Demystifying F&O Trading Taxation

In recent years, Futures and Options (F&O) trading has gained the attention of many investors. Reputable online platforms now offer dedicated plans for F&O trading to address this issue.

Here are some of the latest developments in this area that are worth exploring.

From April 2023, the trading of futures and options (F&O) in India's stock and commodity markets will be subject to increased taxes. As announced by the government, the Securities Transaction Tax (STT) has increased by 23.52 percent on the selling of options. Further, the sale of futures contracts has increased by 25 percent.

Amendments to the Finance Bill 2023 state that the STT on the sale of options will be raised to ₹6,250 for every ₹1 crore of turnover, which is an increase from the current tax regime that levies ₹5,000. Additionally, the STT for options is calculated based on the premium and not the strike price.

Who will the amendment affect the most?

This change in tax policy will primarily affect the trading activity of High-Frequency Traders (HFT), which refers to highly automated machines with a lot of power. The majority of India's equity market volume, which is more than 95 percent, is focused on derivatives – a significant portion of that is driven by HFT machines.

What does high-frequency trading entail?

High-frequency trading, which is abbreviated as HFT, refers to a trading technique that employs advanced computer programs to execute numerous orders within a fraction of a second. This approach uses intricate algorithms to examine multiple markets and carry out transactions based on the prevailing market conditions.

Fundamentals to keep in mind for F&O ITR Filing

Trading-related income can be categorized as either speculative or non-speculative company income. Transferring shares is a part of non-speculative F&O transactions, although intraday trading is regarded as speculative. Any income, excluding pay, may be used to offset a loss from non-speculative F&O trading. Unused losses may be carried forward for up to eight years and applied to non-speculative business revenue. On the other hand, a loss from intraday trading can only be offset against speculative revenue, and any leftover loss can be carried forward for up to four years. The regular slab rates apply to non-speculative business revenue from F&O trading. Advance tax payments are necessary if a financial year's total income exceeds INR 10,000.

Let us unfold crucial considerations while filing F&O ITR.

You must report any gains or losses from F&O trades in your tax return to avoid getting a warning letter from the tax office. You shall benefit from tax benefits to reporting losses through ITR filing. Trading in futures & options is typically seen as a business revenue, regardless of whether you are an individual or a corporation. By reporting your F&O trading activity as a business, you can claim business expenditures.

You do not need to worry too much about your tax compliance because there are various online taxation platforms available to you. The best thing is that the majority of these platforms help you through your investment or financial journey as well as simplify tax filing, allowing you to maximize your tax returns.