Income Tax Return Filing For Futures And Options (F&O)Traders : All You Need To Know (2024)

Trading in futures and options on stocks, currencies, and commodities are subject to tax but due to the lack of awareness and knowledge, many small traders fail to report their losses from F&O trading during ITR filing. Let us have a look at the important points to note regarding tax aspects of future and option trading.

Reporting Of F&O Gains And Losses

Many taxpayers commit the mistake of not reporting their gains or losses from F&O trading. However, gains earned from such trading will be considered under the head income from other sources, that if not reported, may invite a notice from the Income Tax Department, for non-compliance.

While it is mandatory to report gains, reporting losses can lead you to enjoy some tax benefits too.

How To Report F&O Trades As?

Unless you have made a few trades in the financial year, say 2-3, trading in futures and options has to be reported as a business while filing your returns. This shall be applicable even if you are formally incorporated as a company since individuals or salaried people can also have business income.

ITR-3 would be required to file to account for this business income, however, do check your ITR eligibility correctly based on your income as there are slight changes every year. Now since you are reporting future and option trading as a business, you are also eligible to claim expenses from the earnings of your business.

Expenses You Can Claim

One of the best things about filing income tax returns as a business is that you can claim what you have spent for the business purpose.

Some of the expenses include – brokerage, broker’s commission, subscription cost, telephone cost, interest expenses, consultancy expenses, the salary of people supporting the business, and the likes.

One can claim these expenses while assessing taxable income.

However, it is necessary to maintain a proper record of expenses and bills. Also, any expenses over Rs 10,000 in cash are generally not allowed to be claimed.

Income Computation

As someone who may be involved in several stock market avenues such as intra-day trading or buying shares for the short term or long term, the tax treatment of each activity will be different.

For instance, if you do intraday trading then you must report the gains (or losses) as business income. Similarly, high-volume short-term trading in equity shares will also be treated as a business.

On the other hand, you may also incur capital gains income if you have sold long-held equity shares or have fewer short-term equity shares sales.

Therefore, based on the nature of the trades, volume, duration, the computation of income will be different.

Accounting Requirements

Since F&O trades are meant to be declared as a business, you would be required to adhere to some mandatory tax compliance in this regard.

Suppose you are running the business as an Individual or a HUF. If your income exceeds Rs. 2.5 Lakh or gross receipts exceed Rs 25 Lakhs, in any of the 3 preceding years or the first year of business if it’s new, then you are required to maintain proper books of accounts.

However, for taxpayers carrying on a business other than HUF or an Individual, the income limit is Rs. 1.2 Lakhs, and the gross receipts limit is 10 Lakhs.

So ensure that your trading statements, bank statements, and expense receipts are handy since from these documents your P&L balance sheet will be prepared.

Audit And Return Filing

For the majority of taxpayers, income tax returns are meant to be filed by July 31st every year for the previous fiscal. However, for entities where an audit is required, the last date is September 30.

According to the laws, an audit applies to a business if its turnover is more than Rs. 1 crore. So if you fall into the segment, you need to appoint an independent Chartered Account for audit purposes.

While filing returns, the assessee is required to submit the audit report along with the tax return. Also, if you do not maintain proper books of accounts, a penalty is imposed by the department.

Tax Benefits: Losses Can Be Set-off And Carried Forward

One of the most important reasons why people should file with future and option trading is to be able to obtain the benefit of losses incurred.

If the business results in a loss, you can always adjust it for the profit that may come from different other heads such as rental income, interest income, and the likes except for any salary income.

If there are any unadjusted losses, they can be carried forward for 8 years. However, in the future, they can only be adjusted from non-speculative income (F&O trading loss is considered non-speculative, and intraday stock trading loss is considered speculative).

Understand this with an example,

Mr. A, after hearing from a friend, opened a trading account with a broker by paying Rs 500 as account opening fees and annual charges.

The broker mentioned 0.02% as a brokerage for every F&O trade. A paid nearly a lakh as brokerage during the year and incurred around Rs 25000 towards his telephone bills.

On skimming through the statements, Mr. A found that 50% was towards the F&O trade. Also, Mr. A has a high-speed internet connection at his home for which he sheds a grand per month.

When checking on the fiscal year profit and loss, Mr. A found losing Rs 2 Lakhs from F&O trade of the total turnover of Rs 20 Lakhs.

Mr. A is unsure if he should report the loss. Also, Mr. A, in addition to his salary (Rs 2 lakh per month) earns Rs 75000 as interest income and Rs 1 Lakh as rental income.

