Income Tax Liability on Profit or Loss for Trading in Futures and Options

It always confuses taxpayers on the procedures of filing tax returns against any income generated from the trading in Futures and Options. Income tax on the profit or loss obtained via Futures and Options transactions are treated differently as compared to the profit or loss acquired by other forms of businesses. Even though the tax is levied differently, the income that arises from Future and Options is treated either as capital gains or business income.

What form to file for the income tax return?

To file an income tax return for profit or loss arising from Futures and Options, a taxpayer should use the ITR-4 tax form. The taxable income for Futures and Options are treated under the prescribed income tax slab rates.

Benefits for the taxpayer under Section 43(5)

The Section 43(5) of the Income Tax Act says that any transactions taking place during the Futures and Options will be treated as non-speculative transactions, which means that the taxpayer trading in Futures and Options will be able to claim deductions on the expenses that he may have incurred for his business.

Ramifications related to the income from Futures and Options

Income or profits from Futures and Options can be treated either as business income or capital gains. There are several ramifications related to each like, if it is treated as business income then any expenditure related to administration is considered deductible; whereas, if it is treated as capital gains then the income will be taxed according to regular income tax slab rates. You can check online for the other ramifications related to Futures and Options.

Turnover for Futures and Options

There are several factors to determine the turnover.

• The premium obtained by the sale of options
• The total valuation of any favorable and unfavorable trades
• Difference arising from any reverse trades

Section 44AB of the Income Tax Act, in order to conduct tax audit on the final amount, has made it a mandatory option to determine the turnover. Tax audit, however, is applicable only if the total turnover of a fiscal year amounts to more than Rs. 1 crore.

Losses due to trading in Futures and Options

Any loss that has been sustained through trading in Futures and Options are treated in various manners. As the transactions in Futures and Options are deemed to be non-speculative, all the losses are permitted to be offset against any income he or she earns through other businesses. The individual can also carry ahead his losses to subsequent years or offset it against any income that he may receive. However, if individual wishes to carry forward or offset his losses then he should make a full disclosure of the loss incurred.

Claiming expenses while filing tax returns

While filing your tax returns for trading in Futures and Options, you are eligible to claim certain expenses. They include:

• Telephone expenses
• Internet related expenses
• Postal expenses
• Travel and conveyance expenditure
• Depreciation on any asset used by the taxpayer for business purposes.