F&O Traders, Beware! One Wrong ITR can cost more than One Bad Trade
F&O trading is one of the few businesses where investors often lose money first and then discover that tax compliance is another challenge waiting for them!
Futures & Options (F&O) trading has witnessed explosive growth in recent years. Mobile trading apps have encouraged thousands of first-time investors to try their luck in derivatives. Adding to the concern, SEBI has consistently reported that around 9 out of every 10 retail F & O traders end up losing money. Irrespective of whether one makes a fortune or suffers a loss, the Income-tax Act expects proper reporting of such transactions.
Unlike interest income, salary, mutual fund transactions or property transactions, F&O transactions are not reflected in AIS/TIS. Absence of F&O transactions in AIS does not mean they need not be reported. The legal obligation to disclose business income exists irrespective of whether it appears in AIS or not. The irony is that while the market may ignore your losses, the Income-tax Act certainly doesn’t. In taxation, losses don’t exempt compliance—they often increase it!
Whether you earn a profit or incur a loss, every F&O transaction has tax implications and deserves proper reporting. Placing an F&O trade may take just a few seconds, but filing the tax return for those trades deserves far more time and attention. Let us know more about the taxation of F & O.
F&O Income Is Business Income:
Under the Income-tax Act, income from trading in futures and options on recognized stock exchanges is treated as non-speculative business income. It is not taxed as capital gains but as Business Income. As a result, even if a person has executed only a single F&O transaction during the year, the income or loss has to be reported as business income.
The Income-tax Department doesn’t care whether your trade lasted five minutes or five months. If it’s F&O, it is business.
Which ITR Form Should Be Used?
Many salaried taxpayers who also dabble in F&O trading unknowingly file ITR-1 or ITR-2. This is incorrect. Anyone having F&O business income is generally required to file ITR-3. Filing the wrong return may lead to defects, notices or denial of legitimate loss carry forward.
One interesting change this year is that ITR-3 now contains a dedicated field for reporting F&O trading. This clearly indicates the increasing focus of the tax department on derivative transactions & therefore taxpayers need to exercise greater care while reporting it.
Why F&O Turnover is different from Net Profit:
Unlike a normal business, turnover in F&O is not the total value of contracts traded. As per ICAI’s Guidance Note on Tax Audit, turnover for tax audit purposes is generally computed by aggregating:
a)Absolute profit and loss from all trades.
b)Premium received on sale of options. However, where the premium received is included for determining net profit for transactions, then such net profit should not be separately included.
c)Differences arising on reverse trades, wherever applicable.
Suppose an F&O trader earns a profit of ₹80,000 from Nifty Futures, incurs a loss of ₹50,000 from a Nifty Call Option and a further loss of ₹40,000 from a Reliance Put Option. The turnover for tax purposes will be ₹1,70,000 (₹80,000 + ₹50,000 + ₹40,000) because both profits and losses are considered at their absolute values while computing turnover. (Illustrative only. Actual turnover in case of option contracts is to be computed in accordance with the ICAI Guidance Note.)
Although the net result is a loss of only ₹10,000, the turnover for tax purposes is ₹ 1,70,000. This turnover is relevant for determining audit applicability and the applicability of presumptive taxation provisions.
Tax Audit – Don’t Ignore It:
Not every F&O trader requires a tax audit. Broadly, tax audit may become applicable depending upon turnover, declared profits and the mode of transactions. Since almost all F&O transactions are carried out through banking channels, the enhanced audit threshold of ₹ 10 crore may be available where the prescribed cash transaction limits are satisfied.
Taxpayers engaged in F&O trading whose turnover does not exceed ₹3 crore should ensure that the income offered for taxation is at least 6% of turnover. Failing this, they may be required to maintain books of accounts, get them audited and furnish the tax audit report before filing the return of income. Many loss-making traders wrongly assume that losses reduce tax compliances. In reality, losses may sometimes trigger maintenance of books and tax audit.
Since audit applicability in F&O cases depends upon multiple factors, taxpayers should seek professional advice before concluding that audit is or is not applicable.
Can F&O Loss Be Carried Forward?
Yes. Since F&O income is treated as non-speculative business income, business losses can generally be:
• Set off against other eligible income in accordance with the provisions of the Income-tax Act during the same year.
• Carried forward for up to eight assessment years, subject to filing the income tax return within the prescribed due date.
Many traders lose this valuable benefit simply because they either file the wrong ITR or file it after the due date.
What Expenses Can Be Claimed?
Profits may disappear overnight. Fortunately, legitimate trading expenses don’t. A genuine F&O trader can claim business expenses incurred wholly and exclusively for trading, such as:
• Brokerage and transaction charges (except STT).
• Exchange and clearing charges.
• Internet expenses.
• Trading software subscription.
• Advisory or research charges.
• Depreciation on computer and related equipment, wherever applicable.
• Other business-related expenses supported by proper records.
Proper documentation should always be maintained to substantiate such claims.
Before Clicking ‘Submit’, Every F&O Trader Should Check:
– Correct ITR Form
– Correct turnover calculation
– Audit applicability
– Loss carried forward
– Trading expenses claimed
– Books maintained wherever required
The Tax Talk:
In F&O trading, stop-loss is optional. In income tax, proper reporting isn’t. F&O trading may appear to be only a few clicks on a mobile screen, but from a tax perspective it is a full-fledged business activity. Selecting the correct ITR form, computing turnover properly, checking audit applicability and preserving the right to carry forward losses are all equally important.
Before clicking the “Submit Return” button, every F&O trader should ensure that every derivative transaction has been correctly reported. A few extra minutes spent on accurate reporting today can prevent tax notices tomorrow and preserve valuable tax benefits for the future.
Your broker settles the trade. Your Income-tax Return settles your tax responsibility. Don’t ignore either.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
