F&O Taxation – ITR Filling for Futures & Option Trading

It has been observed that more people have started trading in derivatives. This rise in participation is perhaps due to the affordable payment options by brokerage firms or the information spread through social media, webinars, and trading events.

Although there are good opportunities to earn money in futures and options (F&O) trading, it is important to know about the taxes that apply to F&O income to stay compliant with the Income Tax department.

What is F&O trading?

F&O trading involves buying and selling contracts that give the right or obligation to trade an underlying asset at a predetermined price on a specified date. So if you are planning to start trading F&O, it is important to know how these trades will affect your tax portfolio.

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F&O Gains and Losses

Many taxpayers who trade in F&O often overlook reporting F&O gains on their tax returns because they are not aware of the rules. However, it is important to accurately declare all sources of income. Not reporting F&O trading income could lead tax authorities to send you notices, as they have access to detailed stock market transaction data. Plus, if you report losses from F&O trading, you can benefit from tax advantages.

F&O Trading as Business Income

Under Section 43(5) of the Income Tax Act, profits or losses from F&O trading are considered non-speculative business income. This means that you must report any gains or losses from F&O trading as part of your business income.

ITR Form for F&O Income

Since F&O income is categorized as business income, individuals who trade in F&O need to use the ITR-3 form to file their taxes. This form is specifically designed for taxpayers reporting income from Profits and Gains of Business and Profession (PGBP).

Tax Implications

When it comes to taxes, different types of trading and investments have their policies. For example, if you are doing intraday trading or making long-term and short-term investments, these are treated differently from futures and options (F&O) trading.

• Intra-day trading is often considered speculative business income, separate from F&O. 
• Trading in Short-term Equity: Depending on how often and how much you trade, these could be classified as business income or capital gains. It is important to keep your approach consistent from year to year.
• Long-Term Equity Investments: Usually, profits from these investments are considered capital gains.

Classification of Income and ITR forms

According to Section 43(5) of the Income Tax Act, of 1961, income or losses from Futures and Options (F&O) trading are considered non-speculative business income. This means you need to report it under ‘Profits and Gains of Business or Profession’ (PGBP) on your tax return.

If you choose the presumptive taxation scheme, you can use ITR-4. This makes tax calculations easier by allowing you to declare your profits as 6% of your turnover (or 8% for non-digital transactions).

ITR Forms
For reporting F&O income or losses, you should use ITR-3, which is meant for individuals and Hindu Undivided Families (HUF). If you are using the presumptive taxation option under Section 44AD, you need to file ITR-4.

Audit Requirements
If an F&O trader's turnover exceeds ₹10 crore, they must have their accounts audited. If the turnover is less than ₹3 crore, traders can choose to declare 6% of their turnover as presumptive income under Section 44AD, which means they won't need a detailed audit.

Tax Rates and Turnover Calculation
Tax rates for individuals and Hindu Undivided Families (HUFs) follow the current income tax slabs. For F&O trading, turnover is calculated based on the total profit, which includes both positive and negative differences from all trades.

Advance Tax for F&O Traders
Traders who owe more than ₹10,000 in taxes must pay advance tax in four installments: 15% by June, 45% by September, 75% by December, and 100% by March. If traders have opted for presumptive taxation, they must pay the full amount of advance tax by March 15 in one go.

STT on Futures and Options
Starting October 1, 2024, the Securities Transaction Tax (STT) on Futures will rise from 0.0125% to 0.02%, and on Options (Premium) from 0.0625% to 0.1%. This increase will raise trading costs and could affect the profitability of traders.

Deductions and Set-Off of Losses

Eligible Deductions: Traders can deduct expenses that are directly related to their trading activities. You need to ensure that you only claim those expenses that are directly related to your trading activities. This includes:

• Brokerage fees
• Broker's commissions
• Subscriptions to trading journals
• Telephone and internet bills
• Traders can also deduct fees paid to consultants or salaries for anyone they hire to help with their trading business.

Treatment of Losses
Losses from futures and options (F&O) trading are classified as business losses. These losses can be set off against other business income, but not against salary income. If there are still losses after this, they can be carried forward for up to 8 years to offset future business income.

New Tax Regime Structure - F&O Traders

Futures and Options traders can choose to pay taxes under a new tax system outlined in Section 115 BAC of the Income Tax Act. Here are some key points to keep in mind:

• Your tax amount will be based on the new tax slab rates.
• You can't claim deductions from Chapter VI-A, like those under Sections 80C and 80D, in the new system.
• If you are a trader and switch to the new system, you can only go back to the old system once in your lifetime. To do this, you need to file Form 10-IEA. 

Conclusion
If you are an intra-day trader, make sure to report all your profits and losses when filing your income tax returns. This helps you avoid penalties from the tax department. When it comes to trading in F&O in India, it is important to report your gains or losses as business income. Use the ITR-3 form, and keep clear records of your expenses and calculations.

Disclaimer
This information is general. It is advisable to consult your tax advisor for any tax-related queries before filing an ITR.