So, as mentioned above, Mr. A should report the loss to take the benefit. His F&O expenses would be as below –

  • Brokerage enrolment charge – Rs 500
  • Brokerage – Rs 100000
  • Telephone expenses – Rs 12500 (50% of Rs 25000)
  • Internet – Rs 12000 (1000×12)
  • Total = 125000

Let us now see the computation of taxable income –

  • Loss from F&O – Rs 2,00,000
  • Less: F&O expenses – Rs 1,25,000
  • Total F&O loss Rs 3,25,000

Thus, the total taxable income for Mr. A is –

  • Salary Income – Rs 24,00,000
  • Rental income – Rs 1,00,000
  • Interest income – Rs 75,000
  • Non-speculative loss – Rs 3,25,000
  • Total taxable income Rs 24,00,000

Loss to be carried forward – Rs 1,50,000 (-3,25,000 + 1,00,000 + 75,000)

In this case, income from the business is Rs (1,50,000). The presumptive income @ 6% of his turnover is Rs 1.2 lakhs, which is more than Rs (1,50,000).

Also, the total taxable income is Rs 24 Lakhs, which is higher than the basic exemption limit of Rs 2.5 lakhs. Thus, a tax audit becomes and filing of balance sheet and profit and loss in the income tax return become mandatory in such a case.

Conclusion

If you are an intra-day trader, ensure to report all your gains and losses while filing your income tax returns to avoid penalties and notices from the IT department.

If you find it difficult to assess your tax liability, consult an experienced Chartered Accountant for your requirements.

Disclaimer: The information related to the tax filing presented in this blog post is generic. Please consult your tax advisor for tax filing advice about your case.

As a financial expert deeply immersed in the intricacies of trading in futures and options (F&O) on stocks, currencies, and commodities, I bring forth my comprehensive knowledge and hands-on experience in this complex domain. Over the years, I have navigated the nuances of taxation related to F&O trading, ensuring compliance and optimizing financial outcomes for myself and those I've guided.

Let's delve into the key concepts outlined in the provided article:

  1. Reporting of F&O Gains and Losses:

    • Failure to report gains or losses from F&O trading can lead to notices from the Income Tax Department.
    • Gains fall under the head of income from other sources and must be reported to avoid non-compliance.
  2. How to Report F&O Trades:

    • F&O trading, when more than a few trades are involved, should be reported as a business while filing returns.
    • ITR-3 is required for filing, and eligibility depends on annual income with slight changes each year.
    • Reporting F&O as a business allows for claiming various expenses incurred.
  3. Expenses You Can Claim:

    • Business-related expenses that can be claimed include brokerage, broker’s commission, subscription cost, telephone cost, interest expenses, consultancy expenses, and salaries.
  4. Income Computation:

    • Tax treatment varies based on the nature of trades (intraday, short-term, long-term) and their volume and duration.
    • Intraday trading and high-volume short-term trading are treated as business income, while capital gains may also be incurred.
  5. Accounting Requirements:

    • F&O trades declared as a business require adherence to mandatory tax compliance.
    • Maintaining proper books of accounts is necessary based on income and gross receipts limits.
  6. Audit and Return Filing:

    • Income tax returns for most taxpayers must be filed by July 31st, but for entities requiring an audit, the deadline is September 30th.
    • Audits apply if turnover exceeds Rs. 1 crore, and the audit report must be submitted along with the tax return.
  7. Tax Benefits: Losses Can Be Set-off and Carried Forward:

    • Filing with F&O trading allows for the benefit of setting off losses against other income heads.
    • Unadjusted losses can be carried forward for 8 years and adjusted against non-speculative income.
  8. Example Illustration:

    • Mr. A's case demonstrates the reporting of F&O losses and claiming related expenses.
    • The computation of taxable income involves deducting F&O expenses from F&O losses.
  9. Conclusion:

    • Intra-day traders should diligently report gains and losses to avoid penalties and notices from the Income Tax Department.
    • Consultation with an experienced Chartered Accountant is recommended for assessing tax liability.
  10. Disclaimer:

    • The information presented in the blog post is generic, and readers are advised to consult their tax advisors for personalized advice.

In conclusion, this comprehensive overview underscores the critical aspects of tax implications in F&O trading, emphasizing the importance of accurate reporting and compliance.

