Trading in futures and options on stocks, currencies, and commodities are subject to tax but there is little awareness around the subject. This lack of information also leads to many small traders failing to report their losses from futures and options while filing their income tax return. With this article, I aim to bring forth all the necessary points to remember around tax aspects of F&O trading. Read on.
In this article
Reporting Of F&O Gains And Losses.
Due to a lack of awareness around the subject, taxpayers, in general, may make the mistake of not reporting their gains or losses from F&O trading. However, gains from F&O trading will be considered as income from other sources, that if unreported, may lead to a notice from the Income Tax Department, for non-compliance.
While on the other hand reporting gains is mandatory, reporting losses can lead you to enjoy some tax benefits as well (explained further ahead in the article)
How To Report F&O Trades As?
Unless you have very less 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 is applicable to you even if you are not formally incorporated as a company since individuals or salaried people can also have business income.
You would be required to file ITR-3 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 F&O 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 on for the business purpose.
Some of the expenses are – brokerage, broker’s commission, subscription cost, telephone cost, interest expenses, consultancy expenses, the salary of people supporting the business and the likes.
These expenses can be claimed while assessing taxable income.
However, it is essential to maintain a proper record of expenses and bills. Also, any expenses over Rs 10,000 in cash is generally not allowed to be claimed.
As someone who may be involved in several stock market avenues such as intra-day trading or buying shares for a short term or longer-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.
Thus, depending on the nature of the trades, volume, and duration, the computation of income will be different.
Since F&O trades are to be reported as a business, you would be required to follow through some mandatory tax compliance in this regard. Suppose you are running the business as an Individual or a HUF.
If your income is more than Rs 2.5 Lakh or gross receipts exceed Rs 25 Lakhs, in any of the 3 preceding years or in the first year of business if it’s new, then you are required to maintain books of accounts.
However, for taxpayers carrying on a business other than HUF or Individual, the income limit if Rs 1.2 Lakhs and the gross receipts limit is 10 Lakhs.
So make sure you have your trading statements, bank statements and expense receipts handy since from these documents your P&L balance sheet will be prepared.
Audit And Return Filing
For the majority of the taxpayers, the returns have to be filed by July 31st every year for the previous fiscal. For example, for fiscal 2019, the returns should be submitted by July 31, 2019.
However, for entities where an audit is required, the last date is September 30.
Audit, by law, applies to a business if its turnover exceeds Rs 1 crore. So if you fall in the segment, you need to appoint an independent Chartered Account for audit purposes.
At the time of filing returns, the assessee is required to submit the audit report along with the tax return. Also, if you do no maintain books of accounts, a penalty is levied by the department.
Tax Benefits: Losses Can Be Set-off And Carried Forward
One of the most important reasons why people should file with F&O trading is to be able to get the benefit of losses incurred.
If the business results in a loss, you can always adjust it for the profit that may arrive from different other heads such as rental income, interest income, and the likes except for any salary income.
Also, any unadjusted losses can be carried forward for eight 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).
Let us now see 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 of 0.02% as a brokerage for every F&O trades. 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 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.
If you are into intra-day trading, make sure to report all your gains and losses while filing your income tax returns to avoid penalties and notices from the IT department.
In case you find yourself in difficulty to assess your tax liability, consult an experienced Chartered Accountant for your needs.
Disclaimer: The information related to the tax filing presented in this blog post is generic in nature. Please consult your tax advisor for tax filing advice pertaining to your case. The views expressed here are of the author and do not reflect those of Groww.