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Tax Filing For Security Traders - Future And Options

By Mohammed S Chokhawala

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Updated on: Jul 12th, 2024

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6 min read

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 income from different heads. The article covers everything that security traders need to know about Tax filing.

How To Compute Income From F&O Trades?

Any profit or loss incurred from trading in futures and options is considered Business Income and is shown under the head “Income from business or profession” in the ITR. Income from F&O is not a speculative business income. 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 and retired senior citizens often deal in F&O trades.

Also, reporting income under the 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, e.g. rent of the premises used for the trading, mobile or telephone expenses, internet charges, broker’s commission, demat account charges, depreciation on a 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.

Classification of different types of trades is as follows;

Type of trade

Head of Income

Future and Options

Income from Business and Profession (Non Speculative, i.e., Normal Business Income)

Intraday trading

Income from Business and Profession (Speculative)

Cash Segment - Delivery based trades

Capital gains

Which ITR Is Applicable For Security Traders?

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 you declare F&O income as presumptive business, and you have capital gains also, ITR 3 is applicable.

How To Report Loss From F&O Trades?

Reporting of the F&O transaction, Intraday and Capital gains is mandatory irrespective of whether it has resulted in Profit or Loss: It is quite common 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. Also if you don’t file ITR in case of loss, you will not be eligible for the carry forward of losses incurred by you.

The depository will send details of your F&O trades to the Income tax department using SFT filing. Thus non-declaration of F&O trades might result in a notice being issued by the income tax department.

Declaring your losses while filing your returns comes with multiple benefits that many are unaware of. Any loss incurred by trading in F&O can be set off against any other income (Like SB Interest, Dividend income etc) except salary income. For instance, if you have a rental income of Rs 8 lakh and a loss from F&O of Rs 2 lakh, then your total taxable income would be Rs 6 lakh.

Such loss, if it 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. Details of such loss will be reflected in Schedule CFL of your ITR form

schedule cfl

Documents Required To File ITR For Traders

  • Form 16, if any
  • Form 26AS tax credit statement
  • Aadhar card
  • Bank statement when interest received is above Rs. 10,000
  • Trading account statement from the broker
  • AIS - Annual Information Statement / TIS - Tax Information Summary
  • Capital gains or Tax P&L statement from your brokerage firm
  • Bills for any expenses incurred

When To Maintain Books Of Accounts?

Books of account must be maintained in the following cases:

  • Where the income is more than Rs 2,50,000 from FY 2017-18 (Earlier, this limit was Rs 1,20,000)  OR
  • Total sales, turnover or gross receipts are more than Rs 25 lakhs in any one of the preceding 3 years from FY 2017-18 (Earlier, this limit was Rs 10 lakhs).

In case you are following a presumptive income scheme and declaring profits at 6% of your turnover u/s 44AD, then you are not required to maintain books of account. However, if you declare profits at less than 6%, 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.

Audit Of Books Of Account

An audit is mandatory in the following case:

If you trade in F&O, your business's turnover exceeds Rs 10 crores. (This limit has been increased from Rs 5 crore to Rs 10 crore (from Finance Act 2021 onwards in case of digital transactions).) 

How is turnover calculated for trading futures and options?

Turnover for both Future and Options is computed based on the absolute sum of settlement - Profit / Loss for every F&O scrip

The computation of turnover is important for the determination of tax audit limits. If the turnover is computed in the above manner and such turnover value exceeds Rs 10 Cr, then it is mandatory to get the Tax Audit done under section 44AB

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 the basic exemption limit (i.e. Rs 2,50,000 in old regime and Rs. 3,00,000 in new regime).

The due date for filing the ITR in the case of a business to whom the audit is applicable is 31st October 2024 if it is not extended by the government. Tax Audit report 3CA or 3CB needs to be submitted before 30th September 2024

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.

Example On Computation Of Turnover In F&O

In the below example, you will observe the trader has done some options trading in the NIFTY Index expiring on 22nd April

 turnover  in f &o

This income is taxable under the head business and profession. Now the question is how to declare the turnover. He has made Profits in some trades and Losses in some trades. Turnover is computed based on absolute profits at each trade level. Income has to be declared in the Profit and Loss account in the below manner.

Particular

Amount

Turnover from F&O

2,60,20,000

Less: Purchase cost*

95,20,000

Income under the head Business and Profession

1,65,00,000

*Here purchase cost is computed as the difference between Net profits and Turnover from F&O

Example On Computation Of Income

Let’s suppose Rahul is dealing in F&O. For the FY 2023-24, he incurred a loss from trading of Rs 2 lakhs. He incurred the following expenses related to trading: Brokerage charges 0.02% for each F&O trade and paid a total of Rs 73,000, Telephone expenses Rs 12,000, and 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

Business Income                                

(3,00,000)

Interest Income                                                     

3,50,000

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.

Related Article

Everything You Should Know About F&O

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Frequently Asked Questions

Do traders need to pay income tax?

Yes, All traders in the derivative segment have to file their income tax return disclosing the transaction under the Business income. Irrespective of whether such trader has made profit or loss, it is mandatory to file the ITR.

Which ITR I have to file if I have done trading in F&O?

If you have done trading in F&O then you have to file ITR-3 since it involves income from business and profession. If you opt to declare such profits under presumptive taxation u/s 44AD then ITR-4 is sufficient subject to applicability.

Can F&O income be shown under Section 44AD?

Yes, F&O can be shown under Section 44AD, as it can be taken under the head business income. 

Can I opt for new regime if I am doing F&O trading?

Yes, you can opt for the new regime, there is no restriction on it.

Am I liable to pay advance tax on my income from F&O trading?

Yes, if your tax liability is more than Rs. 10,000, you will be liable to pay advance tax in quarterly instalments.

About the Author

I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

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