Taxation of Future and Options

Financial market offers different investment opportunities one of them is future and options. Future and options are derivative contracts and gets its value from underlying asset such as stocks, commodities (gold, silver etc.), currencies.

1. Future: – Future is a contract in which both the parties (buyer and seller) agrees to buy or sell underlying assets at a predetermined price on a future date. It creates an obligation on both the parties to fulfil the contract.

For example: 

A stock is trading at Rs. 1000

We buy one future contract at Rs. 1000

A) Let’s assume stock price rises to Rs.1100

         Then our gain is Rs.100

• Let’s assume stock price falls to Rs.900

    Then our loss is Rs.100

2. Options: – Options give buyer a right to buy or sell an underlying asset at a future date, but not an obligation. However, if the buyer exercises his option, it becomes an obligation for the seller. A buyer pays a premium to acquire the right.

Options have two types: –

1. Call option
2. Put option

• Call option: – Call option gives buyer a right to buy an underlying asset at future date. It is used when we expect prices to rise in the future.

For example: –

We buy a call option with a strike price (deal price) = Rs. 5000

Premium= Rs.50

Lot size = 100

Total premium paid = Rs.5000

Case A –

Market price = RS.6000

Now we will exercise our right

Profit = (6000-5000-50)100 = Rs. 95000

Case B –

Market price = Rs. 4000

Since there is a decrease in price we will not exercise our right.

Therefore, our loss = premium paid only = Rs. 5000 (50*100).

• Put option: – Put option gives buyer a right to sell an underlying asset at future date. Put option is purchased when we expect prices to fall in the future.

For example: –

Current Reliance price = Rs. 3000

We buy put option

Strike price (deal price) = Rs. 3000

Premium = 100

Lot size = 50

Premium paid = Rs. 5000

Case A–

Market price = Rs. 2000

We will exercise our right

As a result, our profit will be (3000-2000-100)50 = Rs.45000

Case B–

Market price = Rs. 4000

Since there is an increase in price, we will not exercise our right

Therefore, our loss = premium paid only = Rs. 5000

Nature of income: – Loss from future and options is treated as non- speculative business loss under Income tax Act from 1^st April, 2006.

Carry forward period: – It can be carried forward for 8 assessment years immediately succeeding the assessment year in which the loss was incurred.

Set- off rules: –

• In the year of loss, it can be set off against any income except salary.
• If carried forward, it can set off only against non- speculative business income.

Miss Prachi

CA Mandeep Singh