How To Save Tax On F&O Income?

In this article you will get to know 5 smart ways on how to save tax on F&O income in India legally.

According to a report by the Securities and Exchange Board of India (SEBI), 89% of individual traders in the equity futures and options (F&O) segment incurred losses, while only 11% were able to make decent profits. It’s natural to feel frustrated about paying taxes on the hard-earned profits you’ve generated in such a competitive market. Many traders seek ways to save on F&O income taxes. Your search ends here! In this article, you’ll discover the top 5 strategies for saving tax on F&O income in India.

5 Ways On How To Save Tax On F&O Income

1. Set off and Carry forward of losses

F&O trading is considered a business activity and is categorized under “Profit from Business and Profession” for income tax purposes. This means that if you incur losses from F&O trading, you can carry forward these losses up to 8 years and setoff from the future profits.

Additionally, if you have profits from F&O trading but incur losses from another business, you can setoff your business losses with F&O business profits leading to pay less tax on F&O income.

Example:

Year 1:

F&O Trading Loss: You incur a loss of ₹10,00,000 from F&O trading.

Business Loss: You also have a traditional business with a loss of ₹1,00,000.

Since F&O trading losses can be carried forward, you can carry forward the ₹10,00,000 F&O loss to setoff future profits. The business loss of ₹1,00,000 can also be carry forward to setoff with future profits.( It is assumed that no other income is earned except these two Incomes)

Year 2:

F&O Trading Profit: You make a profit of ₹15,00,000 from F&O trading.

Business Loss: Your traditional business incurs another loss of ₹2,00,000.

Now, you can setoff the current year’s business loss of ₹2,00,000 against F&O trading profit of ₹15,00,000 in Year 2. This reduces your taxable F&O profit to ₹13,00,000 (₹15,00,000 – ₹2,00,000). You can use the carried-forward F&O trading loss from Year 1 (₹1,00,000) to setoff the remaining F&O trading profit of ₹13,00,000 in Year 2.

Additionally, you can setoff previous year’s business loss of ₹1,00,000 against the remaining F&O trading profit. This further reduces your taxable income to ₹2,00,000 (₹13,00,000 – ₹10,00,000-₹1,00000).

This example demonstrates how carrying forward F&O trading losses and setting-off business losses can help reduce taxable income and tax liability over multiple years.

2. Depreciation

Every asset you purchase for your F&O business allows you to claim up to 40% depreciation expense, reducing your taxable income and lowering your tax liability. Different assets have different depreciation rates, helping you save on taxes accordingly.

Example:

Trading Profit: ₹10,00,000

Asset Purchases: Laptop: ₹1,00,000, Trading Software: ₹50,000

Depreciation Rate: 40% for both laptop and software

Calculation: Total Asset Cost: ₹1,50,000

Depreciation: 40% of ₹1,50,000 = ₹60,000

Reduced Taxable Income: ₹10,00,000 – ₹60,000 = ₹9,40,000

By claiming depreciation, you reduce your taxable income to ₹9,40,000, resulting in lower taxes payable.

3. Expenses

Any expenses directly attributable to your F&O income can help you lower your taxable income. You can claim these expenses to reduce your income. However, if an expense exceeds ₹10,000, it must be made through a prescribed online mode.

Example:

F&O Income: ₹8,00,000

Expenses:

Plane Ticket: ₹30,000 (for attending a seminar in another city)

Seminar Fee: ₹10,000

You can claim the total expense of ₹40,000 (₹30,000 + ₹10,000), reducing your taxable income to ₹7,60,000. This significantly lowers your tax liability.

4. Deductions

Claiming deductions under sections like 80C, 80CCD, and 80D etc. can significantly reduce your gross total income from F&O trading, leading to lower taxes.

Example:

Gross Total Income from F&O: ₹7,00,000

Investments and Payments: PPF Investment: ₹1,50,000 & Medical Insurance: ₹50,000

By claiming these deductions, your total taxable income is reduced to ₹5,00,000. Due to the rebate under section 87A, you will have zero tax liability on this income.

Gross Total Income: ₹7,00,000

Deductions: ₹2,00,000 (₹1,50,000 + ₹50,000)

Net Taxable Income: ₹5,00,000

Income Tax Payable: ₹0

Leverage these deductions to minimize your taxable income and enjoy substantial tax savings.

If you need personalized consulting on how to save your taxes or file your income tax return for your F&O income, you can consult with us for free.

5. New Tax Regime vs. Old Tax Regime

Choosing the right tax regime is crucial, especially if you have income from F&O trading.

Key Points:

New Tax Regime: Ideal if you haven’t made any investments under specified schemes.

Old Tax Regime: Beneficial if you have made investments under schemes like 80C, 80CCD, 80D, etc.

Example:

Let’s discuss with an example to see which regime suits you best:

Scenario 1: No Investments

Income from F&O Trading: ₹8,00,000

New Tax Regime: Lower tax rates, but no deductions.

Old Tax Regime: Higher tax rates, but no applicable deductions.

Scenario 2: With Investments

Income from F&O Trading: ₹8,00,000

Investments: ₹1,50,000 in PPF and ₹50,000 in medical insurance.

Old Tax Regime: Deductions reduce taxable income to ₹6,00,000, potentially leading to lower overall tax.

Choosing the right regime can save you a substantial amount in taxes. Consult with us to find the best option for your specific situation!

Conclusion

There are several effective strategies to save on taxes from F&O income. Firstly, leveraging the set off and carry forward of losses from F&O trading and other businesses allows you to reduce taxable income over multiple years. Secondly, claiming depreciation on assets used for F&O business can significantly lower taxable income, as illustrated by the example with a laptop and trading software. Thirdly, deducting expenses directly related to F&O income, such as travel and seminar fees, can further reduce tax liability. Additionally, utilizing deductions under sections like 80C, 80CCD, and 80D helps in reducing gross total income, potentially resulting in reduced tax liability. Lastly, choosing between the new and old tax regimes depends on your investment scenario, impacting tax rates and deductions available. These strategies offer substantial opportunities for tax planning and savings on your F&O income.

For personalized guidance on optimizing your tax strategy or filing your income tax return, feel free to consult with us for free.

FAQ’s