the limited purpose of identifying different sets of options. On the squaring up or expiry of the options, the value of the option on sale or maturity is received or paid, and the profit/loss on the options accounted for. There is a view that such value of the options on squaring up/maturity would constitute the turnover in case of options, though the better view seems to be that it would be the gross differences, as in the case of futures that would constitute the turnover.

This post was written with the help of Kumar Verma & Associates, a reputable CA firm established in New Delhi.

Elvis D'Souza

Elvis D'Souza

Elvis is responsible for managing the entire backoffice operation at RKSV. Elvis enjoys movies, partying, and listening to music. He is a self proclaimed biggest Aamir Khan fan on the planet.

  • sridhar sahu

    income from intraday trading on equity market,
    what will be the tax treatment in above case

  • Elvis D’Souza

    This will be treated as income from “Speculative Business”. This income will be added while calculating your gross total income, which cannot be set off with any other source of income and can only be set off with Speculative gain / loss only.

  • Santosh Bhat

    Hi,

    If a long straddle option is kept for the entire month till expiry, how will this be treated in taxation?

    • Elvis D’Souza

      If trading is done in Straddle option or any derivative, as per the Income Tax Act, the income from this would be considered under the head Profit and Gains from Business or Profession i.e. this income will be shown as business income.

      • A SIVARAMAKRISHNAN

        Dear sir,
        if i keep a nifty position for two days and then closing what will be the turn over,and which section of incometax act this comes under

        • Elvis D’Souza

          Section 43(5) provides that FnO transactions will not be treated as speculative if, :

          (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and

          (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

          In the above clause, “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfills such conditions as may be prescribed and notified by the Central Government for this purpose;]

          Determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:

          1. The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
          2. Premium received on sale of options is to be included in turnover.
          3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.

          Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.

  • sohan mane

    If trading is done in Straddle option or any derivative, as per the Income Tax Act, the income from this would be considered under the head Profit and Gains from Business or Profession i.e. this income will be shown as business income

  • harish agrawat

    dear elvis, if my f&o contract note says net amount due to you- 2370 rs. now this 2370 is my profit but i have paid brokerage,stt and other taxes and commission on both sale and buy side,what is the treatment of these expenses for income tax purpose

    • Elvis D’Souza

      It has two sides:
      1. If FnO Income is treated as business income – STT and all the other expenses are deductible.
      2. If FnO Income is treated as capital gain – all the expenses related to purchase and sale of such transactions are deductible other than STT.

  • D Sharma

    Hi,

    I am working in a PSU and is currently trading in Options. Now I have the following questions:-
    1. How will I calculate my tax liability on Profit & loss ?
    2. Will it be a short term gain for me or business income ?
    3. Deductions applicable on the taxes, brokerage etc.
    4. How to calculate the turnover and does it requires any audit?
    5. Any other rules of IT Act applicable on me being a PSU employee.

    • Elvis D’Souza

      Please find below point wise reply:-

      1. How will I calculate my tax liability on Profit & loss?
      Tax will be charged on such income at the normal rates applicable to an individual treating it as normal business income.

      2. Will it be a short term gain for me or business income?
      Income from trading in futures & options (F&O) is generally treated as normal business income.

      3. Deductions applicable on the taxes, brokerage etc.
      Any expense incurred for carrying on the business can be claimed as business expense including brokerage, Stamp Duty, Security Transaction Tax.

      4. How to calculate the turnover and does it requires any audit?
      It is the sum of profit / loss from each transaction. Suppose loss from transaction one is Rs.100 & gain from other transaction is Rs.150, then the turnover shall be Rs.250. If turnover exceeds 1 core, tax audit is applicable.

      5. Any other rules of IT Act applicable on me being a PSU employee.
      • Loss, if any from F&O, generally treated as business loss and cannot be set off from salary income.
      • If there is a loss in F&O and then you should file it before due date to carry forward the loss and set off from the income in future.

  • D. PAL

    I have made a loss of 5 lakhs in F&O trading from 2008 to 2012 , not filed it under my tax return of salary ………. Now in 2013 , I have made profit of 2.5 Lakhs from F&O … So how shall I file IT return ?

    • Elvis D’Souza

      The loss under F&O can be carried forward if the return has been filed as per the time specified u/s 139(1). Section 139(1) defines the time within which the return should be filed depending upon the assessee. The time period for filing the return for AY 2012-13 in your case will be 31st July 2012. If you have not claimed the loss while filing the return than this loss cannot be carried forward and will be deemed as dead loss.

      For 2013, the income of 2.5 lakhs from F&O will be taxed as business income. The said amount will be added to your salary income and tax would be applicable as per the relevant slabs.

  • yusuf ali

    I AM TRADING IN OPTION TRADE..
    HOW WILL BE ITS TAX TREATMENT?…PLS REPLY.

    • Elvis D’Souza

      Futures and Option trading basically being non delivery based trading is taxable as business income. Profit or loss from such business (F&O) will be taxable as income under the head profits and gains of business or profession whether or not the assesse is carrying on any other business or profession.

  • paresh

    sir

    is there any 8%of turnover RULE for audit for profit or loss is applicable in case of FNO?

    • Elvis D’Souza

      Sir the current situation is interpreted by different people differently. The Act states that, “Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.”.

      – Profits and gains specified in sub-section (1) = a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business
      – Total income = Gross total income less deductions

      Therefore if an assessee has just one source of income and incurs loss in it, then he shall not be covered under this section as his “total income” would be less than the minimum amount chargeable to tax.

  • ABHISHEK MANGLAM

    sir, i am dealing in mcx commodity market in gold and silver commodity, which is most likely same as future market. As per above discussion, you told that the sum of profit and loss of each transaction will be considered as turnover. Here you cleared what is turnover,, now in such case, what will be purchased?

    • Elvis D’Souza

      The scrip wise gross differences for each maturity should be determined, the negative signs of the losses within scrip of each maturity ignored and such losses grossed up with the gains to compute the turnover.

  • GOPALSARAN

    i am a day trader and trading in f&0 daily i suffered a loss during 12-13 so i have not filed my return till today so kindly advice as the return is late now what is the penaltes andhow i can file it

  • Elvis D’Souza

    F&O trading is taxable under the head Profits and Gains from Business and Profession. In case the loss under this category is to be carried forward, the return for the Financial Year 2012-13 should have been filed by 31st July 2013 considering you are not liable for tax audit. The return can be filed u/s 139(4) i.e. belated return. You can file the return upto 31st March 2015, after this date the return would become time barred. Since you have loss in your return, therefore no interest is payable.

  • Iqbal Singh Digra

    1) What is the turnover in option buying ? (buy fist then sell)
    2) What is the turnover in option selling ? (sell first then buy)

    if this is business income can i deduct expenses such as internet bill mobile bill rent software charges and advisory fee and salary paid to person how trade on my behalf (laptop or desktop bill one time)

  • Elvis D’Souza

    As told earlier, determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:

    1. The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
    2. Premium received on sale of options is to be included in turnover.
    3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.

    Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.

    Yes all the expenses can be claimed, if they are incurred for the business. In respect of payment for laptop or desktop, depreciation will be claimed on these.

  • Deepak Gala

    – Contradiction of Section 43(5)(d) & Expln to Section 73
    For a Company, Whether Loss in Cash segment (Expln to Section 73)
    can be set off against theProfit from F&O segment (Sec 43(5)(d) in light of the recent Delhi HC judgement in CIT V DLF COMMERCIAL DEVELOPERS LTD (2013) 35 TAXMANN.COM 280 (DEL)

  • Elroy

    Dear Sir, I regularly deal in shares in 4 categories : Speculation transactions / Short term buying/selling of shares , Notional Gain from shares, Gain fromOpen Sell position. I want to know the income tax implications & under what head will it be taxable in the foloowing cases :
    1. Specualtion gain during the year : 13,638/- ( Sale : Rs.1,89,46,143/-)
    2. Short term loss on shares : Rs.(1,16,030) (Turnover : Rs58,66,099/-)
    3. Notional gain on shares : Rs.4,77,999/- (Turnover :Rs.35,29,405/-)
    4. Open Sell Position : Rs.28,72,653/-

    Whether tax audit is applicable in my case? Also whether the loss in one head cna be set off profit under another head?

