Friday, 10 January 2014

Taxation of future & options

The experience says that the common taxpayers are very confused about the taxability of income from futures & options or treatment of lossses on same. They also ask us, how to calculate turnover of this, do we need to get the books audited. Please read on to clear all your doubts……
The provision of the Income Tax Act, 1961 treates income from futures & options (F&O) as normal business income. Moreover, on trading in F&O turnover for tax audit u/s 44AB turnover in such types of transactions is the grossing up of the difference of all the trades entered, whether positive or negative. Premium received on sale of option is to be added. Difference on reverse trades is also to be considered.

Futures are agreements/contracts to buy or sell specified quantity of the underlying assets at a price agreed upon by the buyer and seller, on or before a specified time. Both the buyer and seller are obligated to buy/sell the underlying asset.
An option is a contract, which gives the buyer (holder) the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date).
The underlying may be commodities like wheat/ rice/ cotton/ gold/ oil or financial instruments like equity stocks/ stock index/ bonds etc.
Cost of entering into a futures contract is nothing whereas there is a cost of entering into an options contract, termed as Premium.
As income from futures & options (F&O) will be treated as normal business income and not speculative business income, So, one can set off the loss from F&O against normal business income, including short-term capital gains.

The transactions for the purchase and sale of F&O are completed without delivery of shares and securities. Contract notes are issued for the full value of the asset purchased and/or sold, but accounting is done only for the difference. The amount paid/received is this difference.

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