Tax Treatment of Future and Option

Tax Treatment of Future and Option

Futures and options are the two instruments in share market with which either you can be a billionaire or you will become a savage. That is the reason that future and option trading contribute most to the market turnover. In this post we will know about the tax treatment of future and option, tax rate in future and options in India, tax treatment of derivative transaction. So let's start.

We have already discussed about the tax treatment of income arising to investors in our previous post. You can check it here.

Taxation of income of Investors

Today we will discuss about Intraday Trading.

Basic Knowledge from INCOME TAX ACT

Intraday trading is considered as speculative transaction in INCOME TAX ACT, 1961 in India. So if you have profit from intraday trading then it will be treated as "speculative income". Similarly if you have suffered loss in intraday trading then it will be classified as "speculative loss".

Speculative loss can be set off with speculative income only and not with other income. 

But Non-speculative loss can be adjusted with speculative income.

Let's understand this with an example.

Miss Alia had suffered loss 60000 in 2018. In this year she earned 600000 from her fashion designing store and earned 80000 in intraday trading. Now what is her total income?

Business income = 600000
Speculative income = 80000
Speculative loss ( Previous year ) = 60000

Total income = 600000+80000-60000 = 620000

In 2020 She suffered loss in her fashion designing store of 90000. She earned 250000 from intraday trading. So her total income for the year 2020 will be 250000-90000 = 160000.

In this way if you face any loss in intraday trading then you can set off for 4 years from the year it has occurred.

One more thing which you should remember that you can set off speculation loss only if you have filed return of income within due date.

Tax Rate For Speculative Income

As it comes under business income, it will be taxed accordingly. If you are a sole propreitor, then it will be taxed according to your slab rate. If you have a partnership firm then it will be taxed at the rate of 30%. If you are a company then it will be taxed at the rate of 30%.

So we have discussed about intraday trading and its tax treatment. Then what about Future and Option Trading? Is it same as intraday trading?

Answer is No.

As per section 43(5) of Income Tax Act, Derivative transactions are not treated as Speculative Transaction. What does it mean?

That means that you can set off the losses arising from derivative transaction with normal business profit. So if your dealing in trading of future and option then you can consider it as a normal business. Tax rate will be same which we discussed in intraday trading. Let's understand it by example.

Mr, Dani has following income.

Income from shoe manufacturing = 6000000
Income from Intraday trading = 650000
Income from Future and Option trading = 1500000
Loss From Intraday trading in previous year = 800000
Loss from future and option trading in previous year = 2500000

What is his income?

Income from business
Shoe manufacturing = 6000000
F&O Trading = 1500000
F&O Loss (Setoff) = 2500000

Total = 6000000+1500000-2500000 = 5000000

Speculative income = 650000
Speculative loss = 800000
Total = 650000-800000 = (150000)
This 150000 will be carried forward to next year and set off with that year's intraday profit.

So this was our today's discussion. I tried to explained it with examples in a simpler way. If you have any question then you can comment in comment box.

Thank You.

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