    • Elvis D’Souza

      Dear Sir,

      The turnover has been discussed earlier in the comments. Quoting again, that the determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:
      1. The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
      2. Premium received on sale of options is to be included in turnover.
      3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.
      In regards to tax computation and audit requirement, kindly consult your tax advisor.

  • Kunal

    Hi Elvis,

    Thanks for explaining the Derivative Taxation Topic in such detail. This was really helpful.

    But I still have some questions, for which I seek your help –

    1. My understanding based on the above content is that the Future Transactions (NSE based) will be accounted under Business Income and not as Speculative Transactions. Hence, it will be taxed as per taxation laws for income and not as Capital gains. Please confirm.

    2. You have mentioned the calculation for Turnover for Future transaction in multiple comments above – and I get it. But can you please help me with the actual section name/number in IT laws that support this definition. I ask this question because my C.A. has told me that the turnover would be calculated based on the total traded value of the Future contract. Hence, if you can please point me in the right direction, I will be able to pick this up with my C.A.

    Thanks for all your help.

    Regards.

    • Elvis D’Souza

      Dear Mr. Kunal,

      Please find my comments below:

      1. Yes this is correct. It is taxable as business income.

      2. It is included under section 44AB.

      Thanks,

  • Maddy

    In one simple question.
    If i have earned say 50 Lkh in Only Option Trading in whole year.
    My whole year expense of internet + electricity + advisory is say 2 Lkh
    How much tax i have to pay …. and how STT help in me… Kindly show the calculation and all details how u calculated…
    Its very important plz let me know.

    • Elvis D’Souza

      Dear Sir,

      I would advice you to consult your CA / Tax Consultant regarding this.

      Thanks,

  • Nikhil Jain

    Hi,

    I do options trading only.

    How to calculate turnover in options trading? suppose I bought nifty 1 lot (50) shares at premium 100 and sold at premium 150. what is the turnover?

    Same if I sell it in premium 50, then what would be the turnover?

    Thanks

    • Elvis D’Souza

      As told earlier, determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:

      1. The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
      2. Premium received on sale of options is to be included in turnover.
      3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.

      Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.

      Thanks,

  • anish jain

    I had purchased option for 10 lacs in nifty and stock as i was bullish but made loss and no stt was paid as i had only purchased option and they expired can i adjust this loss against business income.

    • Elvis D’Souza

      Dear Mr. Anish, as told earlier:

      “In terms of the specific provisions contained in the Income Tax Act, 1961, a transaction in respect of trading in derivatives carried out, normally referred as Futures & Options (F & O), on a recognized stock exchange shall not be treated as speculative transaction even if no deliveries are effected. The loss on these F & O transactions is considered as business loss. The said business loss can be set off against any head of income (Income from business/profession, Capital gain, Income from House Property, Income from other sources) other than Salary during the same year and loss not set off can be carried forward for next 8 years but such carried forward loss can be set off against business income only and as mentioned earlier, the tax payer needs to file the tax return in time to carry forward the losses.”

      As per the above, the said loss in your case can be adjusted with business income.

      Thanks,

  • vijay

    1. For F&O Derivatives, the profit and loss will be calculated as Business Income – Am i right?
    2. Still if you get profit on monthly basis, whether short term capital gains tax should be paid ?
    3.what are the documents needed for filing the Income tax if one trades on F&O ?

    • Elvis D’Souza

      Dear Mr. Vijay,

      Please find below reply to each point:

      1. For F&O Derivatives, the profit and loss will be calculated as Business Income – Am i right?
      Yes.

      2. Still if you get profit on monthly basis, whether short term capital gains tax should be paid ?
      Since F&O is taxable under business income therefore no short term capital gains would be calculated.

      3.what are the documents needed for filing the Income tax if one trades on F&O ?
      The income will be shown as a business income, taxable under the head Profit Gains from Business and Profession. A profit and loss account of your trading, to ascertain the gross income and the expenses so incurred on it, is required. You can deduct the expenses directly incurred on earning this income. Other than this, the normal documents i.e. PAN, bank details, etc are required.

  • Sai

    Thanks Elvis for your answers,

    Please help me on the below query,

    I am salaried employee and I fall into the 30% tax bracket. My wife is doing F&O trading. She borrowed 5 lakhs from me and she made a profit of 2 lakhs till now.

    My query is

    1) How much percentage she should pay towards tax?
    2) Is it fixed percentage tax on derivatives?
    3) Like salaried employees whether she can invest in 80C and can reduce the tax amount or tax on derivatives is flat on profit?

    Many Thanks.

    • sachin

      F&O Trading is Business activity and income from Derivative is treated as income from business .
      In Derivative transaction turnover is very important , whether the differences in transaction i.e. profit or loss to be totaled to get the turnover. If turnover is more than the tax audit limit then she has to get the accounts audited, or else she has to calculate 8% profit on turnover to get the taxable income.
      If the 8% of the turnover is more than the exempted limit to women then she has to pay the tax accordingly.or else no tax no audit is required.
      yes she can invest in 80C investment category if she has income (explained above) above the exempted limit i.e. 8% of turnover is more than the exempted limit to women then she can use section 80c for investment

    • Elvis D’Souza

      Dear Mr. Sai,

      Please find below reply to each point:

      1) How much percentage she should pay towards tax?
      As told earlier, F&O trading is considered as business income. Tax would be calculate as per the income slab she falls in.

      2) Is it fixed percentage tax on derivatives?
      There is no specific percentage in F&O trading. It will be done as per the income slab.

      3) Like salaried employees whether she can invest in 80C and can reduce the tax amount or tax on derivatives is flat on profit?
      Yes, she can claim the benefit of 80C investment to reduce her tax liability.

      All of the above will be considered, if the said amount is shown as a loan.

      Thanks.

  • sachin

    I am trading in F & O . How to find turnover of Option Trading , According to ICAI Guideline:-
    1) The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
    2) Premium received on sale of options is to be included in turnover.

    So the difference of Option Trading is loss or profit but what is this premium received on sale of option is also be included in turnover means what
    suppose option buy Rs. 100/- sale of option is 120/- profit is Rs,20
    how to find turnover net Difference is Rs.20/-
    and also premium received to be included i.e. Rs.120/- ?
    Or turnover is Rs.20/- or 20+120= 140/- ?

  • Elvis D’Souza

    Dear Mr. Sachin,

    The turnover in this case will be the net profit i.e. Rs, 20 only.

    Thanks.

  • Priya

    Sir I got notice for It Tax dept for “Non filing of Income tax return” from 2009.(Information code :- CIB-321, Description :-Share transaction 20000 or more)
    I am share trader from 2008.I invest in market 50000 rs. in 2008.My total turnover is 1crore in 2009-10 and 2011-12.I am private tuition teacher my income is 10000rs per month so not file itr for 2009-10 and 2010-11 and 2011-12. when i go to it dept. they say u got penalty on r ur turnover.
    pls give advice.

    • Elvis D’Souza

      I hope you are calculating the turnover correctly. Since your turnover is above the minimum limit for tax audit purpose, you were required to file your return during the time limit set under it. The returns for all the financial years are time barred now and cannot be filed. The AO can ask you to file the return u/s 148. However, once the turnover is proven, the AO has the authority to issue penalty on you equivalent to 0.5% of turnover or Rs. 150000 whichever is less for each of the years.

  • hafiz

    I do on and off trades in futures buying stock and sells them when they are in profit or sometimes loss and or carry forwarding them also and simultaneously in same account I keep the delivery of equity of stock for 2-3 months ….
    I’m in profit from stock futures and I have earned from deliveries of equities.
    Should Gains of stock future fall in general tax slab? And gains from equity stock which I keep for 2-4 months fall in short term capital gain slab? or both fall in same slab ?..what should I show myself while filing it returns trader or investor…
    You are doing a wonderful job by helping newbie like me who doesn’t know anything about taxes please clear this confusion also

    • Elvis D’Souza

      Sir, the gain from derivatives will always be considered as your business income and taxed as per your slab. For equity, you need to check, whether these trades were done for the purpose of investment or for the purpose of profit, and secondly the frequency of transactions done. It is the discretion of the AO to check this. However, in your case the frequency of transactions are not lot and therefore the gains from the same should be taxed under head capital gain only.

