All things F&O traders need to know about taxes and IT return filing

Even though futures and options (F&O) trading has picked up pace over the last few years, most investors are yet to get through the complexities around taxation and return filing on the income generated from this segment.

As the tax filing deadline approaches, ET Markets tries to simplify the jargon as F&O traders can enjoy several benefits by reporting such income.

Non speculative income

Firstly, under the income tax rules, the income arising out of futures and options trading is treated as non-speculative income.

A speculative income is defined as a transaction, which is not based on any delivery of the commodity, be it shares or others. For instance, equity intraday income is considered as speculative income as traders buy and sell the stock on the same day and there is no delivery to the demat account.

However, income from F&O is treated as non-speculative as it is assumed that investors are using this segment for hedging purposes.

Report as business incomeThe income or losses from F&O trading should be reported as business income. Hence, traders will pay the taxes under the income tax slabs.

However, this rule doesn’t apply if investors have only few trades (2 or 3) during the financial year.

“Those who file business returns are allowed to claim expenses of their return. Income from remaining heads is added to this income to arrive at total income and it is taxed at slab rates applicable to the individual. In case the taxpayer opts for presumptive taxation under Section 44AD, then special rates of tax shall apply,” said Archit Gupta Founder and CEO Clear.

Now that investors treat such income under the business segment, they must choose ITR-3 form, as opposed to ITR 1 or 2, which is generally used for regular tax filing.

Claiming deduction for expenses

As investors report F&O income as business income, they can claim deductions for expenses incurred for trading in futures and options. In this case, traders usually pay a brokerage fee, interest expenses on loans or incur for seeking advice from professionals. They can claim all such expenses at the time of filing IT returns.

“Since it is business income, the investor can claim deduction for expenses towards F&O trading. One can also claim deduction for equipment bought for the purpose of trading,” said Sudhir Kaushik, CEO,

Carrying forward losses

Reporting income from F&O trading is mandatory under the income tax rules. However, what should investors do if they incur losses during the financial year?
Traders can adjust the losses incurred to other income generated during the year such as rental, or capital gains income. However, they cannot adjust it to salary income.

However, if the trader chooses not to adjust the losses, he can carry forward the same up to a period of 8 years. If the loss is not disclosed in the income tax return or the income tax return is not filed before the due date – the loss would not be allowed to be carried forward.

“The single most important reason to file with F&O trading is to be able to benefit from losses you have incurred. If your business resulted in a loss, don’t worry, report it in your tax return. However, in the future, they can only be adjusted from non-speculative income,” said Gupta.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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