Tax Filing For Security Traders - Future And Options

Many traders are involved in Futures and Options (F&O) transactions, and around 91% of the retail traders in F&O lose money. The Profits and losses generated from F&O transactions come under the Profits and Gains of Business or Profession. Irrespective of profit or loss made in F&O transactions, the trader has to report it in the ITR. This will allow them to set off F&O losses against any income except salary and can be carried forward up to 8 assessment years to be set off against any business income. Non-reporting of F&O transactions will attract an income tax notice. 

Turnover Calculation for F&O Trading

Turnover for both Future and Options is computed based on the absolute sum of settlement - Profit / Loss for every F&O scrip. However, the premium on the sale of options is also added to the absolute value of profit/ loss when calculating the turnover on the sale of options.

• 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.
• 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/ gross receipts or maximum up to Rs 1.5 lakhs, whichever is less.

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

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.

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

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.

Example On Computation Of Income

Let’s suppose Rahul is dealing in F&O. For the FY 2024-25, 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.

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.

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 or aggregate of expenses exceeding Rs 10,000 in a single day to a single person should not be paid in cash to claim deduction.

Classification of different types of trades is as follows;

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.

When To Maintain Books Of Accounts?

Books of account must be maintained in the following cases:

• Specified professionals mentioned under section 44AA(1) like doctor, engineer, interior decorator, etc. They need to maintain compulsory books of accounts when their income of all of their last 3 years crosses Rs 1.5 lakhs.
• For existing business, where the income is more than Rs 2.5 lakh in any of the last three years and for new business, the estimated income is more than Rs 2.5 lakh. from FY 2017-18 (the original income threshold was Rs 1.2 lakh but for individuals or HUF, it has enhanced to Rs 2.5 lakh w.e.f 1 April 2018).
• For professional, total sales, turnover or gross receipts are more than Rs 25 lakhs in any one of the preceding 3 years and for newly started professionals estimated income is more than Rs 25 lakh (the original turnover threshold was Rs 10 lakh, but for individuals or HUF, it has enhanced to Rs 25 lakh w.e.f 1 April 2018).
• Opt out of presumptive taxation scheme and income exceeds the basic exemption limit.
• Tax audit is applicable under section 44AB.

In case you are following a presumptive income scheme and declaring profits at 6% (in case of not more than 5% of the receipts being in cash) or 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 6% or 8% and the income exceeds the basic exemption limit, 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, details 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.
• Business turnover/ sales/ gross receipts exceeding Rs 1 crore are also subject to audit when more than 5% of the transactions are cash payments and receipts.
• For professionals, gross receipts exceeding Rs 50 lakh are subject to audit.
• When you declare profits less than 6% or 8% of turnover, your total income exceeds the basic exemption limit (i.e., Rs 2,50,000 in the old regime and Rs 3,00,000 in the new regime), and you are eligible for the presumptive taxation scheme under sections 44AD and 44ADA.

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. 

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

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