Any Individual trading in Futures & Options (F&O) must report it in the income tax return (ITR) even if their overall income is below the basic exemption limit. Non-reporting will result in notices if the trading turnover is reflected in broker reports and annual information statement.
Non-reporting may result in loss of the right to carry forward business losses, which is permitted only when the ITR is filed within the due date. So, disclosure ensures compliance and preserves future tax benefits. Derivatives traders have to mandatory maintain books of account if their income is more than Rs 2.5 lakh and tax audit is required if the turnover is more than Rs 1 crore.
Business income
As per Section 43(5) of the Income-tax Act, trading in F&O is classified as a non-speculative business transaction and any gain or loss from such transaction is taxable under the head ‘profits and gains of business or profession’ and is taxed at normal slab rates applicable to individuals.
Sandeep Sehgal, partner, Tax, AKM Global, says there is no separate concessional rate for F&O profits unlike certain capital gains on securities. “Losses from F&O are treated as business losses and Section 71(2A) permits set-off of such business losses against income from any head other than salaries,” he says.
Income from equity and debt instruments are taxed under the head ‘capital gains.’ For equity, long-term capital gains above Rs 1.25 lakh (LTCG) are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%.
Claim expenses
As F&O income is taxed as business income, taxpayers are allowed to claim all expenses incurred wholly and exclusively for the purpose of trading, as per Section 37(1). Such expenses include brokerage, internet expenses, advisory or software fees, depreciation on laptops or computers used for trading, telephone expenses, and bank charges. Importantly, expenses of personal nature are not allowable as deduction.
“There is no specific monetary limit prescribed for such deductions. However, the expenses must be reasonable, properly documented, and directly related to the trading activity,” says Neeraj Agarwala, partner, Nangia & Company.
How to set off F&O losses
Losses from F&O trading are treated as non-speculative business losses and can be set off in the same assessment year against income under any head other than salaries. If the loss cannot be fully adjusted in the same year, the unabsorbed loss can be carried forward for up to eight assessment years and set off only against business income of subsequent years in accordance with section 72 of the I-T Act.
Reporting norms
Income from F&O trading, whether gains or losses, is required to be reported under the head “Profits and Gains of Business or Profession” in the business schedules of the ITR, with mandatory disclosure of trading turnover, expenses incurred, and net profit or loss.
In contrast, gains or losses from equities and debt instruments are reported under the head ‘Capital Gains’, separately classified as short-term or long-term, and disclosed in the dedicated Capital Gains schedules without any requirement to report turnover or business expenses. F&O income is reported in ITR-3, while only capital gains are reported in ITR-2.