Salaried individuals if involved in F&O trading should be all the more cautious while filing the return and for the same selecting the Income Tax Return Form. Any earnings realized on account of F&O trading can be classified as either income from business or capital gains income based on some of the facts.
For the purpose of determining whether the accruing income from F&O trading is business income or capital gains incomes, a couple a factors come to play. Some of such factors are trading in commodity derivative being linked to the main business; holding period and frequency of transaction; motive per se such a transaction; and volume of the transaction. For instance : For an individual for whom trading in shares encompasses his main work area, F&O income shall also be regarded as income from business.
The Finance Act 2005 further with regard to derivatives trading clarified that trading of derivative with underlying being either shares, commodities or some other allowed financial instrument on recognized stock exchange shall not be deemed as speculative transaction. So, with the clarification put in place, losses on account of such a trading activity or transaction can now be set-off against any income.
If the income from F&O is determined to be business income then following tax considerations come into play:
1. Administrative expenses together with Securities transaction tax (STT) are deducted from the income.
2. In case of turnover of over Rs. 1 crore, tax audit compliance is required to be done.
3. Losses incurred due to derivatives trading is not allowed to be set-off against one's own salary.However, the same can be offset against business income, income from house property and income from other sources.
4. Also, unabsorbed losses can be set-off against business income with carry forward allowed for as many as eight years.
In case the income accruing from derivatives trading is adjudged to be capital gains income, following tax implications apply:
1. STT on such income is not deducted however expenses associated with the purchase and sale including brokerage are deductible.
2. Also, deemed to be short term gains, tax on such income is charged as per applicable slab rate.
3. Short term capital losses allowed to be carried forward for 8 years can be set-off against any capital gains income.
So, in case if the income on account of derivatives trading is determined to be business income the income tax filing date turns out to be September 30 while in the other case the income tax return has to be filed by the individual by July 31.