  • Sai

    Hi,

    I have query on turn over calculation.

    1) I have bought options at Rs. 100 and sold at 140. Turn over here is 40?
    2) I have bought options at 120 and sold at 100. Turn over is -20?

    Total turn over in options (#1 & #2) is 20. is that correct?

    3) Hope futures calculation also in the similar way. Please confirm?

    Thanks

    • Elvis D’Souza

      Dear Sir,

      Please find the reply to each point:

      1) I have bought options at Rs. 100 and sold at 140. Turn over here is 40?
      2) I have bought options at 120 and sold at 100. Turn over is -20?

      Total turn over in options (#1 & #2) is 20. is that correct?

      Sir, the total turnover is 60. You need to consider the absolute values.

      3) Hope futures calculation also in the similar way. Please confirm?

      Sir, Yes it is the same way.

      Thanks.

  • Kailash

    I have some loss and profit for FY 2013 – 2014.

    – 35000 loss in Intraday for shares
    – 120000 loss in FNO for shares
    – 80000 profit in commodity (gold)
    – 20,000 short term profit in bank shares

    I have other business income of Rs 2,50,000 from other source (Not from share / commodity trading)

    I would like to know how much tax liability will occur if these income and loss setup each other.

    Thanks

    • Elvis D’Souza

      Dear Sir, you need to consult your Tax Advisor or CA for this.

  • amit

    Sir , I have Salary income of more than 15 lacs and this time I have done F&O trading for one month and suffered loss of Rs 30 k. Total Turn over( Buying and selling future/options) was around 8 crores.
    Could you please provide answer to following question:
    1) do I need to provide books of accounts
    2) Do I need to get my books of accounts audited by CA.
    3) Which ITR should I use to file return.
    Request you revert at earliest

    • Elvis D’Souza

      Dear Sir,

      Please find the reply to each point:

      1) do I need to provide books of accounts – Yes
      2) Do I need to get my books of accounts audited by CA. – Yes, the turnover of 8 crore is subject to tax audit. Sir, I hope you are calculating the turnover correctly.
      3) Which ITR should I use to file return. – ITR 4

      Thanks.

  • Alok

    I am a salaried person having no other business income other than F&O trading.
    I had suffered a loss of Rs. 200000 in AY 2011-2012 in F&O Trading.
    I had declared this as other business income Gross Receipts as 0, Expenses as -200000. So net profit / Loss is -200000.
    I received a Notice that without the Gross Receipts how can you have expenses and loss.
    1. What would be my Gross Receipts.
    2. Since I have a loss to be carried forward, will this have penalty under section 44AB for not having the Tax Audit.
    Please suggest whether the tax Audit is mandatory if you are not showing min 8% profit of turnover in derivatives.

    • Elvis D’Souza

      Dear Sir,

      Tax audit is subjective to the turnover that is done. For AY 2011-12, the limit was Rs.60 lakhs. If your turnover was above the limit than you had to get audit done from a CA and file your return accordingly. The loss under F&O trading should have been shown under the head PGBP (Profits or Gains from Business or Profession) and not income from other sources. Secondly, the 8% calculation is done on the turnover in derivatives. If you are showing profit less than 8% then yes audit is mandatory.

      Thanks.

      Thanks,

  • RAVINDRA KUMAR

    Sir,

    I trade (age 30) in commodity derivatives (both MCX and NCDEX). I have not filed IT Returns. Please clarify the following :

    1) During FY2011-12, I made a net Trading Profit of Rs.1233000/- & the turnover is Rs.83.00 lakhs &
    2) During FY2012-13, I made a net Trading Profit of Rs.1700000/- & the turnover is Rs.68.00 lakhs.

    For your information, I had added the settlement profits & losses to arrive at Turnover figure during the financial year.

    Please inform me which of the following methods I should adopt to pay Income Tax ie,

    (1) deduct the expenses like Office Rent, salaries, etc, etc from Net Trading Profit & pay Income Tax as per the slabs applicable (or)
    (2) declare 8% profit on turnover figure and pay Income Tax strait away ? Please also explain in detail with pros & cons for adopting any specific method.
    (3) One of my friend says the choice will be with Tax Payer & he/she can adopt any one of the methods. Whether this is true that Tax Payer can have choice like adopting any of the above methods or any guidelines are there for this ?

    Can I declare more than 8% profit on turnover, considering the remaining profit as expenses ? I mean declaring say 10% profit of Rs.830000/-, considering the remaining Rs.403000/- as expenses for FY2011-12 and declaring 16% profit of Rs.1088000/-, considering the remaining Rs.612000/- as expenses for FY2012-13 ?

    If I file Returns calculating as above, will there be any chances that IT Department questening me in future ? Please tell me the pros & cons over the matter.

    • Elvis D’Souza

      Dear Sir,

      Please find the reply to each point:

      1) During FY2011-12, I made a net Trading Profit of Rs.1233000/- & the turnover is Rs.83.00 lakhs &

      – Since during the financial year 2011-12, your turnover was above Rs. 60 lakhs, you were suppose to get your accounts audited and file the return by 30th September, 2012.

      2) During FY2012-13, I made a net Trading Profit of Rs.1700000/- & the turnover is Rs.68.00 lakhs.

      – In the financial year 2012-13, this limit was increased to Rs. 1 crore and therefore you are not bound to get the accounts audited.

      For your information, I had added the settlement profits & losses to arrive at Turnover figure during the financial year.
      Please inform me which of the following methods I should adopt to pay Income Tax ie,

      (1) deduct the expenses like Office Rent, salaries, etc, etc from Net Trading Profit & pay Income Tax as per the slabs applicable (or)

      – You need to prepare proper books of accounts. Proper financials will also go with your return, i.e. details of your assets and liabilities have to be disclosed in the return.

      (2) declare 8% profit on turnover figure and pay Income Tax strait away ? Please also explain in detail with pros & cons for adopting any specific method.

      – You can choose this option also and show the profit at 8% of your turnover. You can’t charge any expense from the 8% profit.

      (3) One of my friend says the choice will be with Tax Payer & he/she can adopt any one of the methods. Whether this is true that Tax Payer can have choice like adopting any of the above methods or any guidelines are there for this ?

      – Yes you can choose any option.

      Can I declare more than 8% profit on turnover, considering the remaining profit as expenses ? I mean declaring say 10% profit of Rs.830000/-, considering the remaining Rs.403000/- as expenses for FY2011-12 and declaring 16% profit of Rs.1088000/-, considering the remaining Rs.612000/- as expenses for FY2012-13 ?

      – As told above, the return for FY 2011-12 should have been filed by 30th September, 2012. For FY 2012-13, you can either show the actual profit and charge expenses against it or show profit at 8% of the turnover. If you show profit at 8%, then you cannot charge any expense against it.

      NOTE : There is still some ambiguity in considering the share transaction turnover for 8% profit calculation. It is advisable to show actual profit and deduct the expenses from it. For further queries please consult a CA.

      Thanks.

  • Shweta Roy

    I have made a profit of Rs. 2,48,000 from closed F&O positions during 2013-14. However, on the open positions I am currently carrying into April, May & June on a mark-to-market basis, I am currently making a loss of over Rs. 5,00,000. These are largely NIFTY Calls which I have sold earlier (prior to yesterday’s expiry).
    I request you to clarify whether I need to pay IT on the profit booked by me, or can I nett off the profit against the mark-to-market losses (as on 31st March ’14) and carry forward the remaining loss into the next financial year?
    I would appreciate an early response, as this is really worrying me.
    Thanks,
    Shweta

  • vivek kapoor

    I want to know that whether my carried forward loss thru mcx derivative trading of previous two years can be set off against business income in this current year

    • Elvis D’Souza

      Yes Sir, the loss can be set off under the head Profit & Gains from Business / Profession.

