Lots of queries and issues have been raised on taxation, accounting, and audit of Futures and Options transactions. A small note was prepared for the benefit of all, containing a few specific issues including certain common questions shared with me over a couple of years which was published on 18th January 2022. Thereafter some changes were made in the definition of turnover by ICAI through its Guidance Note on Audit under section 44AB of the Income-Tax Act, 1961 – AY 2022-23. Considering the same it was thought that the document be revised as version 2.0.
Head of Income under which F&O transactions are taxable
According to Proviso (d) and (e) of Section 43(5) of the Income Tax Act, 1961 trading in derivatives of the Securities carried out in a recognized stock exchange and trading in commodity derivatives carried out in a recognized stock exchange, respectively are not speculative transactions.
Hence, trading in Futures and Options being derivatives would not be a speculative business but a normal business income, which could either be a net gain or net loss and taxable under the head ‘Profits and Gains from Business’.
However, according to section 2(14)(b) of the Income Tax Act, 1961 any securities held by a Foreign Institutional Investor (FII) who has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 is a capital asset. According to section 2(i) of the Securities and Exchange Board of India Act, 1992 “securities” has the meaning assigned to it in section 2 of the Securities Contracts (Regulation) Act, 1956, and as per section 2(h) (ia) of the Securities Contracts (Regulation) Act, 1956, securities include derivatives. Hence for FII derivatives being a capital asset, any gain thereof would be taxable under the head ‘Capital Gains’.
Determination of Turnover
In case, derivatives are taxable under the head ‘Profits and Gains from Business’, the method for determination of turnover is not provided under the Income Tax Act, 1961. However, as per generally accepted accounting practice and as per ICAI Guidance Note on Tax Audit revised for AY 2022-23, it should be as follows:
- The total of favorable and unfavorable differences (Profit/Loss) shall be taken as turnover (In other words, all the differences, whether positive or negative are aggregated for calculating the turnover).
- The premium received on the sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included.
- In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Example of calculation of Turnover of Futures:
| Future | Units | Buying Rate | Selling Rate | Total Sell Value | Total Buy Value | Gain / Loss |
| (A) | (B) | (C) | (D) | (E = B x D) | (F = B x C) | (G) |
| Index A | 75 | 18000 | 17100 | Rs. 12,82,500 | Rs. 13,50,000 | Rs. – 67,500 |
| Company B | 6750 | 240 | 260 | Rs. 17,55,000 | Rs. 16,20,000 | Rs. 1,35,000 |
| Index C | 100 | 38000 | 38000 | Rs. 38,00,000 | Rs. 38,00,000 | Rs. 0 |
| Total Turnover | Rs. 2,02,500 | |||||
Example of calculation of Turnover of Options:
| Options | Units | Buying Rate | Selling Rate | Gain / Loss | Premium Received | Turnover |
| (A) | (B) | (C) | (D) | [E= (B) x (D-C)] | (F= D x B) | (G) |
| Index A XX CE | 100 | 300 | 210 | Rs. -9,000 | Rs. 21,000 | Rs. 9,000 |
| Company B XX PE | 500 | 0 | 70 | Rs. 35000 | Rs. 35,000 | Rs. 35,000 |
| Index C XX CE | 125 | 348 | 400 | Rs. 6,500 | Rs. 50,000 | Rs. 6,500 |
| Total Turnover | Rs. 50,500 | |||||
Accounting & Filing of financial statements in ITR
Accounting of gains or losses in Futures & Options may be done gain-wise and loss-wise only. It has been also explained in the Tax Audit Guidance Note (Revised AY 2022-23) that though the contract notes are issued for the full value of the underlined shares or securities or commodities purchased or sold out, entries in books of accounts are made only for the differences.
For example, in the example given in this document. An F&O gain/loss account should be created and a loss of Rs. 67500/- and a gain of Rs. 135000/- should be entered into this account. It is the choice of the assessee to have a single account for gain and loss or a separate account for gain and a separate account for loss.
While filling the data in ITR in the Profit & Loss Account, assessee should fill the loss or gain accordingly, and nothing should be filled in the column of turnover. This is so, as the determination of turnover is only for the purpose of applicability of audit, TDS, or any other similar purpose. The balance sheet of only the F & O business should be filled in by the business head of the ITR.
Audit
Audit under Income Tax Act would be required only if the business is covered under any of the clauses of section 44AB.
In case an assessee has no other business activity, then an audit in the case of Futures & Options would be required only where his turnover (as determined above in this document) exceeds Rs. 10 Crores in a financial year. This is so, as transactions in F&O are always through proper banking channels mainly online through RTGS / NEFT / IMPS, etc. Hence as per the proviso to section 44AB(a), the limit for getting the audit done would be Rs. 10 Crores.
Few commonly asked questions
Below are a few questions, which have been commonly asked:
| S. No. | Question | Answer |
| 1 | F&O Turnover is Rs. 3 Crores in AY 2023-24, is tax audit | No, as there are no cash transactions, the limit for a tax audit is Rs. 10 Crores. |
| required? | ||
| 2 | This is so as under section 71(2A) loss from business is not allowed to be set off against salary income. | No, as the assessee never availed s. 44AD earlier, hence provisions of s. 44AB(e) is not applicable. |
| 3 | Assessee being a salaried employee who has no other income, F&O loss is disallowed by CPC, why? | This is so as under section 71(2A) loss from business is not allowed to be set-off against salary income. |
| 4 | Salaried Individual, having F&O loss, which ITR would be filed? | ITR -3, filing the profit & loss and balance sheet of F&O business. |
| 5 | Can an individual claim benefit of s. 44AD in F&O trading? | Yes, there is no restriction, however, disclose the actual profits which may be more than 6%. |
| 6 | Can an assessee claim expenses against F&O gains? | Yes, actual expenses can be claimed which would include STT, brokerage, cess, etc. |