The participation of retail and professional traders in India has risen sharply in F&O trading. While some traders place their attention on a defined trading strategy as well as technical analysis, an equally crucial but often neglected part is Income Tax on F&O trading in India. Knowing the rules regarding taxation and the methods of saving tax by the legal framework allows traders to optimally use their profits and keep away from punishment on the charge of non-compliance.
This blog provides comprehensive information about how F&O traders can legally sa ve taxation on F&O trading, manage their tax responsibilities, and guarantee proper F&O ITR filing.
What is F&O Trading?
F&O Trading in India includes buying and selling of futures and options contracts in the stock market. These are not ordinary equity delivery trades; rather, they are derivative instruments whose value depends on the underlying assets such as stocks, indices, or commodities.
F and O trading is carried out by the traders to either hedge positions, speculate for profits, or manage risk. However, profits earned from these trades are not treated similarly to regular capital gains. For the purposes of taxation, they are classified as business earnings, which makes knowing your Tax absolutely imperative.
Income Tax on F&O Trading in India
In India, the taxation on F&O Trading falls under the category “Income from Business or Profession,” even if a sole trader conducts it. This indicates that all gains or losses would be classified and reported as business income rather than capital gains.
F&O transactions can be categorised into two types:
Speculative: Primarily intra-day equity trades.
Non-speculative: F&O trades, as they consist of contracts that are settled either in cash or with delivery.
Because F&O trades are classified as non-speculative business income, the taxation on F&O trading is calculated as such.
Applicability of Tax Audit in F&O Trading
Perhaps most notable within taxation on F&O Trading is the point at which a tax audit becomes compulsory. As specified in Section 44AB of the Income Tax Act, a tax audit is required if:
Turnover is above Rs. 10 crore for digital transactions.
Turnover is above Rs. 1 crore for physical/non-digital transactions.
Declared income is below 6% of the turnover, and total income exceeds the basic exemption limit.
Given that Futures & Options Trading is primarily conducted online, the Rs. 10 crore threshold is met. However, for smaller traders, the 6% profit margin becomes relevant.
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