Budget 2024: Higher income tax on F&O trading income and a TDS on trading will require taxpayers to revise their tax plan

The Securities and Exchange Board of India (SEBI) has conducted a study and published a report on January 25, 2023 on profit/loss of individual traders trading in the F&O equity segment. This study on Futures and Options (F&O) highlighted that there was an increase in individual traders by over 500% in FY 22 as compared to FY 19. It also stated that 90% of active traders incurred an average loss of INR 1.25 lakh during FY 22. Recently, as per news reports, Hon’ble Finance Minister Nirmala Sitharaman at an event at the Bombay Stock Exchange (BSE) on May 24 stated that “any uncontrolled surge in retail trading in futures and options (F&O) could create future challenges not just for the markets but for investor sentiments and also for household finances.” She also added, “Household finance has undergone a generational shift. We want to protect that and ensure that it is not destroyed.”

In this context, based on the data relating to individual F&O traders and the statement of the Honourable Minister of Finance, there is widespread conjecture that the Government may categorise F&O trading as ‘speculative’ income in Budget 2024.

Under the current Income-tax Act, 1961, F&O trading has been specifically excluded from the definition of “speculative transaction”. Therefore, if F&O trading by individuals is categorized as “speculative business income”, the same may have the following resultant impact:

• Individual traders can set off F&O loss only against gains/income from other speculative business. Currently, F&O trading loss (for taxpayers who classify it as business income) can be set off against any head of income (except salary income).
• Losses carried forward from F&O trading may be eligible for offset only against speculative trading income of subsequent years.
• Individual traders may be able to carry forward F&O loss to only 4 immediately subsequent tax years. Currently, non-speculative trading loss being classified as trading income/loss can be carried forward to 8 immediately subsequent tax years.

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In addition, the following proposals are also being widely publicized as provided for in the 2024 Budget.

• F&O trading may be taxed at 30%:

Similar to the taxation of virtual digital assets (e.g. cryptocurrencies, etc.), F&O activity may be subject to a flat rate of tax (e.g. 30 percent tax plus surcharge and cess on F&O gains). The government may also propose TDS on F&O trading. However, considering the volume and complex nature of F&O transactions, it would be interesting to see if such a TDS is introduced, whether it will be applicable to the income generated from F&O trading or to the value of the F&O transaction. Should all or any of the above amendments be proposed by Budget 2024, individual traders will have to revisit and evaluate their income tax implications and compliance in India to be compliant with tax laws as well.

(The author is a partner and head of Global Mobility Services-Tax at KPMG in India)

(Disclaimer: The opinions expressed in this column are those of the writer. The facts and opinions expressed herein do not reflect the views of www.economictimes.com.)

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