According to the provisions of the Income Tax Act, 1961, Futures and Options are termed as “Non-Speculative” business income provided certain conditions are fulfilled.
An activity being carried out in a normal course of the business depends on so many factors. The complete nature of the transaction and the intention of the individual plays a dominant role in determining the classification of such business activity. These factors include the nature of the businesses, frequency of the transaction, etc. which helps to determine if these transactions are business transactions. While determining the nature of a transaction, the substance of each transaction plays a key role and is also important.
According to the provisions of Section 43(5) of the Income Tax Act, if a transaction of futures and options investment is conducted through a recognized stock exchange then, that transaction of Futures and Options will be termed a “Non-Speculative” business.
Again, it is also a misconception regarding the applicability of tax audits concerning Futures and Options. According to the income tax laws, a tax audit is applicable if the investor has suffered a loss from the transactions of Futures and Options and the turnover exceeds the threshold limit. Otherwise, there is no such mandatory provision for audit in case of losses from Futures and Options.
Most investors are under the influence that the calculation of turnover for Futures and Options refers to the turnover generated by adding the profits and losses. It is to be noted that the premium received on Options will be added to the turnover. The differences must also be added to the total turnover concerning the reverse trade. All the differences will be aggregated to compute the turnover irrespective of the differences being positive or negative.