Nowadays many people are doing trading in stock market especially F&O trading has become quite popular. But computing income from trading and filing tax returns may not be easy for everyone. It becomes more difficult when you have other sources of income as well. In this article, we will explain you everything that security traders should know about Tax filing.
1. How to compute Income from F&O Trades?
Profit or loss 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 eligible 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 shall not be paid in cash, otherwise it will not be allowed.
ITR Applicable: ITR 3 is applicable for Business income. Even if you have salary income, income from house property or income from other sources, you can disclose such income along with F&O income in ITR 3. In case you are following 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. So for trader in securities they can declare 6% of the turnover), then you should file ITR 4.
2. How to report Loss from F&O Trades?
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. But it is mandatory to report the loss in your ITR, otherwise, you may receive a notice from the Income Tax department.
Set off and carry forward of losses: Declaring loss in return comes with multiple benefits which many people are not aware of. Loss from trading in F & O can be set off against any other income except salary income. For instance, if you have rental income of Rs 8 lakhs and loss from F&O of Rs 2 lakhs, then your total taxable income would be Rs 6 lakhs.
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 against only business income in subsequent years and not any other income.
3. When to maintain books of accounts?
Books of account must be maintained in the following case:
- 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 all preceding 3 years from FY 2017-18 (Earlier this limit was Rs 10 lakhs)
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.
4. When to get the Audit done?
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.
5. Illustration on computation of Income
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.