Filing income tax returns has often been a complicated process for traders dealing in futures and options (F&O). However, with access to proper documentation guidance and an understanding of the latest changes in tax rules and procedures, such traders can have a smooth and seamless experience in filing their returns this season.
Income from F&O trading is considered non-speculative business income. It is added to one’s gross total income and taxed per an individual’s tax bracket. Review last year’s turnover and profits from F&O to estimate current tax liability. Maintain records of contract notes, bank account statements, demat account statements, etc. Compute other incomes from sources such as interest, capital gains, rental, etc.
Documentation Needed
Futures and options traders should have certain documents handy for smooth ITR filing. These include mandatory Form 16A indicating any TDS deductions, bank statements, demat account statements reflecting holdings and transactions, consolidated ledger statements from brokerage or clearing houses, consolidated profit and loss statements, and copies of contract notes for executed trades.
All these documents serve as proof of trading activity and help compute tax liability accurately. ITR 3 is the applicable ITR form to be filled by F&O traders. As per government rules, having one’s PAN and Aadhaar linked to a Demat account and trading account is necessary for recognition and validation.
Recent Changes In Tax Rules
The latest Union Budget has ushered in significant changes to the existing income tax slabs and rules that taxpayers should be aware of. The key highlights are the increase in the basic exemption limit to Rs 3 lakhs under the new regime, the reduction in the surcharge rate from 37% to 25% for incomes above Rs 5 crores, and the elevated Section 87A rebate limit of Rs 25,000 for incomes up to Rs 7 lakhs compared to the earlier threshold of Rs 5 lakhs.
Further, the budget extended the Rs 50,000 standard deduction to the new regime, introduced a deduction from family pension income capped at Rs 15,000, and announced a deduction for Agniveer Corpus Fund contributions under 80C. With more rebates and wider tax slabs, the new income tax regime will likely benefit a larger section of taxpayers from fiscal 2023-24 onwards after the latest direct tax reforms kick in from April 1, 2024.
How To Minimise Tax Incidence
Traders can adjust losses in one Futures and Options trading segment, say futures trading, against profits in the other segment, like options trading, while filing ITR. Open a Public Provident Fund (PPF) account to claim deductions up to ₹1.5 lakh under Section 80C. Donations to approved charitable institutions also make you eligible for deductions from gross total income.
Outlook For F&O Trading
F&O trading volumes have surged in India, crossing ₹100 lakh crore mark in 2022 on NSE alone. Retail investors now account for over 40% of trading activity compared to just 18% in 2016, indicating higher participation in the derivatives market. Expanding product bouquets, reduced trading costs, simplified margin rules, and tax incentives have boosted the segment. Market experts foresee continued strong momentum in F&O trading this year as well.
So, by maintaining diligent records, understanding the latest ITR filing rules, and exploring deductions, F&O traders can ensure compliance, claim permitted benefits, and continue smoothly investing in one of the fastest-growing investment avenues. Additionally, traders must ensure their demat account is fully KYC compliant and that all contract notes are reflected in the Demat statement.
An active demat account linked to their trading account allows for seamless tracking and reconciliation of trading transactions while filing ITR. Further, the demat account is an official record of trading activity, applicable taxes paid via brokerage, and other supporting documentation.
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