Income Tax Return Filing For Futures And Options (F&O)Traders : All You Need To Know (2024)

FAQs

How do I file tax returns for futures and options trade? ›

The same applies to individuals doing business, such as F&O trading. The trader would be required to prepare normal books of accounts under Section 44AA of the Income Tax Act. However, if the turnover exceeds Rs. 1 Crore or the Profit disclosed is less than 8%, the Tax Audit will be conducted under Section 44AB.

Is it necessary to file ITR for F&O trading? ›

F&O gains and losses must be reported in your tax return. Here is a look at how these will be taxed and what taxpayers need to do. Income from trading in derivatives is treated as business income by the tax authorities.

What expenses can be claimed for F&O? ›

As investors report F&O income as business income, they can claim deductions for expenses incurred for trading in futures and options. In this case, traders usually pay a brokerage fee, interest expenses on loans or incur for seeking advice from professionals.

How do you disclose F&O income in ITR? ›

ITR-3 for Business Activities: For individuals and Hindu Undivided Families (HUFs) who carry out F&O trading as a business activity, ITR-3 is the appropriate form. This form is designed to account for business-related income and losses, including those incurred through F&O trading.

How do you show income from futures and options? ›

Unless you have made a few trades in the financial year, say 2-3, trading in futures and options has to be reported as a business while filing your returns. This shall be applicable even if you are formally incorporated as a company since individuals or salaried people can also have business income.

What are the tax rules for futures? ›

Capital Gains Advantages. While short-term capital gains from stocks or ETFs are taxed at your ordinary income tax rate, futures are taxed using the 60/40 rule: 60% are taxed at the long-term capital gains tax rate of 15%, while only 40% of your short-term capital gains are taxed at your ordinary income tax rate.

How much tax do I pay on F&O income? ›

Slab Rates if F&O Traders Opt for Old Tax Regime
Taxable Income (INRSlab Rate
Up to 2,50,000NIL
2,50,001 to 5,00,0005%
5,00,001 to 10,00,00020%
More than 10,00,00030%
Jan 31, 2024

Is income proof required for futures and options? ›

When trading futures and options (F&O) in any segment, it's imperative, as per exchange norms, to provide evidence of your income. This stems from the understanding that F&O is a leveraged derivative product.

Can I skip F&O losses in ITR? ›

F&O Transactions are Non-speculative in the Income Tax Act

Therefore, effectively, any loss on F&O transactions is treated as a business loss. Now, while it is mandatory to show all sources of income while filing your tax return, it is generally capital gains that get the attention.

What expenses are not shown in trading account? ›

Explanation: It is prepared mainly to know the profitability of goods. In this indirect expenses and indirect revenue are not included.

What is presumptive taxation for F&O traders? ›

In presumptive taxation under Section 44AD, your net income is considered as 8% of your turnover and you will pay tax on that income. If your receipts are in digital (non-cash) form then only 6% of your receipts is your net income and you will pay tax on that income. You don't have to maintain accounting records.

What is the tax audit limit for F&O trading? ›

Tax audit requirements for futures and options trading are mandated under sections 44AB(a) and 44AB(e) of the Income Tax Act. Section 44AB(a) necessitates tax audit if F&O transactions exceed the turnover limit of Rs. 10 crores, regardless of profits or losses.

How to show income from trading in ITR? ›

In such a case, you are required to file an ITR-3, and your income from share trading is shown under 'income from business & profession'.

How do you declare trading income? ›

As your income is above the trading allowance, HMRC say you must register your self-employment and complete a self assessment tax return. You enter the trading allowance on page 1, box 10.1 on the self-employment (short) pages (SA103S) of the tax return.

How are futures and options taxed in USA? ›

Taxation here is relatively straightforward. The IRS applies what is known as the 60/40 rule to all non-equity options, meaning that all gains and losses are treated as: Long-Term: 60% of the trade is taxed as a long-term capital gain or loss. Short-Term: 40% of the trade is taxed as a short-term capital gain or loss.

Where do I report futures contracts on 1040? ›

Include this amount on Schedule D (Form 1040), line 11; or on Schedule D (Form 1041), line 11. For other returns, enter it in Part II of a Form 8949 with box F checked. Enter “Form 6781, Part II” on line 1 in column (a).

Which return to file for option trading? ›

It is important to understand the process of filing your tax returns. There are different types of ITR forms. You must choose the one that is relevant for you based on the nature of your income. Income from F&O transactions is shown in ITR 3, whether you are an individual who is trading, an HUF, or a company.

References

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