In this article, we delve into the intricacies of income tax treatment concerning derivatives trading and intraday transactions.
Firstly, let’s explore derivatives, futures contracts, and intraday transactions.
Derivatives are financial instruments whose value is derived from underlying assets, commonly futures and options. Futures contracts entail the purchase or sale of underlying assets on a specified future date at a predetermined price. On the other hand, options grant one party the right, but not the obligation, to buy or sell assets at a predetermined price.
Intraday transactions involve buying and selling securities within the same trading day, with all positions closed before the market’s closing.
Now, let’s decipher how income is treated in accordance with the Income Tax Act:
Income derived from derivative instruments and intraday transactions is categorized as business income, further classified into speculative and non-speculative activities.
Speculative income is generated from intraday trading activities, subject to taxation at normal rates, to be added to other income sources like salary or rental income.
Non-speculative income, on the other hand, arises from derivative trading, both intraday and positional, and is taxed separately.
While tax rates for speculative and non-speculative income are the same, their treatment differs concerning offsetting and carrying forward losses.
Calculating income involves subtracting purchases and other expenses from total trade value. Additionally, for futures and options trading, the turnover can be calculated under section 44/44AD of the Income Tax Act, assuming a deemed income of 6% (or 100% for electronic transactions).
Turnover in futures and options trading is computed by aggregating positive and negative differences, including premiums received from options sold.
Losses from speculative activities can be offset against all income, except salary, and can be carried forward for eight consecutive years. However, losses from non-speculative activities can only be offset against income from other non-speculative activities in the same assessment year, with a four-year carry-forward provision.
Tax audit requirements vary based on turnover:
Turnover exceeding Rs 2 crore mandates a tax audit.
Turnover between Rs 1 crore and Rs 2 crore requires a tax audit if not opting for the presumptive tax system.
Turnover below Rs 1 crore generally exempts from tax audit, but a tax audit may be necessary if income falls below 8% of turnover and total income exceeds the basic exemption limit.
Understanding these tax implications is crucial for traders navigating the complex landscape of derivatives and intraday trading.