  • Vijay

    Dear Sir,

    I have question on the taxation I need to pay…

    1. Lost 2 L Rs in Equity trading between 2008-2010.
    2. Lost 2L Rs in Margin plus trading between 2008-2011.
    3. Earned around 6L Rs in Nifty Options from 2014 Mar

    So I want to know how much tax I need to pay total and can I offset my 4L losses from earlier years against this profit. Also the net profit is it taxable at 15 % I.e will it be considered as Short term capital gain or Business income please advise….

    • Elvis D’Souza

      Dear Mr. Vijay,

      Please find the answer to each points mentioned below:

      1. Considering this as loss under capital gain. This can be carried forward for 8 assessment year. Loss for assessment year 2009-10 i.e financial year 2008-09 can be carried forward to financial year 2016-17.

      2. This is a loss under the head PGBP. This can be carried forward to financial year 2016-17.

      3. This is business profit. The loss of 2L of margin plus trading can be set off against it. You will have to pay tax as per your slab rate on the remaining amount i.e. 6-2 = 4 lakhs.

      So, the loss of Capital Gain head cannot be set off against Business profit. The same loss of Rs. 2 lakh will continue to be carried forward.

      Thanks,

  • Nem Singh

    Is there any recent direct decision of any court on considering turnover in F & O transaction (total negative + positive) for the purpose of section 44AB except BabuLal Enterprises and Growmore Exports Ltd vs ACIT [78ITD 95

    • Elvis D’Souza

      Hi Nem Singh,

      The method for calculation of turnover has been clarified by a Guidance Note issued by ICAI. Its titled “GUIDANCE NOTE ON TAX AUDIT UNDER SECTION 44AB OF THE INCOME-TAX ACT, 1961” (Revised 2014 Edition).

      Thanks,

      • Nem Singh

        Dear friend thanks for your valued information! I am also well aware about it. Thanks

  • Lakshay Kapoor

    I trade in futures from home. Can i add full home rent and telephone bill which are in my father’s name? Also can i show commission expense as an individual?

    • Elvis D’Souza

      Dear Mr. Lakshay,

      Adding full home rent and telephone bill may not be correct. You need to proportionate the expense in terms of how much it may be used for personal and official purpose. You can use 50% or 60% as a base and use this as an expense. Yes, you can show commission expenses as an individual.

      Regards,

  • jagan chandra

    I INVESTED 8 LAKHS FROM APRIL 2014 , I MADE TOURNOVER OF 110 LAKHS AND EARNED 320000 ,ALL TRANSACTIONS ARE FROM NSE ALL ARE DLELIVARY BASED(STT PAID FOR BUYING&SELLING)THIS INCOME COME UNDER STCG OR BUSINESS INCOME DUE TO TURNOVER .PLEASE REPLEY

    • Elvis D’Souza

      Dear Mr. Jagan,

      As told earlier, it is a matter of ambiguity. You need to see the frequency of the transaction, volume and other factors. You also need to see how you are showing this kind of income in the past years. As per the current situation, it seems you have done good amount of trading, so considering it as business income should be fine. However, please contact your CA for final say on this.

      Regards,

  • please clarify

    suppose i day trade only in the equity segment and i gain 5000 one day and loose 5000 next day assume my there are 250 trading days in a year. so my turnover would be 5000 x 250 = 1250000 and profit would be 0. which is less that 8% of the turnover.

    now my questions are

    1) do i need to get my books audited. ?

    2) in ITR 4 where do you enter the turnover, don’t you only put in the speculative gain and loss ? how does the income tax dept know how much is your turnover ?

    thanks in advance.

    • Elvis D’Souza

      Dear Mr. Anirban Roy,

      Please find the reply below each question:

      1) do i need to get my books audited. ?
      Books need to be audited in two cases, when the total turnover is more than 1 crore and/or the profit is less than 8% of the turnover. In your case audit is required as the profit is less than 8%.

      2) in ITR 4 where do you enter the turnover, don’t you only put in the speculative gain and loss ? how does the income tax dept know how much is your turnover?
      The turnover is mentioned in ITR-4 for 44AD purposes. It automatically calculates 8% profit on the same.

      Thanks,

  • Kuldeep Thareja

    HI Elvis,
    Nice info.. i want to know the applicability of Audit..let say my turnover is 8 lakh and my profit is more than 64k..Do i need to get my books audit in this case?

    • Elvis D’Souza

      Dear Mr. Kuldeep,

      Audit is mandatory when the turnover is over 1 crore u/s 44AB. Audit will also be required to be done if the turnover is below 1 crore but the profit shown is below 8% and we are filing the return u/s 44AD which is presumptive taxation.

      In the current case audit is not required as no condition is satisfied.

      Warm Regards,

    • Elvis D’Souza

      Hi Kuldeep,

      We need to see the applicability of audit from two point of view.

      1. Turnover is more than 1 crore – tax audit is required
      2. Turnover is less than 1 crore, proper books of accounts not maintained and profit calculated u/s 44AD (which is estimated income) is less than 8% of turnover.

      In your case where you are showing profit of 64k which is exactly 8% of 8 lacs hence, tax audit is not required u/s 44AD.

      Thanks,

  • Sanjay Kapoor

    Dear Elvis,

    I started trading in currency derivatives and F& O in the previous financial year. My turnover as per the daily mark to market differences is not more than 8 lacs. First of all I am not able to get these statements of daily mark to market differences from my broker which was ICICI Web Trade Limited. I made a loss of Rs.2 lacs from these transactions. I stopped trading after 4 months of this loss making experience. This is not my regular profession.

    Although my turnover was less than 1 crore in the year, my loss was more than the 8% gain for tax audit. Am I liable to tax audit? Can I carry forward my loss over the next financial years without tax audit? Under what head should I show this loss? When is my last date of tax filing to carry forward this loss?

    Thanks,

    • Elvis D’Souza

      Dear Sanjay,

      You are not liable for tax audit u/s 44AB as your turnover is less than 1 crore. However, for tax audit u/s 44AD that is presumptive taxation, if you are not maintaining books of accounts, then you need to show a profit of 8%. In your case you are liable for audit u/s 44AD as your profit is less than that and I am assuming you are not maintaining books of accounts. You can carry forward the loss only after getting the audit done.

      The other option you have is to maintain proper books of accounts and not go under presumptive taxation method. In this case you can show the actual profit or loss without getting the audit done.

      The return will be filed as ITR-4. You will show this loss under PGBP i.e. business income.

      If you are subject to tax audit then the last date was 30th November for financial year 2013-14 income. For non tax audit return, due date was 31st July. The return needs to be filed before the due date if you want to carry forward the loss.

      Thanks,

      • Sanjay Kapoor

        Thanks a Lot Elvis. Your explanation was very detailed.

        I just need one clarification in your reply: what is the meaning of “maintaining proper books of accounts”? I have accounts statement from my broker for every transaction made and I was maintaining an Excel sheet of all details. Does this qualify under “proper books of account” that you describe?

        • Elvis D’Souza

          Dear Sanjay,

          Proper books of accounts means you need to prepare balance sheet and profit & loss. Just maintaining on excel is not sufficient.

          Thanks,

          • Rajesh

            But income tax act does not describe what books of accounts need to be maintained if your F&O income/loss is treated as business income. So why would one need to prepare a balance sheet? you bring in certain funds for trading in derivatives and if you make a loss you have an erosion of whatever sum you brought in for carrying on this activity. So why not a simple trade book, P&L statement and say a bank book be sufficient? and why not maintain them in excel?

  • ssr

    Hi
    I am a software employee and I get 9 lakhs per annum, at the same time i am doing F&O share market trading and I got loss of 8 lakhs. In my company they have deducted TAX on my salary. but at the same I got loss of 8 lakhs in trading. So please adivise can get my deducted TAX back by showing 8 lakhs loss during ITR filing.

