What makes it a captivating investment discourse?
Options trading is a widespread choice among individuals in India because it offers greater volatility than conventional stock trading techniques. It offers many opportunities for analysing and leveraging unanticipated events! The unpredictability and diversification of it make it challenging in a profitable way! These events could range from geopolitical events to economic fluctuations that could result in sudden price hikes or declines before the expiration date (which potentially occurs within three months). Several professionals consider options trading as the most profitable way to earn money by speculating on volatility levels.
According to the revised Finance Bill 2023, the Securities Transaction Tax (STT) imposed on the sale of options has been increased to ₹2,100 for a turnover of ₹1 crore, which got previously set at ₹1,700. Similarly, for the sale of futures contracts, the STT has been raised to ₹1,250 for a turnover of ₹1 crore, which was previously set at ₹1,000. It is important to note that in options trading, the STT is levied on the premium rather than the strike price.
This decision will primarily affect the trading activity of High-Frequency Traders (HFTs), which are highly advanced automated machines. The vast majority, over 95%, of India’s equity market volume is focused on derivatives, and a significant portion of that is driven by HFT machines.
Let us take an overview of the tax structure to follow under the umbrella of F&O trading:
A business must be disclosed if you trade futures or options, unless you only make a small number of trades (say, only 2-3 trades) within the financial year.
Keep in mind that individuals get included in this. To generate income from your business, you don’t necessarily need to be legally recognised as a company or other legal body. People can also make money from their businesses.
Which ITR form applies to F&O trading?
Profits and losses from trading in futures and options are classified as regular business income or losses. Consequently, taxpayers are required to file their income tax returns using the ITR-4 form to report this income.
Let us unravel tax audit and advance tax concerning F&O profits/trading
When a tax audit is required for F&O trading, there are a few factors to take into account. If the trading turnover is less than one crore, you are not required to assist with a tax audit. A tax audit under section 44AB is necessary, nonetheless, if the turnover exceeds one crore and the net profit from these transactions is less than 6% of the turnover. In addition, regardless of the claimed profit or loss, a tax audit under section 44AB is required if the turnover reaches Rs. 2 crores.
Advance tax payments on F&O profits are regarded as non-speculative business income and are subject to the standard slab rates of taxation.
When a trader’s annual total revenue from all sources, including F&O trading, surpasses INR 10,000, they are required to prepay tax in four installments. This is under the relevant deadlines.
Descending into tax regulations conforming to when you categorise a trading activity as a business
It is noteworthy that if an individual or a Hindu Undivided Family (HUF) conducts business and their income exceeds Rs 2.5 lakhs or gross receipts surpass Rs 25 lakhs in any of the previous three years, they are required to maintain accounting records. This requirement also applies during the first year of business operations. These thresholds were updated as of April 1, 2017, and previously stood at Rs 1.2 lakhs for income and Rs 10 lakhs for gross receipts. However, the previous thresholds still apply to taxpayers conducting businesses other than individuals or HUFs. Even if an individual is engaged in a business like futures and options trading, they must comply with these rules. However, the bookkeeping process may be less complex in this case.
It is worth noting that several leading tax filing platforms in India have developed dedicated subscription models to manage taxation for futures and options trading. These platforms can be highly beneficial and are certainly worth exploring. In addition to using these platforms, keeping track of trading statements, expense receipts, and bank account statements should suffice. These documents can get used to preparing your profit and loss account and balance sheet, ensuring that you stay on top of your tax obligations.
