What if F&O profits are tagged as 'speculative income' in forthcoming Budget 2024?

A report quoting sources today suggested that the government was considering various options to discourage retail participation in the futures and options (F&O) segment, including moving F&O from the head of ‘business income’ to ‘speculative income’ in the Union Budget 2024-25. 

If such a change is introduced in the full -year Budget, F&O transactions would entail larger pay-outs in the form of tax, resulting in lesser margin, said Rajarshi Dasgupta, Executive Director at AQUILAW.

"I think it would be a bold move to categorise F&O transactions as 'speculative income' rather than 'business income'. The very nature of F&O is to transact on a 'future price of a stock' at a pre-determined price. The move would treat F&O as any other speculative transaction i.e., lottery etc. with a pre-determined price set to trade in the future, as and when the stock hits that price," said Prashanth Shivadass, Partner, Shivadass & Shivadass Law Chambers.

Trading in derivative instruments i.e. Futures & Options of an underlying asset at a pre-determined price is known as F&O trading. The underlying asset could be an equity share, commodity, or currency. Thus, F&O trading can be equity F&O trading, commodity F&O trading, or currency F&O trading i.e. Forex trading. 

Dasgupta said F&O income or loss is a non-speculative business income as per the Income Tax Act. It is reported as 'Business Income' under the head PGBP (Profits & Gains from Business and Profession). Thus, a part of current practice, businessman can adjust/off-set the F&O profit with losses in other businesses and vice-versa, he noted.

The Financial Express report quoting a source suggested that the government and regulators are worried for quite some time about the increased retail participation in the derivatives segment. There are fears that if markets correct, there could be significant losses to retail investors, leading to overall dampening of sentiment, the report suggested.

If F&O transaction is treated as speculative income in the forthcoming Budget, it would attract a straight 30 per cent income tax (plus 4 per cent cess) instead of applicable slabs of 5 per per cent, 20 per cent or 30 per cent on different slabs of income, Dasgupta said.

There would be applicability of TDS. Also, one could only offset profit out of F&O transactions against loss of F&O transactions, Dasgupta said.

"Thus if such change in introduced in Budget, 2024-25, then F&O transactions would entail larger pay-outs in the form of tax resulting in lesser margin," he said.