  • satish

    In my F&O Transactions aggregate of “-” (negative) sign total Rs. 39,57,491 and “+”(positive) sign total Rs.31,64,582. Net Loss from the F&O business is Rs. 7,92,909(Loss). Now my questions is if i shown my turnover amount Rs. 71,22,073 (aggregate of “-” and “+”) in credit side of the P&L account then what are the debit side figures of P&L account, and how can i show my loss of Rs. 7,92,909 in p&l account. please guide me sir

    • Elvis D’Souza

      Dear Satish,

      The turnover is not shown on the credit side. As FnO transactions constitute a business, you will have to maintain proper books of accounts to show the loss of Rs 7,92,909. Proper books of accounts mean, cash book, bank book, profit & loss and balance sheet. You can claim all the business related expenses against this FnO transactions. The gross profit / loss is shown on the credit side of PnL. All the expenses are shown on the debit side.

      Thanks,

  • Kunal

    Hi Elvis,

    This is a really helpful blog that you have put up. I am actually facing a problem with my Tax filing. I had done some

    Future transactions in the FY 2012-13. Total value of these transactions crossed 1 crore (by total value I mean – sum of

    all transactions after multiplying Lot Size*Cost of one share). My CA says that is how we should be calculating the Turnover

    – and by his calculation the turnover crosses 1 crore mark and hence a tax audit is necessary.

    But based on what you have detailed here in this blog, I understand that it is the absolute sum of the profits and losses that

    I make on the Future transactions that would account for my turnover. And going by this calculation, the amount is only close

    to 10 lakhs. Which is mostly loss only. So, I don’t need to file a tax audit – right? Can you please confirm that. Also, can

    you please point me to the specific article in the IT law that states this – so that I can take it up with my CA as well.

    Please reply back to this post. Hoping to hear back soon from you regarding this.

    Thanks,

    Kunal

  • Sunil Shah

    Sir,
    I am trading in F&O and Cash segment.My turnover in F&O segment is Rs 245328991 – (Perches side ) and Rs. 244985921/-(Sales side) and
    as per my knowledge my total turn over comes to Rs. 49 crore.
    And making loss of Rs. 343000/-. (Approx)
    Now i would like to know how to fill return for this year .I have to show
    all the transaction i made or only turn over difference i have to show.(2) I nave to make audit from my C.A. or not .(3)Profit or loss comes as my business loss or profit.
    I am regular trader And my income is less than taxable income than It is compulsory for me to fill return.

    • Elvis D’Souza

      Dear Sir,

      Please find the answers as follows:

      (1) As mentioned earlier, the turnover of FnO transactions is calculated in the following manner:

      (i) The total of favourable and unfavourable differences shall be taken as turnover.
      (ii) Premium received on sale of options is also to be included in turnover.
      (iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

      I think you are not calculating the turnover the correct way. Kindly recalculate your turnover.

      (2) Once you recalculate your turnover correctly and if the turnover is above 1 crore, then you need to get your accounted audited by a CA.

      (3) Yes this income is considered as business income.

      (4) If the turnover is above 1 crore and even though your final net profit is less than taxable income, still you need to file your return.

      Thanks,

      • gust

        sir thank you for the information
        can you please tell me if i have done this two transaction than what will be the actual amt. of my total turnover
        First- buy 1 nifty lot(25 unit) at 8200 and sold at 8225.
        second – buy 1Bank nifty lot (25 unit) at 17200 and sold at 17150

  • praji k

    Sir,
    Pls help me, i have the following doubts for calculating turnover
    1. for delivery based equity trade : do we take the sell value only OR the sell value + profit or loss ?
    2. for Options : do we take the sell side premium value OR the premium + the profit or loss ?
    Thanks

    • Elvis D’Souza

      Dear Praji,

      Please find below the reply:

      1. Delivery based transactions: Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sales is to be considered as turnover.

      2. The turnover in such types of transactions is to be determined as follows:

      (i) The total of favourable and unfavourable differences shall be taken as turnover.
      (ii) Premium received on sale of options is also to be included in turnover.
      (iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

      Thanks,

  • Bhuwan Bhatt

    Dear Mr Elvis

    I am an employee and also doing some
    F&O trading which resulted LOSS in last Fy 13-14 for Rs. 2 lac. Total F&O
    turnover is 9 lac. Should I need to get audit by a CA firm being Loss. However
    books of A/cs are maintained and also drawn
    P&L B/sheet by me itself? Also pls
    suggest in which column of ITR IV to show credit of Rs. 3.50 Lac as Profit from F&O transactions AND Debit of
    Rs. 5.50 lacs as Loss from F&O transactions as per P & L A/c having a
    loss of Rs. 2.00 lac. If there are some income from Other Source can be
    adjusted against the said LOSS in F&O and rest can be carried forward. With
    Thanks & Kind Regards B C Bharr

    • Elvis D’Souza

      Dear Mr. Bhuwan Bhatt,

      If the books of accounts are maintained and the turnover is less than 1 crore, you don’t need to get yourself audited by a CA firm. The profit and loss should be maintained by showing your gross profit or gross loss and then setting off the expenses against it. You can also claim and any other business expense incurred to earn this FnO income which is considered as business income. The gross profit or gross loss should be shown under “Sales/Gross receipts of business” under sub head “Other Operating revenues”.

      The loss of FnO can be set off against income from other sources and the rest can be carried forward. However, please note that the loss of FnO cannot be set off against salary income.

      Thanks,

  • Bhuwan Bhatt

    Dear Mr Elvis

    I am an employee and also doing some
    F&O trading which resulted LOSS in last Fy 13-14 for Rs. 2 lac. Total F&O
    turnover is 9 lac. Should I need to get audit by a CA firm being Loss. However
    books of A/cs are maintained and also drawn
    P&L B/sheet by me itself? Also pls
    suggest in which column of ITR IV to show credit of Rs. 3.50 Lac as Profit from F&O transactions AND Debit of
    Rs. 5.50 lacs as Loss from F&O transactions as per P & L A/c having a
    loss of Rs. 2.00 lac. If there are some income from Other Source can be
    adjusted against the said LOSS in F&O and rest can be carried forward. With
    Thanks & Kind Regards B C Bharr

  • Elvis D’Souza

    Dear Mr. Vijay,

    Please find the answers as below:

    1. Yes the profit and loss are considered as business income.

    2. Any transaction done under FnO is to be treated as business income and is taxed under the head Profits and Gains from Business Profession. Therefore, no short term capital gains would be calculated.

    3. Proper books of accounts need to be maintained. Proper books of accounts mean, cash book, bank book, profit & loss and balance sheet. You can claim all the business related expenses against this FnO transactions.

    Thanks,

    • praveen sambu

      what do you mean business related expenses against FnO transactions. Please give an example. let say i am with rskv and do 2 crores of turnover in FnO and make a profit of 5 lakhs …what could be business related expenses in this case?

  • Oscar Amandus

    Hi,

    Will you please explain, what are the meaning of the word ” Profit ” and the word ” Loss ” with respect to Income Tax Act ?

    In my opinion, this is important because in case you have incurred a ” Loss ” how does the clause ” profit less than 8 % ” apply for determining audit applicability. Here the words ” Profit ” and ” Loss ” are the key.

    ” Profit ” and ” Loss ” are two different terms with different meaning. When one uses the word ” Profit ” it is clearly different from the word ” Loss “.

    ” Profit ” means receiving or gain or earning or receipt or positive cash flow or benefit or something which is more than what you started with.

    ” Loss ” means giving or losing or expense or negative cash flow or charge or penalty or something is less than what you started with.

    Income tax philosophy is to give to government part of some thing which you earn or gain or profit or end up with more than what you started with.

    The words are ” income tax ” and not ” expense tax ” or ” loss tax” .
    Hence if you are in ” Loss “, you are not liable for tax audit.

    What do you say ?

    Rgds,
    Oscar

  • Oscar Amandus

    Hi,

    Will you explain, what are the meaning of the word ” Profit ” and the word ” Loss ” with respect to Income Tax Act ?

    In my opinion, this is important because in case you have incurred a ” Loss ” how does the clause ” profit less than 8 % ” apply for determining audit applicability. Here the words ” Profit ” and ” Loss ” are the key.

    ” Profit ” and ” Loss ” are two different terms with different meaning. When one uses the word ” Profit ” it is clearly different from the word ” Loss “.

    ” Profit ” means receiving or gain or earning or receipt or positive cash flow or benefit or something which is more than what you started with.

