Introduction

A derivative is a security with a price that is derived from one or more assets. The derivative itself is a contract between two or more parties based upon the asset(s) and value is determined by fluctuations in the asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. There is also a tax on the derivative trading will is to be paid.

Most popular derivative products are swaps, forwards, warrants, options and future trading. But we’ll be discussing only future trading and options (F&O).

  • A future trade (stock trading): It is a contract between two parties to purchase or offer a benefit at a specific time in future on at a specific cost. Such contracts work for the individuals who don’t have the cash to purchase now but acquires a specific date in future. This type of agreements utilized for arbitrage by dealers.
  • An Options Trade: It gives the purchaser the privilege yet not the commitment. As a purchaser, you may give an alternative to purchase call or put but as a dealer has a commitment to conform to the agreement.

Income from F&O trading usually comes under business income (one of the 5 heads) and is treated irrespective of the frequency or volume of transactions (no limitation). Taxpayers who have business income have to file ITR-4.

F&O trade business 

  • Can claim expenses from your business income which may result in a profit or loss incurred.
  • Tax on derivative trading is applied if losses are reported on time, can avail tax benefits.
  • Total income (all 5heads) have different tax rates.
  • Businesses can be speculative or non-speculative, and the tax on derivative trading is different for both.
  • Intra-day stock trades falls in a category of speculative business.

The income tax Act says that F&O trade can be considered as a non-speculative business.  F&O trades is referred as a business thus, tax rules of capital gains do not apply but the tax on derivative trading is applied.

Prepare business’s profit and loss details:

Sum up the receipts for the whole year, prepare a balance sheet and mention in ITR-4.

Include all the expenses like:

  • Rent or maintenance;
  • Mobile or telephone;
  • Internet charges;
  • Demat account charges;
  • broker commission;
  • Depreciation on laptop/PC used for trading and;
  • any other expense directly related to your work.

People trade in many stocks like:

  • Intra-day stock transactions along with F&O trades is referred as business
  • Stock hold for long-term investments is capital assets.
  • Invest in mutual funds.

People may get confused in computing the profit and losses in F&O. Therefore, calculate them separately because of tax on derivative trading.

Report the losses timely because:

  • losses have tax benefits;
  • Reduce total taxable income and;
  • Losses from F&O can be set off income from other heads (except salary income).

Penalty

If a company incurred losses then the account must be audited and turnover must exceed Rs.1 crore. If accounts are not audited timely then, a minimum penalty of 0.5% of turnover may be levied (maximum Rs.1.5 lakh).

For example,

A company PQR incurred:

  • Loss of Rs 1 lakh from F&O business,
  • Salary income is Rs 5 lakh,
  • Income from rent is 2 lakh, and
  • Interest income is 50,000.

Total taxable income is Rs.6.5 lakh and 8 years time is provided by the government to set off the losses.

After 8 years this will be set off as a non-speculative business income not as speculative business.

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business Return, Bulk Return or Revised Return Filing.