How to report F&O trading income in your IT returns

The deadline for filing the income tax return (ITR) for fiscal year (FY) 2021-2022 or tax year (AY) 2022-23 is fast approaching. If you are a trader and derive income from futures and options (F&O), including intraday trading, profits from this activity must be reported as business income on your returns.

ITR-3 is the applicable ITR form for reporting income from “Business or Professional Profits and Gains (PGBP)”. The tax payable on this income is at the flat rate applicable to each individual.

The declaration of business income makes it possible to deduct the associated expenses. Thus, costs such as broker’s commission, dematerialization costs, cost of research reports, depreciation of devices used for trading and internet costs can be claimed as expenses from this income.

Set-off and deferral

Trading income is further divided into speculative and non-speculative business income. Intraday trading transactions are considered speculative (since there is no stock delivery) and other F&O transactions are treated as non-speculative.

Although the tax payable on both incomes is the same, the difference comes in terms of disclosure and particularly where a loss is incurred – the latter allows you to use the set-off or carry-forward provisions to adjust the loss relative to income and reduce tax. spent.

If you incur a loss on non-speculative F&O transactions, this amount can be used to offset the loss with any income except salary. For example, the loss on F&O trading can be deducted from your property income or capital gains or income from other sources as well as any non-speculative income. The unused loss, if any, can be carried forward eight years and can only be deducted against non-speculative business income.

On the other hand, an intra-day (speculative) trading loss can only be offset by speculative income. The unused balance, if any, can be carried forward over the next four years to be deducted from speculative income.

The only condition for deferring trading losses is to file the ITR before the due date, according to Neetu Brahma, Director, Nangia Andersen India.

Account and audit books

When declaring business income, the obligation to keep books of accounts arises “when the turnover is greater than 25 lakh or if the net profit is more than 2.5 lakh per annum in the case of an individual,” said Sandeep Sehgal, Tax Partner, AKM Global, a tax and advisory firm.

Brokerage firms usually provide a detailed profit and loss statement of all trades made during a financial year. “These statements are very useful for traders but cannot be considered by themselves as books of accounts,” Sehgal added.

In addition, according to the Income Tax Law, a tax audit is mandatory if the company’s turnover exceeds 10 crore (the limit is 1 crore if cash receipts and payments during the year do not exceed 5% of total cash receipts or payments). If you have chosen flat-rate income tax, then the tax audit is only applicable if your declared profit is less than 6% or 8% of turnover.

The calculation of stock market turnover is slightly different. For intraday trades, the settlement amount of the trade, whether positive or negative, is the turnover. Suppose you bought an ‘X’ share at 1,000 and sold it for 1,500, then the difference of 500 is the turnover. The same goes for futures contracts. Suppose you entered into a contract with a future value of 1 lakh and later sold to 95,000, the negative difference of 5,000 is the turnover.

In the case of options, the premium received when selling the option must also be taken into account. Let’s say you bought an option on an index of 100 units at 50 and sold it to 60, turnover is (100 units*( 60-50)) plus the option premium received (100 shares*60) which equals 7000 (1000+6000).

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