    ” Loss ” means giving or losing or expense or negative cash flow or charge or penalty or something is less than what you started with.

    Income tax philosophy is to give to government part of some thing which you earn or gain or profit or end up with more than what you started with.

    The words are ” income tax ” and not ” expense tax “.

    What do you say ?

    Rgds,
    Oscar

    • Nishant

      Hi Elvis,

      Please clarify below point specific to calculation of option trading turnover.

      >>Premium received on sale of options is to be included in turnover.

      Does it needs to be included only when the option is not squared off ? i.e the option is expired as 0. but then also it is considered as profit/loss only ( depends on the position taken first either sell or buy) , and if we consider the sale value again, then it will be a double calculation of the turnover.

      Another normal case, when we are taking the profit from option then how come the sale value to be considered as Premium received as in original the premium is squared off in terms of profit and loss( logically), hence the profit/loss should be calculated as turnover only.

      For me it seems to be a debatable topic, where some people consider only profit/loss for turnover calculation just like Futures.

      In case you have a different opinion , please share your thoughts on it.

  • renegade_alpha

    Hi Elvis,

    Thanks for the informative post. It was really helpful. However, I have a question that doesn’t seem to be addressed in the comments.

    Suppose I carry a futures position from one financial year to the next, do I pay tax on the daily mark-to-market settlement upto March 31st of the year in which the transaction was initiated or is it counted only when I settle the position?

    A specific example:
    I buy one lot of SBIN futures on March 26, 2015 and my mark-to-market profit from the daily futures settlements is 10000 upto March 31, 2015. However, I close my position only on April 1, 2015 for a total profit of 20000.

    In this case, does the Rs. 10000 count as income for FY14-15 or is the total profit after settlement, Rs. 20000, excluded from FY14-15 income but included in FY15-16 income?

    • Elvis D’Souza

      Hi,

      The taxation of such income depends upon the accounting method followed by you. If in the earlier years you have booked income on accrual basic i.e. on daily mark to market basis, then you need to pay tax on the income so deemed on 31st March. However, you need to be consistent in following the accounting method and not change it year on year basis depending upon the income or loss.

      Thanks,

      • renegade_alpha

        Hi Elvis,

        This is the first year I’m filing taxes for income from trading. Therefore, am I free to account for the position once it’s closed?

        Also, is it mandatory for those trading in F&O to file ITR4?

        • Elvis D’Souza

          Hi,

          Yes, you can account for the same once they are closed. Do take care to follow the same method in the future years.

          If your gross total income before claiming deduction under Chapter VI-A is above Rs.2,50,000/-, then it is mandatory for you to file the return. Income under FnO is a business income and ITR4 needs to be filed for the same.

          Thanks,

  • Mohit Agrawal

    Dear Mr. Elvis
    Your post were proved useful to me. However I have some doubts. According to the provisions of presumptive taxation, Higher of 8% of turnover or book profit shall be treated as income from business profession but if assessee is not maintaining books of accounts then he can calculate straight 8% on turnover. My question is favourable and unfavourable differences are available with the assessee i.e. book profit. In that case whether assessee need to mention book profit or calculate 8% straight on turnover for calculation of income from F&O as actual profit is greater than presumptive profit.
    Thanks

    • Elvis D’Souza

      Dear Mohit,

      The intention to legislate section 44AD is to help small time traders who find it difficult to maintain proper books of accounts and accordingly to ascertain the amount of profit earned. In case, profit can be ascertained with reasonable efforts section 44AD shall not apply. In those cases, tax needs to be paid on the actual amount of profit earned based on the available information. You shall also fall in the same category and accordingly you need to pay tax on the actual profit. Nonetheless, in case profit earned by you is less than 8% of the turnover and you are keen not to maintain proper books of accounts, you can opt for presumptive taxation, subject to fulfillment of other conditions.

      Thanks,

  • Kakarla Muralidhar

    Dear Elvis

    I have a question on the expenses and depreciation side of F&O business. Can the expenses incurred like Internet Charges, Rent, Electricity and Fuel (Petrol) be deducted from the Profits. Also the assets used like Computers, House, Furniture and car be depreciated if yes at what rate.

    Thanks

    • Elvis D’Souza

      Dear Kakarla,

      The income from FnO is treated as business income. Yes, you can show the expenses and depreciation which are related to earning such income.

      Thanks,

  • Surinder Kumar Gupta

    I did option trading through online trading in US stock market and incurred a loss of about rupees one lakh. I have other source of income like professional income ,interest income and short term capital gains from Indian Stocks. Please advice me how to treat my loss from option trading in US market in my ITR

    • Elvis D’Souza

      Dear Surinder,

      Sorry for delay in replying. Only a Financial Consultant can assist you in regards to this query, since certain documents / figures need to be computed. So, we recommend you to please contact your Chartered Accountant / Tax Consultant who will be able to give you tailored advice.

      Thanks,

  • Lokesh

    Dear Mr Elvis,

    Could you please clarify on the accounting treatment for the following futures transactions put together for the FY 2014-15

    For Scrip 1 :

    Buy Qty 1,24,000 Shares
    Buy Amount 6,15,40,799/-

    Sell Qty 1,24,000 Shares
    Sell Amount 6,20,67,899.80/-

    For Scrip 2 :

    Buy Qty 2,52,000 Shares
    Buy Amount 13,00,86,702.20/-

    Sell Qty 2,52,000 Shares
    Sell Amount 13,03,20.200.20/-

    For Scrip 3 :

    Buy Qty 3,125 Shares
    Buy Amount 3,84,02,668.78/-

    Sell Qty 3,125 Shares
    Sell Amount 3,76,99,203.76/-

    For Scrip 4 :

    Buy Qty 2,000 Shares
    Buy Amount 15,975

    Sell Qty Nil as the positions were taken on 27th March 2015 and the settlement will be done only on following thrusday i.e.,02nd April 2015. but mark to market as on 31.03.2015 is 18,653

    i have drawn p&L claiming my admin expenses like this

    To Telephone 12,000 By Profit for Scrip 1 5,27,100

    To Rent 60,000 By Profit for Scrip 2 2,33,500

    To Salaries 1,20,0000 By Loss on Scrip 3 7,03,465

    To Loss on Scrip 3 7,03,465 By Profit on Scrip 4 2,678

    To Net Profit 6,79,278

    15,74,743 15,74,743

    is this correct way of accounting for transaction of futures and options????
    Further i have invested 1,50,000/- in PPF hence for tax computation my total taxable income will be INR 5,29,278/- i.e., 6,79,278-1,50,000. on which i pay taxes at applicable rates.

    Please clarify

    • Darshan

      Hi lokesh i have same query can u share ur mobile no or call me at 7045052087

    • Elvis D’Souza

      Dear Lokesh,

      Sorry for delay in replying. Only a Financial Consultant can assist you in regards to this query, since certain documents/figures need to be computed. So, we recommend you to please contact your Chartered Accountant / Tax Consultant who will be able to give you tailored advice.

      Thanks,

  • Nevill Shah

    Hi Elvis.

    Thanks for this write up.
    One question. What about the taxability of unexpired contracts at year end.

    Eg : I entered into April futures for a scrip. And as on 31st March the stock prices soared. So as on 31st March my MTM inflates. But until 30th April, this MTM is subject to market volatility. The contract is active and not squared off. Do I pay tax on this unexpired contract as on 31st March?

    2. Does the MTM gain (upto 31st March) of this unexpired contract also add up to the gross gain/ loss balance used for calculating audit turnover as on 31st March?

    • Elvis D’Souza

      Hi Nevill,

      As told earlier, choosing whether to show expired profit depends on the accounting practice so followed. The accounting practice should not change from year to year. You can choose not to show the profit on the unexpired contract and show the actual gain / loss on 30th April, when the contract has actually expired.

      Does the MTM gain (upto 31st March) of this unexpired contract also add up to the gross gain/ loss balance used for calculating audit turnover as on 31st March?
      Ans: MTM Gain / Loss would be considered for calculating turnover if you are showing the accounting practice of considering profit / loss on unexpired contract.

