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The number of people trading in the stock market, especially in F&O trading has been consistently rising over the years. However, computing your income from trading and filing tax returns can be quite tricky at times, especially when you have other sources of income. The article covers everything that security traders need to know about Tax filing.
Any profit or loss incurred from trading in future & options is considered as BUSINESS INCOME and is shown under the head “Income from business or profession” in the ITR. It is not necessary to open a separate company for dealing in F&O trades. Any individual can deal in F&O trades. Many salaried individuals, retired senior citizens often deal in F&O trades.
Also reporting income under business head comes with multiple benefits. You can claim expenses related to trading.
How to claim expenses: Like any other business, while calculating the income from F&O trades, you are allowed to deduct expenses which are directly related to earning this income, for e.g. rent of the premises used for the trading, mobile or telephone expenses, internet charges, broker’s commission, demat account charges, depreciation on laptop, consultancy charges in case you took advice from a professional etc. But you must maintain the receipts/bills of such expenses. Also, any expense exceeding Rs 10,000 in a single day should not be paid in cash to be deemed valid.
ITR Applicable: ITR 3 is applicable for Business Income. Even if you have a salary income, income from house property or income from any other sources, you will be able to disclose the income along with the F&O income in the ITR 3. In case you are following a presumptive income scheme and declare profits at 6% of your turnover (8% in case of non-digital transactions and 6% in case of a digital transaction. Security traders can declare 6% of the turnover), then you will be required to file ITR 4. However, you will be required to file ITR-3 if you declare your F&O income as presumptive business with capital gains. When we declare F&O income as presumptive business and we have capital gains ITR-3 is applicable.
Reporting Loss is mandatory: It is quite common to not to report a loss on your income tax return since no tax is payable on it. However, it has been made mandatory to report any losses in your ITR. Failure to do so will result in the Income Tax Department issuing a notice.
Declaring your losses while filing your returns come with multiple benefits which many are unaware of. Any loss incurred by trading in F & O can be set off against any other income except salary income. For instance, if you have a rental income of Rs 8 lakh and loss from F&O of Rs 2 lakh, then your total taxable income would be Rs 6 lakh.
Such loss if cannot be fully set off against the income in the current year, can be carried forward for the next eight years. But the point to be noted here is that carry forward loss can set off only against business income in subsequent years and not any other income.
Books of account must be maintained in the following case:
In case you are following presumptive income scheme and declaring profits at 8% of your turnover u/s 44AD, then you are not required to maintain books of account. However, if you declare profits at less than 8%, then you must maintain books of account.
No specific records are prescribed. But you must maintain such books of accounts and other documents which help the Assessing Officer to calculate taxable income as per the Income Tax Act for instance bills and receipts of your expenses, detail of your bank statement, Profit and loss account and balance sheet which needs to be prepared. You can keep the soft copies too.
An audit is mandatory in the following case :
Turnover of your business exceeds Rs 2 crores. (This limit has been increased from Rs 1 crore to Rs 2 crore from FY 2016-17 onwards.) Turnover here means the absolute sum of settlement profits & losses for F&O per scrip and the sell side value of option contract. OR When you declare profits less than 8% of turnover and your total income exceeds Rs 2,50,000.
The due date for filing the ITR in case of business to whom audit is applicable is 30th Sep if not extended by the government.
If you do not maintain books of account or get the audit done, then you are liable for penalty under the Income Tax Act. The maximum penalty that can be charged for not maintaining books of account is Rs 25,000. In case of failure to get the audit done, the penalty is 0.5% of turnover maximum up to Rs 1.5 lakhs.
Let’s suppose Rahul is dealing in F&O.For the FY 2016-17, he incurred a loss from trading of Rs 2 lakhs.He incurred the following expenses related to trading : Brokerage charges 0.02% as for each F&O trade and paid a total of Rs 73,000 Telephone expenses Rs 12,000, Internet Rs 15,000.
He also has Interest income from bank Rs 3,50,000.
|Calculation of Income from F& O|
|Loss from F&O||2,00,000|
|Less: Expenses of F&O|
|Brokerage Rs 73,000|
|Telephone Rs 12,000|
|Internet Rs 15,000||1,00,000|
|Income(loss) from F& O||(3,00,000)|
|Calculation of total taxable income|
|Total Taxable income||50,000|
So even if Rahul has incurred a loss from trading in F&O, he must disclose it in his ITR as such loss can be set off against his interest income and will reduce his total taxable income.
If you’re trader and want to file your taxes, visit our page on tax filing for traders.