Taxation of income from trading in listed shares, futures & options

In today’s blog, we are going to discuss various aspects relating to the taxation of income from trading in listed Shares, Futures & Options. All the information provided in the current discussion is relevant for Assessment Year 2022-23.

Taxation of Income from Trading in shares listed in Recognized Stock Exchange:

Trading in shares can be of two types-

   • Intra-day Trading
   • Delivery Trading 

First of all, we need to understand the definition of Speculative Transaction –

According to Section 43(5) of the Income Tax Act, 1961 – “Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips”

Intraday Trading in the cash market –

Intraday trading means buying and selling stocks on the same trading day. Intraday trading is also known as Day Trading. Share prices keep fluctuating throughout the day, and intraday traders try to draw profits from these price movements by buying and selling shares during the same trading day.

Dealing in Intra-day Trading will be treated as a Speculative Transaction. The resulting profit or loss will be treated as Speculative Business Income under the head PROFIT AND GAINS FROM BUSINESS OR PROFESSION (PGBP).

Any taxpayer having income under the head PGBP will be required to file his return of income in Form ITR-3 and taxes will be levied at applicable normal tax rates.

If a person is having a loss from Intra-day Trading, it will be treated as Speculative Business Loss and will be allowed to set off only from Speculative Business Profit. The Speculative Business Loss can also be carried forward for 4 subsequent assessment years provided the return has been filed within the due date.

Expenses will get deduction only from speculative business income.

Calculation of Turnover will be similar to the futures as discussed below. A tax audit under section 44AB needs to be conducted if Turnover exceeds INR 10 Crores.

Delivery trading –

Delivery trading means when traders buy the stock for trading purposes but the trader is not buying and selling on the same day. This is called delivery-based trading. The shares so held by the trader will be treated as capital assets as per section 2(14) of the Income Tax Act, 1961.

The shares will be treated as Long-term Capital assets if they are held for a period exceeding one year, otherwise treated as Short-term Capital Assets.

• Capital gains on transfer of listed shares held for a period exceeding one year will be taxable @ 10% on the amount in excess of INR 1,00,000 under section 112A of Income Tax Act, 1961 – Long term Capital Gain (LTCG). Deduction under  Chapter VI-A and Rebate under section 87A of Income Tax Act, 1961 are not allowed against LTCG taxable under section 112A.

• Capital gains on transfer of listed shares held for a period not exceeding one year will be taxable @ 15% under section 111A of Income Tax Act, 1961 – Short term Capital Gain (STCG). Deduction under Chapter VI-A is not available against STCG taxable under section 111A.

Individuals or HUF having Income from Delivery Trading but not having any Business Income can file their return of income through Form ITR-2 instead of Form ITR-3.

Security Transaction Tax paid at the time of purchase or sale will not be allowed as a deduction under capital gains.

Short-term capital gains are allowed to set off against both STCG & LTCG. Long-term capital gains are allowed to set off only against LTCG.

Short-term or Long-term Capital Losses can be carried forward for 8 subsequent assessment years provided the return has been filed within the due date.
Indexation benefit is not available in the case of shares referred under section 112A.

However, in the case of equity shares referred to in section 112A acquired before 1st February 2018, the Cost of Acquisition shall be calculated as Higher of step 1 & 2:

Taxation of Income from Trading in Futures and Options (F&O):

The Income or Loss arising from trading in F&O Transactions would be treated as a Business Income or Loss and therefore taxpayer will be required to file his return of income in Form ITR-3.

Section 43(5) of the Income-tax Act, 1961 has specifically excluded transactions in F&O Market from being treated as Speculative Transactions. Even though these transactions are non-delivery-based transactions, these transactions would still be treated as Non Speculative Transactions.

The expenses incurred for the purpose of business, like Telephone Expenses, Internet Expenses, Broker’s commission, Security Transaction Tax etc. would be allowed to be claimed as a deduction in the income tax return.

The tax on the balance taxable income arising on the sale of F&O transactions would be levied at applicable normal tax rates.

If a person is having a loss from Trading in F&O, it will be treated as Non-Speculative Business Loss and will be allowed to set off against any head other than INCOME FROM SALARY. Losses can also be carried forward for 8 subsequent assessment years provided the return has been filed within the due date.

Clubbing of Losses – Where the assessee gifted a certain amount to his wife which she invested in the business of F&O and incurred loss, then the entire amount of loss resulting from the business of F&O incurred by the assessee’s wife is liable to be clubbed in the hands of the assessee for the purpose of setoff.

1) Calculation of Absolute Turnover in case of Futures/ Intra-day Transactions –

The Turnover should include:
a. The total of favourable and unfavourable differences.
b. In respect of any reverse trades entered, the difference thereon.

Example for the calculation of absolute turnover in the case of futures:

2) Calculation of Absolute Turnover in case of Options –

The Turnover should include:
a. The total of favourable and unfavourable differences.
b. Premium received on sale of options.
c. In respect of any reverse trades entered, the difference thereon

Example for the calculation of absolute turnover in the case of options:

Whether an assessee dealing in F&O Transactions can opt for the Presumptive Taxation Scheme?

F&O transactions are executed through a recognized stock exchange and account cum records are maintained by the agencies/brokers of the Demat account. Hence presumptive tax scheme under section 44AD can be availed in case of F&O income.

Presumptive Taxation Scheme under section 44AD of Income Tax Act, 1961 can be opted only if the Turnover as calculated above is up to INR 2 crores and a fixed percentage i.e., a minimum of 6% of absolute turnover should be declared as profit.

No other expenses are allowed against the income declared under section 44AD of the Income Tax Act, 1961. Losses of Previous years also cannot be set off in the current year if opted for Presumptive Taxation.

Requirement of Tax Audit under section 44AB of Income Tax Act, 1961:

The threshold limit of INR 10 crores will always be applicable in the case of F&O as 95% of the business transactions are done through the banking channels. So, if absolute turnover exceeds INR 10 crores, then only tax audit under section 44AB is applicable.

In the case of an Individual or HUF, a Tax Audit is applicable if the assessee has claimed income less than 6% of his turnover & his Total Income is more than INR 2,50,000.

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Hemanth Uppala

CA Finalist

Content Writer | TAX DESTINATION