ITR Filing: Common misconceptions about Futures and Options taxation

Taxation of futures and options is very tricky and there are also many misconceptions about it. We take a look at some of them.

Taxation of futures and options is very tricky and there are also many misconceptions about it. We take a look at some of them.

Taxation of futures and options is very tricky and there is more misinformation than facts out there. There were many new entrants to the FnO trading last year and they need proper understanding of F&O taxation. Old time traders have many misconceptions or misinformation and they need to get many doubts cleared. Remember, wrong information leads to wrong ITR filing (getting Income Tax Notices) and in turn losing peace of mind!

Do not think that you have to file income tax return only on making of profits. Income tax return must be filed whether you make profits or losses. Yes, in case of a loss, you may not need to pay tax, but still you have to file income tax return. It has two benefits … First, you can carry forward the loss to the next year, and Secondly, you can save penalty upto Rs 10k for non filing of ITR.

Second most important doubt with taxpayers is whether income from F&O is speculative income. This question comes with little apprehension in mind since many of the benefits are not available to speculative income. By the very nature of the transactions, the F&O appear to be speculative transactions. However, this is specifically clarified in the Income-Tax Act that F&O income is NOT speculative income. The income earned in F&O transactions is a normal business income.

Income form F&O is considered as non-speculative business income. Therefore, basic exemption limit is available to users.

For example, if you are having only income from F&O and not any other source income, then income upto basic exemption limit, i.e. Rs 2.5 lakh, is exempt from taxation!

As an individual, you can claim all eligible tax saving deduction u/s 80C in respect of income from F&O, just like any other normal business income.

Another major misconception is that one need to do audit if there is net loss from F&O transactions. It’s very simple. If you have only loss from F&O transaction, you need not do audit as long as your F&O turnover is less than the prescribed limit. Just ensure that you file ITR before the due date so that you can carry forward this loss for future years.

One more misconception is about requirement of audit. General rule says that audit is needed if the turnover is more than Rs 1crore.

Firstly, we should understand that for AY 2021-22 (year for which we all are going to file ITR now), the turnover limit is increased to Rs 10 crore if all transactions are through the banking channel. We all know in F&O, all transactions are through the banking channel and so audit won’t be needed till the turnover is less than Rs 10 crore. It’s very important to note this.

Now next important point is ‘how to compute the turnover in case of F&O transactions?’

The misconception is to consider the total transaction value as turnover. Beware …. This is not so.
Absolute value of profit and loss is counted as Turnover and if it’s option, do add premium.

For example, you have entered into two transactions. One transaction has ended up with a loss of Rs 50 lakh and another transaction was with a profit of Rs 75 lakh. So summation of absolute value of loss and profit here is 50 + 75= 125.

So, turnover would be Rs 1.25 crore. and as it’s less than Rs 10 crore & there are no any cash expenses, we can conclude that Audit is not required.

I have seen many F&O traders do simple arithmetic and compute taxable income.

For instance, suppose you have Rs 28 lakh as F&O profit and Rs 8 lakh as FnO loss. Now simple working on taxable income from F&O would be (profit-loss) (28-8)=20.

No! Rs 20 L cannot be taxable income from F&O. You have to deduct incidental expenses incurred while carrying out F&O transactions. Like data charges, electricity, spend on any analyst etc. You need to ensure only two things. Those expenses should be incidental to the F&O activity and no expense shall be in cash. Suppose, in this example, there are all such incidental expenses of Rs 1.5 lakh, then we need to reduce it from the taxable profit. So 20-1.5= Rs 18.5 L is taxable income from F&O!

(By Sujit Bangar, Founder TaxBuddy.com)

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