      Thanks,

  • Muthusamy M

    Dear Elvis,

    You are running a great thread, thank you very much!!!

    I do following trades over the year:

    a. I have a SIP in 4 equity mutual fund schemes with
    dividend payout option. I almost never sell equity mutual funds. Zero SELL
    transactions in the year.

    b. I fully sold my other investments to re-align
    the portfolio into the equity funds (as said in point (a) above. This has
    resulted in some LTCG and some STCG.

    c. I have parked my cash in 5 liquid funds. I sell
    some of these every 3 months for my living. This results in STCG/ LTCG
    depending on whether the purchase date was before 3 years or not. About 4 to 8 SELL transactions in the year.

    d. I hedge my equity mutual fund holdings with
    equal NIFTY PUT options. I renew the PUT options every two months. Depending on how the market goes, I incur profit or loss in PUT options. I understand this goes under business income. About 6 to 16 SELL transactions in the year.

    Question: Is it correct to show the gains and losses under
    appropriate heads as described above or everything should be under business
    income? Transaction volume altogether is about 25 SELL transactions in the year.

    • Elvis D’Souza

      Dear Muthusamy,

      For equity mutual funds, you need to see the following things, whether these trades were done for the purpose of investment or for the purpose of profit and secondly the amount of transactions done. It is the discretion of the Assessing Officer to check this. However, in your case the amount of transactions are not lot and therefore the gains from the same should be taxed under head capital gain only. Regarding, the transactions in derivatives, that will always be seen as business income.

      Thanks,

  • Didar Hossen

    Dear Elvis,
    I got (INR 954940) as business commission in my personal enterprise bank account from GOA. Now my question is this commission is taxable or not.if taxable how much.Please inform me.

    Thanks

    Didar

    • Elvis D’Souza

      Dear Didar,

      The commission income will be taxable at the normal slab rate. You can however, claim expenses done to achieve this income.

      Thanks,

  • subra srinivasan

    Dear Elvis,
    Please clarify the following points. From the earlier postings I was able to understand ,any points.
    1. In my case the turnover in FO segment for FY 2014-15 is Rs8 Lacs approximately. I incirred a loss of Rs 5 Lacs.
    2. I also have portfolio of shares where I take delivery of Shares and pay STT. Here I have made a profit of about Rs 5lacs. I consider this as STGG.during the FY 14-15.
    3. This year while filing the return ITR4, I want to set off the FO loss against the STCG.

    4. I do not want to carry forward small loss in FO segment after set off against STCG,
    My question is should I have a Tax Audit conducted to declare a loss in FO segment as business loss? or if I do not want to carry forward the loss TAX Audit need not be done?
    What is the correct position.
    My CA in Chennai says as my TO is less than 1 crore and I can declare the loss without tax audit being conducted.
    Can you suggest any CA in chennai for this?
    You can send a PM to subra51@yahoo.com.
    Thanks
    SUbtamanian

    • Elvis D’Souza

      Hi Subramanian.

      Now lets go step by step. The loss of Rs 5 lakhs under FNO is a business loss. The transactions in shares is shown under the head Capital Gain. Since transactions in equity trading is short term, business loss of FNO can be set off against it. Now tax audit needs to be done if you are not maintaining books of accounts and showing profit less than 8% of your turnover, both conditions to be fulfilled.

      Now in your case, if you maintain proper books of accounts, i.e. profit and loss and balance sheet, then you can show the actual loss and the same can be below 8% of the turnover and still tax audit is not required. Yes your CA is correct, since your turnover is less than 1 crore, you can declare the loss without getting the tax audit done, however for that you need to maintain proper books of accounts.

      Thanks,

      • subra srinivasan

        Thanks a lot

      • Vijay Choudhary

        Hi Elvis

        I am a trader at RKSV

        From your above response i deduce that since turnover is less than 1 crore, we can declare the loss without getting the tax audit done, however for that we need to maintain proper books of accounts in case of individual.

        And what if i have Pension income of 5.5 lakhs and FD income of 1.9 lakh as well.
        1. Can i still Carry forward loss without getting Audit done?
        2. Can i set of FD interest income against FNO loss of 9 lakhs. If yes then where to show FD interest in ITR4 form.
        3. Also if answer to question 2 is Yes then can i set off remaining FNO loss with next year FD interest income ?

        Thanks
        Vijay

        • Vijay Choudhary

          Hi

      • Vijay Choudhary

        Hi Elvis

        I have one more case

        1. WHat if i have ONLY FNO loss of 3.9 lakh with turnover

        less then 1 cr and only other source of income is

        Agriculture income of 4.2 lakh which is tax free.

        Do i need to get Audit done to carry forward this

        loss or just maintaining my Book of Accounts is enough ?

        2. Can i set off this Carry forwarded loss against LTCG

        from selling a residential plot next year?

        Thanks

        Vijay

  • manish

    Dear Elvis,

    I would be glad if you could shed some light on my questions.

    Last fin. year I was doing a job only for 3 months and I decided to take up trading for about 4-5 months and after that I stopped trading (this is not my profession). Following is the snapshot of my P/L

    Income from salary : 337000
    STCL : -13072.3 (turnover around 3.5L)
    Loss from intraday trading: -15077.71
    Loss from f&o: -52593.91 (turnover around 3.5L)
    expenses: 28150 (computer and internet)

    Total loss : 108893

    Now my questions are

    1. Is audit required in my case?
    2. I am not inclined to take up derivative and intraday trading again and I might/might not take up short term trading. Is it necessary to file losses?
    3. What ITR should be used in my case?
    4. I asked a CA for computation and he clubbed all losses under STCL which is making me consult another one. What are your thoughts on the same?

    Kind regards,
    Manish

    • Elvis D’Souza

      Dear Manish,

      Please find the answers below:

      1. Is audit required in my case?
      Audit is not required.

      2. I am not inclined to take up derivative and intraday trading again and I might/might not take up short term trading. Is it necessary to file losses?
      Yes disclosing the loss is necessary. It is a legal requirement to do the same.

      3. What ITR should be used in my case?
      You will be required to file ITR 4.

      4. I asked a CA for computation and he clubbed all losses under STCL which is making me consult another one. What are your thoughts on the same?
      Losses will be disclosed as following:

      – STCL – Under head Capital Gain
      – Intraday – Speculation business under head PGBP
      – FnO – Normal business under head PGBP (you can claim expenses against it)

      No, clubbing is not possible in your case.

      Thanks & Regards,

  • Nishant

    Dear Elvis
    Thanks for your valuable suggestions.
    I have a query that what is the meaning of turnover in terms of F&O transactions.
    If I sum up the credit transactions then it constitutes a very large amount in crores and i have suffered a loss of about Rs. 26,45,000
    please share the correct meaning of Turnover here.

    • Elvis D’Souza

      Dear Nishant,

      The turnover in such types of transactions is to be determined as follows:

      (i) The total of favourable and unfavourable differences shall be taken as turnover.
      (ii) Premium received on sale of options is also to be included in turnover.
      (iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.

      Thanks,

  • Vijay Choudhary

    Hi Elvis

    I am a trader at RKSV

    From your above response i deduce that since turnover is less than 1 crore, we can declare the loss without getting the tax audit done, however for that we need to maintain proper books of accounts in case of individual.

    And what if i have Pension income of 5.5 lakhs and FD income of 1.9 lakh as well.
    1. Can i still Carry forward loss without getting Audit done?
    2. Can i set of FD interest income against FNO loss of 9 lakhs. If yes then where to show FD interest in ITR4 form.
    3. Also if answer to question 2 is Yes then can i set off remaining FNO loss with next year FD interest income ?

    Thanks
    Vijay Choudhary

    • Elvis D’Souza

      Dear Vijay,

      Please find the below reply to each point:

      1. Can i still Carry forward loss without getting Audit done?
      Yes you can but ensure to file the return on time.

      2. Can i set of FD interest income against FNO loss of 9 lakhs. If yes then where to show FD interest in ITR4 form.
      FD interest is shown under other income. While making the final computation, loss of FnO business i.e Business loss will be set off against Other Sources income i.e. FD income. The net loss will be carried forward, if any.

