While a large number of retail investors in India face losses in Futures and Options (F&O) trading, many overlook their crucial tax obligations. It’s a common misconception that only profits need to be reported to the tax authorities. However, under Indian tax laws, F&O income is classified as non-speculative business income, meaning both profits and losses must be declared in your Income Tax Returns (ITRs).
Thank you for reading this post, don't forget to subscribe!Why Reporting Losses is Smart:
Ignoring F&O losses on your tax return is a missed opportunity. These losses can be strategically used to reduce your tax burden. As non-speculative business losses, they can be:
- Set off against other income: Excluding salary income, you can use F&O losses to reduce taxable income from other sources in the current financial year.
- Carried forward: If the losses cannot be fully set off in the current year, they can be carried forward for up to eight subsequent assessment years, effectively reducing your tax liability in future profitable years.
This not only helps you save money but also keeps you in good standing with the tax department, which has access to detailed trading data.
Key Tax Rules for F&O Traders (Indian Residents):
- Income Classification: F&O income is treated as “profits and gains of business or profession” (PGBP).
- Taxation: Your F&O income (or loss) is added to your total income and taxed at your applicable income tax slab rates.
- Deductible Expenses: Since it’s business income, you can claim deductions for expenses incurred solely for your F&O trading activities. These include:
- Brokerage and exchange transaction charges
- Advisory and research subscription fees
- Internet and telephone bills
- Office rent and utilities (if applicable)
- Salary paid to employees (if any)
- Important: Always maintain proper records and bills for all claimed expenses.
- ITR Form: You must file your income tax return using ITR-3.
- Advance Tax: If your total tax liability for the financial year is expected to exceed ₹10,000, you are required to pay advance tax in quarterly installments.
- Bookkeeping: Maintaining proper books of accounts is mandatory if your total income exceeds ₹2.5 lakh or gross receipts exceed ₹25 lakh in any of the preceding three financial years. For other businesses, the limits are ₹1.2 lakh in income or ₹10 lakh in gross receipts. This includes trading statements, bank records, and expense bills.
- Tax Audit (Section 44AB): A tax audit may be necessary if:
- Your F&O turnover exceeds ₹10 crore (if 95% or more transactions are digital) or ₹1 crore (otherwise).
- You declare lower profits than prescribed under the presumptive taxation scheme (Section 44AD), and your total income is above the basic exemption limit.
- Note on Turnover: For F&O, turnover is calculated as the absolute sum of positive and negative differences from all trades, plus the premium received on options.
F&O Taxation for Non-Resident Indians (NRIs):
The tax treatment for NRIs engaged in F&O trading is largely similar to that for Indian residents. F&O income is still considered non-speculative business income and taxed at the applicable individual slab rates. NRIs are also subject to similar advance tax, tax audit, and bookkeeping requirements.
However, NRIs have additional considerations:
- RBI and SEBI Compliance: They must adhere to cross-border investment regulations set by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).
- DTAA Benefits: NRIs may be eligible for benefits under Double Taxation Avoidance Agreements (DTAAs) and can claim Foreign Tax Credit (FTC) to avoid being taxed on the same income in both India and their country of residence.
In Conclusion:
Despite the high likelihood of losses in F&O trading, as highlighted by SEBI data showing nearly 93% of retail investors incurring losses, it is crucial not to ignore your tax obligations. Accurate reporting, even of losses, can lead to significant tax advantages and ensures compliance, saving you from potential scrutiny and penalties in the long run.
