Essential guide for traders on F&O trading tax reporting

If you have both F&O gains and losses in a financial year, declaring the losses allows you to offset them against the gains, reducing the overall tax liability on F&O transactions

As July 31st, the last date for income tax return filing, draws to a close, traders active in the futures and options (F&O) segment of the stock market face a crucial task: Accurately reporting their trading income. With the growing popularity of F&O trading in India, understanding the tax implications and reporting requirements has become increasingly important for both seasoned traders and newbies alike.
 

Understanding F&O trading 

 

F&O trading involves speculating on the future price movements of stocks, indices, and other financial instruments, which can result in significant profits or losses. The Income Tax Department has specific guidelines for reporting these transactions, and failure to comply can lead to penalties or legal complications.
 

 

Latest update in Budget 2024 

As a measure to deepen the tax base, securities transaction tax on Futures and Options is proposed to increase to 0.02 per cent and 0.1 per cent respectively. FM Nirmala Sitharaman also proposed the tax on income received on buyback of shares as a measure of equity.
 

How to report F&O Income?

 

Determine the applicable ITR Form
 

Given that F&O Income falls under the category of business income, people having F&O trades must report the profit/loss in ITR-3 form (ITR form designated for people having PGBP Income).
 

Calculate your F&O trading turnover
 

To calculate your F&O trading turnover, take the absolute value of the sum of all your positive and negative differences throughout the year. For example, if you made a loss of Rs 8,000 on one trade and a profit of Rs 10,000 on another, your absolute turnover would be Rs 18,000 (Rs 8,000 + Rs 10,000).
 

Claim eligible expenses as deductions
 

As an F&O trader, you can claim various expenses incurred for your trading activities as deductions from your business income.
 

Set off F&O losses against other income
 

If you have incurred losses from your F&O trades, you can set them off against any other income (except salary) in the current year. For instance, if you have a rental income of Rs 8 lakh and an F&O loss of Rs 2 lakh, your total taxable income would be Rs 6 lakh.
 

Carry forward unabsorbed losses 
 

If your F&O losses cannot be fully set off against your income in the current year, you can carry them forward for the next 8 assessment years.
 

Manikandan S, Tax Expert at Cleartax explains tax audit applicability for F&O traders. Tax audit applicability for F&O traders is discussed below based on their turnover. From the above tax provisions, we can conclude that tax audit will be applicable only in two cases- 1 and 3 below.

 

Trading turnover up to Rs 2 crore
 

If the loss or profit from F&O is less than 6 per cent of the Trading Turnover and you’ve opted out of the presumptive taxation scheme in any of the immediate five previous years, and your total income exceeds the basic exemption limit, then Tax Audit will be applicable under Section 44AB(e).

 

On the other hand, if the taxpayer has a profit equal to or greater than 6 per cent of the Trading Turnover, then Tax Audit is not applicable.

  

Trading Turnover between Rs 2 Crore and Rs 10 Crore

 

If the Trading Turnover falls within the range of Rs 2 crore and Rs 10 crore and the majority of transactions (more than 95 per cent) are carried out digitally, then tax audit is not required, regardless of whether there is a profit or loss. (Section 44AB)

  

Trading Turnover of more than Rs 10 crore

 

Tax Audit is applicable irrespective of the profit or loss under Section 44AB(a).

 

What are the taxability of other investments?

 

In addition to F&O trading, you may also carry out intra-day trading or long-term or short-term investment. However, it is important to note that the taxation rules for each of these activities differ:

 

Intra-day trading must be treated as a separate business (speculative business) from F&O and its income/(loss) should be computed separately.

 

If you have a large volume and high frequency of short term trading in equity shares that may be treated as business income or capital gains. Choose a basis wisely and implement it consistently across financial years.

 

If you are a long term equity investor or have fewer short-term equity shares, gains from these may be treated as capital gains.