"Futures and Options Trading. 

Future and Options are the types of derivatives that are traded in a stock market and it is a type of contract between two parties for trading stock assets at a predetermined price on a later date. In the share market, futures and options India are contracts that derive their price from an underlying asset like; shares, stock market indices, commodities, ETFs, and more. It is an essential part of the Indian equity market. Futures and options trading gives individuals to minimize future risk with their investment through pre-decided prices.

Futures and options trading is utilized as hedging instruments to minimize risk and make profits in a highly volatile situation as the prices may suddenly rise or fall.  

What is Futures and Options?

(What is F&O?)

Derivatives are of four types; Forwards, Futures, Options, and swaps. Now we will discuss futures and options;

Option vs future

Futures.

A futures contract is the commitment to sell or buy an asset at a future date at an agreed-upon price. Futures contracts are hedge investments that are most understandable when considered in terms of commodities like corn and oil.

Options.

Options are a form of derivative financial instrument to which two parties agree to transact an asset at a specific price before a future date. It gives the opportunity to investors but not the obligation to buy or sell assets at a specific price although the contract is still in effect. Options are of two types; call options and put options. A call option provides an offer to buy the stock at the strike price before the agreement lapse. A put option provides an offer to sell a stock at a specified price.

What is F&O trading?

(How to trade in futures and options in India)

F&O are the two vital financial instruments traded in the derivatives market. In F&O trading you can freely trade on various exchanges for example you can trade stock futures and options on stock exchanges, commodities on commodity exchanges, and more of the same. You can do F& O trading without taking possession of the underlying asset. You can do trading in Futures and Options via the Bombay Stock Exchange (BSE). You can trade futures contracts in the share market during trading hours.

For Future & Options trading, you will require a trading account with a broker that allows trading in derivatives. F&O is listed with NSE and BSE, so you need to find the best one in both stocks and indexes to trade.

Tax treatment of futures and options.

(Taxation of futures and options India)

Any gain or loss that comes out from the trading of futures and options is to be treated as business income or business loss. In Futures Options trading transactions would be treated as Non-speculative transactions as per section 43(5) and would be taxed (tax on options trading in India) as like other business income. If there are any expenses arouse for the purpose of business would also be allowed to be claimed in the income tax return.

The tax arising on the sale of futures and Options transactions would be chargeable as per the suitable income tax slab rates.

ITR for Reporting F&O income

The income that arises from F&O trading is to be considered as normal business income or loss. You need to file ITR-4 for reporting this type of income.

Tax audit of income from trading in Futures & Options.

As the income from futures and options are considered as normal business income, hence the provisions of the income tax act will apply in this case. Tax will be computed as per the normal tax slabs as related to assesses;

1. If there is a profit from derivative transactions, the tax audit will be done if the turnover from such trading exceeds Rs. 1 crore.
2. Tax audit u/s 44AB study with 44AD will also be applicable if the net profit arises from such transactions is less than 8% of the turnover from such transactions.

Note: - The tax audit limit from A.Y. 2021-22 has been increased, from 1 crore to 5 crores on the condition that more than 95% of the business transactions should be done through banking channels.

Treatment of loss generated in F&O transactions.

If there is a loss generated through F&O transactions, it would be allowed to be set off against all other incomes except salary income and if the loss is not set off against from the incomes of the same financial year, then this loss can be carried forward & set off against the future incomes. If you have not filed an income tax return before the due date then, the loss would not be allowed for carried forward.

Summing up with Tax Advisory, in this article, there is just basic info regarding tax on income from futures and options trading, for more details and for more assistance you can contact us directly on 8077361475 and you can also visit www.taxadvisory.in. Experts of tax advisory will always be ready for your guidance. 

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