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All you need to know about reporting gains and losses from F&O in your ITR

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Lately, many have resorted to Derivative Trading i.e. trading in futures and options, which has become immensely popular among not only those who have taken up such activity full time but also the salaried lot who consider this as a means of earning a quick additional income. However, many of them are unaware of the tax implications of such trade and also the reporting requirements in the income tax return. Let us read on to understand these.

Trading in Futures and Options - tax implications

First, one needs to understand that everyone dealing in derivatives must report loss or gains out of it. Further, the nature of the income arising out of such trading will depend on the volume and frequency of trade and the motive of such transaction. For instance, if a salaried individual just has a handful of such trades, income out of it will be taxable as capital gains only. However, for a regular trader, the income is chargeable to tax as a business income. Moreover, while intraday trading in shares is considered a speculative business, trading in futures and options is a non-speculative business for the purpose of income tax and the rules of law applicable to any other regular business apply here too.

Do note that expenses relating to trade are deductible under both circumstances i.e. where income is treated as capital gains or as business income. Here are some examples of the expenses that can be reduced from the income.

a. If treated as capital gains - Expenses relating to trading such as brokerage
b. If treated as business income - Brokerage, telephone and internet bills, consultant charges if any etc

As regards tax leviable, if the income is in the nature of short-term capital gains or business income, you will be taxed based on the income slab you come under. If the income is in the nature of long-term capital gains, you would be charged a flat rate of 20% on such gains.

Books of accounts and tax audit

Individuals who have income from the business of trading in derivatives are required to maintain books of accounts for their business, provided their income or turnover has exceeded Rs 250,000 or Rs 2.5 million respectively in any one of the three immediately preceding years. Further, if their turnover from business exceeds Rs 10 million, they would also be subject to audit under the Income tax laws. These businessmen can also opt for the presumptive scheme of tax by having to offer just 6% of their turnover as taxable income provided their turnover does not exceed Rs 20 million during a financial year. Opting for the presumptive scheme can relieve them from the mandate of having to maintain books of accounts.

Failure to maintain books of accounts could attract a penalty of Rs 25,000 and if you fail to get them audited, 0.5% of the turnover, upto a maximum of Rs 150,000 lakh penalty can be levied by the tax authorities.

Losses from Futures and Options Trading

Losses under the head capital gains can be set off only against capital gains income. Losses that have not been set off can be carried forward for upto eight assessment years for set off only against capital gains income.

Losses from derivatives if treated as a business, can be set off against any source of income like interest, rent etc but not against salary income. Further, losses can be carried forward for upto eight assessment years and can be set off only against business income.

Reporting requirements

The income tax return you file is chosen based on the nature of your income. If income is being treated as business income, ITR 3 is the form for you. Schedule BP is where you must report details of your business income and expenses. Choose ITR 4 if you are opting for presumptive scheme of tax. Choose ITR 2 if you are reporting income as capital gains where you can fill in relevant details of income under this head under Schedule CG. Report details of losses if any in Schedule CYLA and Schedule BFLA.


(Archit Gupta is Founder & CEO ClearTax. Views are his own.)

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