Futures and Options (F&O) trading has seen a significant number of participants incur losses, with nearly 93% of traders facing an average loss of ₹2 lakh each in FY23 and FY24, according to SEBI. A common misconception among these traders is that F&O losses don’t need to be reported in their Income Tax Return (ITR). If you share this belief, you’re mistaken!
Let’s clarify the income tax provisions related to F&O trading in India. This guide covers everything you need to know about the tax implications of your F&O trades, the appropriate ITR forms, turnover calculation, tax audit requirements, and more.
F&O Taxation for Residents and NRIs: The Same Rules Apply
It’s important to note that the taxation rules for F&O income are identical for both residents and Non-Resident Indians (NRIs). Since all F&O transactions happen on Indian stock exchanges (NSE or BSE), the income is considered to arise or accrue in India. This means it’s taxable in India, regardless of where the NRI lives.
Understanding F&O Taxation in India
Under Section 43(5) of the Income Tax Act, 1961, F&O trading transactions are categorized as non-speculative business income. Therefore, any profits or losses from F&O trading must be declared as ‘business income’ under the head — Profits and Gains from Business and Profession (PGBP) when filing your return.
Your F&O profits are added to your total income and taxed at your applicable income tax slab rates. For NRIs, this means taxation at the slab rates relevant to their total taxable income in India.
While taxing F&O profits is straightforward, the rules become a bit more complex with losses. Many taxpayers believe that only profits need to be reported, but this isn’t true. Even F&O losses must be reported in your ITR, and doing so offers significant benefits.
Why Reporting F&O Losses is Crucial
Declaring your F&O trading losses can significantly reduce your tax liability. It allows you to:
- Set off losses against other business income, capital gains, rental income, or interest income. However, you cannot set off F&O losses against salary income.
- Carry forward losses for up to eight assessment years to set off against future F&O profits.
Let’s illustrate with an example:
Suppose in FY 2024-25, you have a salary income of ₹5 lakh, interest income of ₹1 lakh, and rental income of ₹2.5 lakh. In the same year, you incur an F&O loss of ₹4 lakh. According to income tax rules, you can set off ₹3.5 lakh of this loss against your interest income and rental income (but not your salary income). This reduces your taxable income for FY 2024-25 to ₹5 lakh. Since you couldn’t fully set off the F&O losses this year, the remaining ₹50,000 loss can be carried forward for up to eight assessment years.
Important Note: Failing to declare your F&O profit or loss in your ITR could result in a notice from the Income Tax Department.
Which ITR Form to File for F&O Income?
Since F&O trading income is considered business income, you’ll need to file either:
- ITR-3: For individuals and HUFs with income from a business or profession.
- ITR-4: For individuals and HUFs opting for the presumptive taxation scheme, with income up to ₹50 lakh from a presumptive business or profession.
Ensure you accurately provide all necessary details about your profit and loss, turnover, expenses, and other information in the relevant sections of the ITR forms.
Can F&O Traders Claim Business Expenses?
Yes! Because F&O trading is treated as a business, you can claim various expenses incurred for your trading activities as deductions from your total income. These can include:
- Brokerage fees
- Internet costs
- Telephone bills
- Trading software subscriptions
- Trading journal subscriptions
- Consultancy charges paid to financial advisors
- Salaries paid for business assistance
Key points to remember when claiming expenses:
- Ensure these expenses are directly and exclusively related to your trading activities.
- Maintain proper receipts and bills to substantiate your claims and avoid scrutiny from tax authorities.
- You may not be able to claim a deduction for expenses exceeding ₹10,000 paid in cash.
- You can claim expenses even if you’ve incurred a trading loss.
Do F&O Traders Need to Maintain Accounting Records?
Yes, F&O traders are mandatorily required to maintain accounting records if:
- Their income exceeds ₹2.5 lakh, or
- Their turnover exceeds ₹25 lakh in any of the three preceding years or in the first year of a new business.
Therefore, keep your F&O trading statements, bank statements, and expense receipts readily available, as these documents will be used to prepare your Profit and Loss (P&L) account and Balance Sheet.
Is a Tax Audit Required for F&O Traders?
A tax audit under Section 44AB of the Income Tax Act is required for F&O traders if certain turnover conditions are met. Generally, this applies if:
- Your turnover exceeds ₹10 crore in the previous year (for businesses where more than 95% of receipts and payments are digital).
- If your turnover is between ₹2 crore and ₹10 crore, an audit might be required if cash transactions exceed 5% of total receipts or payments.
- If your turnover is up to ₹2 crore and you declare a profit less than 6% of the turnover (for digital transactions, or 8% for non-digital) AND your total income exceeds the basic exemption limit. This is particularly relevant if you’ve opted out of the presumptive taxation scheme in any of the immediate five previous years.
Understanding these tax implications is crucial for all F&O traders to ensure compliance and maximize potential tax benefits. Do you have any specific questions about calculating your F&O turnover or navigating the ITR forms?