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How to Show F&O Loss in ITR

24 May 2022

Futures and Options, commonly referred to as F&O, are derivatives traded in the stock market. Investing in F&O gives investors a chance at gaining high returns through the prediction of the price of the stock or commodity in the future. This also allows them to hedge against price fluctuations. It also comes with a lot of risks.

However, many investors are unaware of the tax compliances that they must follow.

F&O transactions are non-speculative in the Income Tax Act

Section 43(5) of the Income Tax Act defines what transactions classify as speculative in nature. According to the provisions of the Act, F&O transactions are treated as non-speculative! 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 gets the attention. The loss is simply adjusted against the year’s profits. However, with F&O, it has become mandatory to declare any F&O transactions. Fret not, F&O loss is not taxable, but declaring it comes with a range of benefits.

Let us break them down for you.

Also, read What is Futures and Options

Benefits of declaring your F&O loss

A prime benefit of showing the loss is you may set it off against any other income earned by you. A loss on an F&O trade can be adjusted against all income apart from your salary. This may include the income from house property, business or profession, or any other source. It reduces your overall tax liability.

Let us take an example. Suppose you receive a rent of Rs. 25,000 a month on your house property. This makes your annual rental income Rs. 3,00,000. Apart from this, over the year you incurred a loss of Rs. 80,000 on your F&O trades. You may set off this loss against your rental income. This reduces your taxable income to Rs. 2,20,000. 

What is even better is that if you were unable to set off a loss in the current year, it can be carried forward over the next 8 years. However, in the subsequent 8 years, you may set it off only against business income.

Provisions under section 43(5) 

Loss on F&O transactions is not taxable. However, as is the case with any other business loss, mentioning it in your return allows you to claim some expenses. These expenses are those that you incur while undertaking F&O trade. Some examples of these expenses on which you can claim a deduction – set off F&O losses – are:

  • Rent paid on the premises where the F&O trade is undertaken.
  • Administration expenses to carry out the trade, such as those on telephone bills and the internet.
  • Salaries of employees or any other individual you have hired for carrying out the F&O trade.
  • Brokerage commission paid or any charges on consulting with experts.
  • Depreciation is charged on assets used for the F&O transactions. 

However, you must have proof of all these transactions in the form of bills or receipts, which are properly filed. Moreover, you shall not be able to claim expenses over Rs. 10,000 if they are in cash.

Apart from this, you may also deduct the amount paid as Security Transaction Tax (STT). 

Now that we have determined why it is beneficial for you to declare your F&O losses, let us see the process involved.

Which ITR should you file?

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. 

ITR 3 allows you to mention all other incomes apart from that earned through F&O trades. There is a provision to mention your salary, income from house property, and income from any other source. However, if you run a business or profession and declare taxes according to the presumptive income scheme, you must file ITR 4.

Another vital thing to keep in mind is maintaining the book of accounts. However, this is simpler for an individual or an HUF trading in F&O. All you must do is maintain all your trading statements, receipts, and bank statements. This is a necessity if you earn an income of more than Rs. 2,50,000 or your gross receipts are more than Rs. 25,00,000 in any 3 preceding years.

Additionally, the applicability of a tax audit needs to be given importance. As an F&O trader, you may require to get an audit done. Let us see when you need to do so.

When is a tax audit necessary?

A tax audit is necessary if your turnover exceeds Rs. 5 crore. However, if the cash transactions form a portion that is less than 5% of your gross receipts/payments, this limit is pushed to Rs. 10 crore. This change came into effect from FY 2020-21. 

According to section 44AB of the Income Tax Act, there are penalties for not getting your books audited. These extend up to Rs. 1,50,000 or 0.5% of gross receipts, whichever is lower.

Moreover, in case you get an audit done, the due date for filing the ITR extends to 30 September. 

This concludes the provisions of the Income Tax Act for showing F&O loss. Let us take an example for a better understanding.

Suppose that you have an F&O loss of Rs. 3,00,000. While trading, you had various expenses. These included rent of Rs. 20,000, telephone bills of Rs. 10,000, and internet fees of Rs. 10,000. Moreover, you spent Rs. 30,000 on brokerage. Apart from this, assume you earned an interest income of Rs. 4,10,000 from other sources. In such a case, your taxable income will be calculated as follows:

Particulars Amount (Rs.)
Loss on F&O (3,00,000)
Less:
Rent (20,000)
Telephone bill (10,000)
Internet fees (10,000)
Brokerage (30,000)
(70,000)
Total loss on F&O (loss from business or profession) (3,70,000)
Interest Income (Income from other sources) 4,10,000
Total taxable income  40,000

The takeaway

Your F&O loss may be bad news, but you may reap some benefit while filing your tax returns. You may set it off against other incomes to reduce your overall tax liability. You may also claim certain direct expenses that you incur while trading. Thus, it is crucial that you keep yourself updated with the latest provisions and threshold limits mentioned in the Income Tax Act to avail maximum benefits.

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