Taxability of F & O Transactions Under Income Tax Act 1961

Introductions:
Ideally when you deal in Futures and Options, the transaction size is big but profits are too small. Therefore confusion prevails that whether these transactions can be termed speculative transaction or they are business losses or profits.
Further computation in case of business losses, Tax audit limit will apply on transaction value or it applies on margin earned or lost in F&O.
For answering these questions we need to analyse each provision and need to resolve query one by one.
General Queries and Solutions: 
1. Whether the F&O transactions can be termed as speculative transaction?
Ans: Section 43 subsection 5 has excluded transaction of future and options as speculative transaction. However exemption is available only for equity. Thus if F&O for commodities are done the same will be termed as Speculative in Nature. Other then commodity trading profit or loss arising out of transaction is treated as Business Loss or profit in nature.
Any expense done in connection to this business will be allowed as expense and can be claimed while preparing Tax computation.
2. Whether provisions of Tax Audit under Section 44AB will apply in transaction in F&O?
Ans:
· In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. 1 crore.
· If the turnover from such trading exceeds Rs. 1 crore but less than 2 crore then the audit can be avoided if we can show the profit at minimum 8% (6%, if all trades are digital).
· Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 8% (6%, if all trades are digital) of the turnover from such transactions.
· Further, please note that any turnover more than 2 crore then audit u/s 44AB will irrespective applicable
3. How to compute turnover limit in F&O?
Ans: In normal business turnover is based on sales and thus reaching the limit takes time. But in F&O it reached easily as each lot is valued high, Limit is reached easily. Therefore computation method need be different. Thus for computing turnover limit Following things should be added:
a. Profits from the trade
b. Loss from the trade
c. Premium received from sale of Options
d. In case of Reverse Trade, difference should also be added
This can be explained by way of illustration. Below are four Components:
a. Profits from the trade – INR 100000
b. Loss from the trade – INR 150000
c. Premium received from sale of Options – INR 50000
d. In case of Reverse Trade, difference – INR 75000
Thus the for the purpose of 44AB, turnover will be 100000+150000+50000+75000 = Rs.375000/-
4. If the transactions are based on delivery, how will the same be treated?
Ans: if the transaction is based on delivery the same will be treated as Capital Gains and provisions of Capital Gains would apply.
5. Can losses be carried forwarded in case of loss in F&O?
Ans: Yes Losses can be carried forward subject to following conditions:
i. Return should be filed on or before due date:
ii. Loss should be disclosed in the return
iii. Set off is not allowed against Salary Income
iv. Loss should not be of Commodity trading.
Conclusion: Based on the above discussion it can be said that F&O from equity cant be termed as speculative loss and provisions related to profit and gains apply. However computation needs to be done carefully in order to avoid the litigation. Further profit margin also need to be identified as if its below 8% (6%, if all trades are digital) same would be liable to tax Audit under section 44AB.
About the Author: The Views Expressed in the article is personal opinion of author. The author is CA and CS by profession and one can reach him on @hemanshow79 on twitter or mail queries on hemanshow79@gmail.com. The article can be said as reference material. However courts can take different opinion based on nature and circumstances of each case.
Tax Audit Limit for Business Rs. 2 Crore & for Profession Rs. 1 Crore