Taxpayers in India whether they are salaried people or not, prefer to involve themselves in share trading as it is an easy way of earning money. As such, one should know the tax implications of share trading. First of all people need to understand the type of share trading activity before getting involved in it. One should know whether it is taxable under the head “Business Income” or not.
Income from Futures & Options (F&O):
Income from Futures & Options (F&O) is considered as income from business and profession according to the Income Tax Act, 1961. The profits or losses arising from Futures & Options are generally assessed under the head “Income from Business and Profession” whether the assessee is engaged in any other business or not.
Salaried persons who are involved in F&O trading should be very cautious while filing the return and at the time of selecting the Income Tax Return Form. Any earnings out of F&O trading are treated as either income from business or capital gains income depending upon certain factors.
For determining whether the income from F&O trading is business income or capital gains income, many factors are taken into account. Some of such factors are motive of such a transaction, volume of the transaction, etc.
F & O income is non-speculative income:
F&O income is normal business income. It is not speculative income. The rate of tax on such income is same as that which is applicable to any person.
F&O transactions are considered as non-speculative business transactions according to the Income Tax Act, 1961, provided certain conditions are fulfilled. Any non-speculative business loss can be set off against any income except salary income. F&O loss can be set off against interest from banks. Non-speculative business loss can be set off against speculative business income. As such, F&O loss can be set off against income from any kind of speculative income.
If the conditions laid down in the Income Tax Act are not fulfilled, then speculative business loss can only be set off against speculative business income. According to the provisions of Section 43(5) of the Income Tax Act, F&O trading will not be treated as speculative business transaction if the transaction is conducted in a recognized stock exchange.
Why is it a non-speculative business transaction?
Whether an activity is a business or not depends upon many factors. It is not decided only for the existence or absence of any one condition. There can be cases where such transactions are not considered as business.
Many other factors, like frequency of transactions, nature of other business which are conducted, etc., also determines whether transactions are business transactions or not. The substance of the transactions is also an important factor in determining the nature of transaction.
Earning from any head of income like intra-day trading in shares is considered to be speculative business. Section 43(5) of the Act deals with speculative deals. Transactions of purchase or sale of a commodity settled by any means other than by actual delivery or transfer of the commodity or scrip is a speculative transaction. In intra-day trading in shares, as there is no physical delivery, it is speculative transaction. According to the tax laws speculative losses cannot be carried forward.
But in case shares are purchased on one day and are sold on the following day, it is not a speculative business. The profit or loss arising out of sale of such shares is considered as short-term capital gain or loss. As such F&O deals are considered as non-speculative business transactions as per the provisions of the Income Tax Act, 1961.