Tax advice for F&O traders in India: 4 important things to remember

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Tax advice for F&O traders in India: 4 important things to remember

Vakilsearch Staff

8 Jun 2019, 09:30 — 6 min read

Background: Of late, the term ‘derivative trading’ has become a topic of discussion amongst traders in India. Derivatives are nothing but financial securities whose value or price is derived from an underlying group of assets like Futures and Options Business (F&O) on stocks, bond and commodities. And there are certain yardsticks that traders need to comply with for tax filings and returns. Vakilsearch in their previous article explained everything about trademarking your brand to safeguard it. In this article they share some important points that traders need to keep in mind while filing their income tax and tax returns.

Computing income and filing tax returns are considered to be one of the most tedious tasks. It further complicates itself when the filing is for traders. While trading is on a rise in the country, it is important that tax filing for traders be properly understood for efficient filing. The dynamic nature of indirect taxation law requires the traders to comply with certain mandatory criterion for tax filing and returns. Here are some must-knows for traders while dealing with tax-filing and tax returns.

1. Computation of income for the purpose of taxation 

Income tax returns have a head of income from business or professionwhich includes business income as well. In order to operate an F&O, it is not necessary that a business entity should be incorporated. Even individuals can take up F&O business operations.Therefore, income in F&O trading transactions shall be mentioned under the head of business income as it is helpful in many ways of claiming expenses in returns. Expenses claimed must be relevant to the expenditure borne in way of the transaction, pertaining to which the income has been stated in the filing documents.

For instance, it may include rent of the premises, charges relating to internet or telecommunication, transportation etc. The applicable ITR in cases of business income is ITR3. This means that salary income, income from house property or income from other sources can be disclosed and listed along with F&O income in ITR 3.

In order to operate an F&O, it is not necessary that a business entity should be incorporated. Even individuals can take up F&O business operations.


2. Recording losses borne by the F&O business operations

The layman understanding is that there is no requirement for reporting the losses incurred in the functioning of the trading business because it is not a matter which is required for tax computation. However, ITR makes it absolutely mandatory to report losses under ITR, or it may result in serving of the notice by the Income Tax Department. The unknown benefit of reporting the losses is that often it is settled against the business income, however not with the income for salary. Therefore, by reporting of losses and its set-off with the income, reduces the tax burden on the taxing enterprise or individual carrying such a trade.

3. Maintenance of Books of Account 

The statutory requirement of maintaining the books of accounts occurs only in certain situations. Therefore it is mandated that books of account be maintained in the following cases:

  • If the income reported exceeds the amount of INR 25,00,000. This limit was introduced from the financial year 2017-18. Earlier this limit was set at INR 1,20,000; or
  • The computation of total sales and turnover of more than INR 25,00,000 (in all preceding 3 years).

Moreover, under the presumptive income scheme, the maintenance of books of accounts is dependent upon the percentage of profit discloses. The rule is that if the profit is more than 8% such maintenance is not required. However, it is mandated if the profit is more than 8%. The format and list of books to be maintained by trading enterprises and individuals have not been mentioned anywhere.

However, it is by the common understanding that books may be maintained in a manner such that it is adequate for the Assessing Officer to calculate taxing income as per the Income Tax Act. There has to be a clear record of expenses, investment schemes etc. The non-maintenance of books of account, when the same is required attracts penalty to the assessee.

4. Conducting audit

The case attracting the conduction of audit in the business is based on the turnover of the trading company. Turnover here means the absolute sum of settlement profits and losses for F&O per scrip and the sell side value of the option contract. Therefore, the turnover of your business exceeds INR 2 crore since the financial year 2016-17. Earlier the limit was set up at INR 1 crore. The penalty of not conducting an audit is 0.5% of the total turnover, not exceeding INR 1.5 lakh in a financial year.

Interested in reading more articles by Vakilsearch? Check out some of our other articles here:

Vendor Agreement: Why is it important?

E-commerce business in India: Predicting trends and analysing laws

Patents, copyrights and trademarks: The double edged swords


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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.  

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Vakilsearch Staff

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