As the first Union Budget of Prime Minister Narendra Modi's third term approaches on July 23, 2024, everyone is eagerly anticipating potential changes in tax, especially Futures and Options (F&O) traders. Lately, there has been rising retail participation in the F&O market, which is a cause for concern for the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). SEBI has been actively working on measures to keep this influx in check.

In this blog, we'll take a look at some of the anticipated changes to tax treatment in F&O trading and how it will impact retail participation in derivatives markets.

Rising Retail Activity in F&O Market

The Indian F&O market has seen a dramatic increase in retail participation. Monthly turnover in the F&O segment has surged from Rs 217 lakh crore in March 2019 to Rs 8,740 lakh crore in March 2024. This significant rise highlights the growing interest and activity among retail traders. However, with this rise in participation, there have been widespread concerns about the losses incurred by retail investors.

The government and regulators have expressed concerns over the widespread losses incurred by retail investors in F&O trading. According to a SEBI report, 9 out of 10 individual traders experienced an average loss of Rs 1.1 lakh in FY22. With fears of potential market corrections leading to significant losses, the anticipated tax changes in the Budget announcement could help protect retailers from major financial setbacks. These changes might also discourage speculative trading in the derivatives market.

Potential Changes in Securities Transaction Tax (STT)

There is a proposal to increase the tax on hedge funds that use high-speed trading algorithms. This higher tax would apply to those with over Rs 1,000 crore in Futures & Options trading. The tax, called the Securities Transaction Tax (STT), is charged on the value of traded securities. Hedge funds with advanced algorithms often trade much faster than regular investors, creating an unfair advantage. The proposed increase in STT aims to protect regular investors from significant losses in these fast trades.

Also Read - How to Show F&O Loss in ITR?

Tax Treatment of F&O Income

Currently, income from Futures & Options (F&O) trading is taxed as business income. However, the upcoming Union Budget might reclassify this income as speculative, similar to lottery or cryptocurrency earnings. This change could also introduce a tax deducted at source (TDS) for F&O transactions, impacting how you manage your taxes and financial obligations.

The Serious Truth You Should Know About Tax on F&O Trading

As per current Income Tax rules, all F&O transactions are to be treated as business activities, so any profit or loss from these trades is considered business income. When you trade in Futures and Options (F&O), any profits you make are added to your total income and taxed based on the tax slab you fall into. If you incur losses, you can offset them against other business income or carry them forward for up to eight years to reduce future F&O profits. 

If you are looking for the right form to use for filing Income tax returns as an F&O trader, you can use one of these as applicable:

1. ITR- 3: This form can be used if you fall under the category of individuals or HUFs with income from profits and gains of business or profession.
2. ITR-4: This form can be used if you fall under the category of Individuals, HUFs, or Firms (other than LLP or (Limited Liability Partnership) and are eligible to opt for ‘presumptive taxation scheme’. Presumptive Tax is a simplified way to calculate your taxes if you run a small business. It lets you pay tax based on a presumed income rather than keeping detailed books and records.

Conclusion

Irrespective of what comes out of the Budget 2024 announcement, as an F&O trader, you must be prepared to deal with all possible developments in this segment. This is especially true considering how fast this segment has been evolving with stricter governance by SEBI. If you want to up your derivatives game, you can explore some of the best resources available on Sharekhan Knowledge Center. These can equip you to deal with various circumstances that can come up in F&O trading.