Income Tax Implication on Derivatives
Under Indian Income Tax Act, trading in Futures & Options (F&O) is treated as non-speculative business income chargeable to tax under the head Income from Business/Profession. Trading in Intraday is treated as speculative business income. In both the cases there is no actual delivery of shares or securities and contract is squared up with margin money. The contract notes are issued for the value of shares/securities purchased and sold but entries in the books of accounts are made only for the margin money paid or received.
Calculation of Turnover for Tax Audit u/s 44AB
- Total of favourable and unfavourable differences (i.e. profit and loss) shall be taken as turnover.
- On sale of options, premium received is also to be included in turnover.
- In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Applicability of Presumptive Taxation scheme u/s 44AD
From F.Y. 2020-21, turnover limit has been increased from 1CR to 5CR subject to the restriction that the aggregate cash payments and cash receipts should not be more than 5% of total payments and total receipts. Taxpayer may avail the benefit u/s 44AD by showing minimum income of 6% of total turnover calculated above.
When Tax Audit is compulsory u/s 44AB
If the taxpayer has suffered losses in the trading of futures & options and Intraday or taxpayer wants to show income less than 6% of total turnover and he is willing to carry forward the losses to next assessment year to be setoff then he is compulsorily required to get the books audited if the total income is more than the maximum exemption limit.
Set off and Carry forward of losses
- Losses from F&O is treated as normal business loss and can be set off against the income from other heads of income except salary income in the year of generation of such losses. It can be carry forward for next 8 assessment years. From the next assessment year it can be setoff against only business income.
- Losses from Intraday can be setoff against speculative income only. It can be carried forward for next 4 assessment years.
Filing of ITR for carry forward of losses
To carry forward the above losses, it is mandatory to file ITR within due date as per section 139(1).
Selection of ITR-Form
Selection of correct ITR Form is very important otherwise ITR is declared as defective return. In case of individuals having business income, either ITR-3 or ITR-4 is applicable.
Also Read: Tax on NRI for sale of Immovable Property in India
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