      3. Also if answer to question 2 is Yes then can i set off remaining FNO loss with next year FD interest income?
      The business loss i.e. FnO loss can be set off against business income only in the next year. You will not be able to set off the unabsorbed business loss with FD income in next year.

      Thanks,

  • Vijay Choudhary

    Hi Elvis

    I have one more case
    1. WHat if i have ONLY FNO loss of 3.9 lakh with turnover less then 1 cr and only other source of income is Agriculture income of 4.2 lakh which is tax free.
    Do i need to get Audit done to carry forward this loss or just maintaining my Book of Accounts is enough ?

    2. Can i set off this Carry forwarded loss against LTCG from selling a residential plot next year?

    Thanks
    Vijay Choudhary

    • Elvis D’Souza

      Dear Vijay,

      Please find the below reply:

      1. WHat if i have ONLY FNO loss of 3.9 lakh with turnover less then 1 cr and only other source of income is Agriculture income of 4.2 lakh which is tax free. Do i need to get Audit done to carry forward this loss or just maintaining my Book of Accounts is enough ?
      Maintaining of books of accounts is enough.

      2. Can i set off this Carry forwarded loss against LTCG from selling a residential plot next year?
      No this loss cannot be set off with LTCG.

      Thanks,

      • Vijay Choudhary

        Thanx Elvis for clearing my doubts

  • guest

    sir what will be the TO amt.if i have done this two transaction
    first- buy nifty 1 lot(25 unit) at 8200 and sold at 8225.
    second – buy 1 bank nifty lot (25 unit) at 17200 and sold at 17150.
    thanks

    • Elvis D’Souza

      Hi,

      The TO amount will be 625 (25 x 8200 – 25 x 8225) + 1250 (25 x 17200 – 25 x 17150) = 1875

      Thanks,

  • Anbu Victor

    Hi Elvis,

    I’m a working professional and I’m doing Options trading. Sometimes intraday and sometime BTST. Will it be considered as speculative income? How can i calculate the turnover from my transactions? When auditing is required?

    • Elvis D’Souza

      Dear Anbu Victor,

      Transactions in derivatives are not considered as speculative transaction, as per Section 43 of Income Tax (IT) Act, 1961. Therefore, income from F&O may be shown as non-speculative business income and it will be taxed according to the slab rate applicable to the particular AY.

      Determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:

      The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.

      Premium received on sale of options is to be included in turnover.

      In respect of any reverse trades entered, the difference thereon shall also form part of the turnover. Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.

      Therefore, in such transactions, the aggregate of the difference amount, i.e., positive difference (profit) and negative (loss) difference should be considered as turnover for the purpose of determining the liability to audit under Section 44AB of the IT Act.

      An audit is required if you have a business income and if your business turnover is more than Rs.1 Crore for the given financial year. Audit is also required as per section 44AD in cases where turnover is less than Rs.1 Crore but profits are lesser than 8% of the turnover.

      Regards,

      • Anbu Victor

        Thanks for your quick response Elvis. Let me clarify my understanding with an example.
        Case 1: If a buy a nifty lot for a price 75 and sold it for 100, my turnover for the transaction will be (100*75 – 75*75) 1875.
        Case 2: If i buy a nifty lot for a price 75 and sold it for 50, my turnover for the transaction will be (75*75 – 50*75) 1875.
        Am i right?

  • Vimz

    Is the difference of favorable and unfavorable trades in FNO to be calculated lot wise (as in first in first out) or contact wise?

  • Vimz

    Is the difference of favorable and unfavorable trades in FNO to be calculated lot wise (as in first in first out) or contact wise?

    • Elvis D’Souza

      Hi,

      It should be calculated lot wise – FIFO basis.

      Thanks,

  • Anil Kumar

    Hello,

    May I opt to file my ITR (in ITR-4S) for FY 2016-17 on presumptive taxation basis under sec 44AD for my income from trading in futures and options if my turnover is not more than 2 crores? I hope I won’t need to pay advance tax if I go this way.
    Thanks,
    Anil Kumar

    • Elvis D’Souza

      Hi,

      The following conditions need to be satisfied:

      The total turnover for AY 2017-18 does not exceed 2 crores
      Profit estimated is not less than 8% of the total turnover

      If the above conditions are satisfied then you can file your return under section 44AD i.e. ITR-4S.
      For advance tax, from the AY 2017-18, as assessee is required to pay advance tax related to such business. However, advance tax can be paid during the financial year on or before 15th March 2017 (no need to pay advance tax related to such business on or before 15th September 2016 or 15th December 2016).

      Thanks,

      • Anil Kumar

        Elvis Sir, Many thanks! that really helps.

        A follow up question for the above situation – may I file under ‘NO ACCOUNT CASE’ section of P&L and Balance Sheet schedules of ITR-4 instead of ITR-4S as I also have income from sources like capital gain that ITR-4S does not seem to allow?

  • DEBAPRASAD SASMAL

    I have traded in F&O through RKSV, I have got a P&L report for 2014-15, where Total Buy Amt. is 16,844,735.00 and Total Sell Amt. is 16,697,308.75. Net P&L is showing -162,678.84. So, in this case what is Turnover amount. How can I carry forward this loss? What need to do for this in 2016-17, as I have done nothing for 2 years. Thanks!

    • Elvis D’Souza

      Hi Debaprasad,

      As told earlier, determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:

      1. The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
      2. Premium received on sale of options is to be included in turnover.
      3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.

      Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.

      The scrip wise gross differences for each maturity should be determined, the negative signs of the losses within scrip of each maturity ignored and such losses grossed up with the gains to compute the turnover.

      The loss in your case cannot be carried forward, as for FY 2014-15, the return should have been filed by 31st July 2015 (other than tax audit assessee).

      Thanks,

  • MAHAVEER GUNDECHA

    Hi , sir my question is in regard of future transaction on NSE , if one has entered in one transaction of future for month of may 2016 on 21 march 2016 what will be the gain and loss to be show for the trasaction if it is not squre-up as on 31 march and what amount to be added in the turnover in that case?

  • satish

    Am retired and Doing F&O trading only. What to mention in nature of business in the ITR4 Form?

  • mpnsmpns mpnsmpns

    Hello Elvis

    I did intraday trading in year 14-15, and incurred loss of 350000.
    And also did delivery based trading and incurred a loss of 58000.

    This was my first year of transaction.

    The turnover of intraday ( for speculation business )
    Total profit + -(-total loss)= 1044000

    Now I have incurred loss from speculative business ( which is less than 8% of turnover ). So do I have to undergo a tax audit ?

    And also do I have to maintain books of accounts ? Or I can avail option of Section 44AA, as it was my first year of speculative business ?

    Thanks

  • Deware’s Technical’s

    Dear Elvis, i am planning for algo trading in future.As per my calculation the turover in nifty may be more than 40cr. and expected profit is 10 lacs. please help me out what the things i have for income tax

  • Arvind Saxena

    Hi Elvis,

    I am an F/O daily trader and I am getting a daily F/O call from a person. The deal is like I need to invest X amount and it will become 3X and That person want 30% profit share. Now my question is Can we show that 30% I am paying through online backing as business expenses or service fee to save TAX?

    Regards
    Arvind

  • Anand Sharma

    Hi Elvis,

    Pls answer me …….I am salaried person

    case 1 – 2013-14 , total turnover in F & O is 80 lacs security 28 Crore , no books maintained , No Audit done , Loss incurred in F & O 40K , how much i have to pay in scrutiny case came by Income tax. salary 20% tax bracket.

    case – 2 – 2014-15 total turnover F & O 1.60 Crore , Security – 170 Crore , No Books , No Audit done , No loss carry forward , Loss in F & O 1.2 lacs , How much i have to pay in scrutiny case came by Income Tax , Salary Bracket 30% paid in Income from salary.

    I have closed the demat account so cant take benefit of loss to be settled of so why i have to pay even i have incurred the losses. what can be the way to minimize such penalties as i am just salaried person.

    pls help and answer.

  • Rajesh

    I think this has the most sane description of what is turnover for futures and options (options in particular) while brokerage firms like zerodha show extremely high turnovers for options trading…it should be the same treatment as futures…