How to Show F&O Loss in Income Tax Return

How to Show F&O Loss in Income Tax Return

Struggling with how to show F&O loss in ITR? The situation is similar for many traders. F&O trading can be rewarding, but it also comes with some risks. It can be difficult to figure out how to show F&O loss in income tax return as it involves understanding specific sections and forms related to capital gains and losses, as well as rules and regulations governing F&O trading. With this blog, understand the basics about F&O, benefits of showing your F&O Loss, and where to show F&O loss in itr. Everything is covered in this blog. 

What is Futures and Options (F&O) Trading?

The futures and options contract, often called as F&O, is an advanced financial instrument used in investing. Future and Options mostly derive their value from underlying assets such as stocks, commodities, or currencies. With F&Os, investors can predict future price movements without actually owning these assets. It's a way to participate in the market fluctuations without directly buying or selling the assets themselves.

For example, in futures trading, an investor commits to buy or sell an asset at a future date at a price agreed upon today. Whereas in options trading, it offers the right but not the obligation to buy or sell an asset at a predetermined price within a specified period. This flexibility makes F&O trading an attractive option for investors looking to diversify their portfolios and manage risk effectively.

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Table of Content

  1. What is Futures and Options (F&O) Trading?
  2. Benefits of Declaring Your F&O Loss
  3. What is the tax treatment for F&O Profits or Losses?
  4. How to show F&O Loss in ITR?
  5. Which ITR Form to File while Reporting F&O Income?
  6. How is F&O Turnover Calculated ? 
  7. Who is Eligible for an F&O Trading Tax Audit, and Under What Circumstances?
  8. Which Expenses can be Deducted from Futures and Options Income?

Benefits of Declaring Your F&O Loss

Here are the benefits of declaring your F&O losses:

  1. Tax Relief:

    By declaring your F&O losses, one can reduce their overall tax bill by providing a welcome relief to their finances, excluding salary.
  2. Future Planning:

    If F&O loss set off the total of a given year, one has the option to carry forward these losses to future years. This forward-looking approach allows you to use these losses to offset any F&O gains down the line, helping to optimize your tax position over time.
  3. Compliance Assurance:

    Accurately reporting your F&O losses demonstrates you value the tax laws and regulations. Avoiding non-disclosure not only keeps you on the right side of the law but also brings the risk of penalties or legal issues.
  4. Audit Avoidance:

    By properly documenting your F&O losses in your tax return can potentially shield you from the scrutiny of a tax audit.
  5. Record-Keeping:

    Thoroughly declaring your F&O losses provides a comprehensive record of your financial transactions. This documentation serves as a valuable resource for future financial planning and may prove useful for loan applications or investment strategies.
  6. Balancing Act:

    When you have both F&O gains and losses in a financial year, reporting the losses enables you to offset them against the gains. This balanced approach helps to minimize your overall tax liability on F&O transactions, contributing to enhanced financial efficiency.

What is the tax treatment for F&O Profits or Losses?

  • Section 43(5) of the Income Tax Act categorizes Futures and Options (F&O) trading as non-speculative transactions. This means that any income generated from F&O trading is treated similar to business income for tax purposes.
  • Now, once your trading activities are considered as business, there are some important things to keep in mind. Proper books of accounts need to be maintained by a business if it has an annual income or turnover of more than Rs 2,50,000 in any of the three preceding years (or if it is a new business). Income Tax Act Section 44AA mandates this.
  • Under section 44AB, if your turnover crosses Rs. 1 Crore or the profit disclosed is less than 8% then you're subject to a Tax Audit. This means you'll need a Chartered Accountant to audit your accounts and submit that audit report along with your tax return within the specified deadline.
  • Failing to maintain proper accounting records can lead to penalties. Under Section 271A, there's a penalty of Rs 25,000 for non-compliance. Additionally, if your books are not audited as required under Section 44AB, you could face a penalty of about Rs 1.5 lakhs or 0.5% of your gross receipts or turnover under Section 271B. In essence, understanding and following these tax regulations are crucial for F&O traders to ensure compliance and avoid potential penalties.

How to show F&O Loss in ITR?

When it comes to declaring F&O losses in your tax return, it's important to understand how they can be managed. A significant advantage is in the event of F&O losses, these transactions can be offset against all other income sources except salary. These income sources could include income from a business or profession, rental income from property, or other revenue streams.

For example, if you are getting a monthly rental income of Rs.2,000 (Rs, 24,000 annually) and you get an F&O loss of Rs. 4000 in the same year then you can offset this loss against your rental income. So this will reduce your taxable rental income to Rs. 20,000. 

Now, if you're unable to offset this loss in the current tax year, you have the option to carry it forward for up to 8 years. However, during these subsequent years, the condition remains the same – you may only offset the loss against business income.

Which ITR Form to File while Reporting F&O Income?

Various factors are considered while selecting the ITR form to file while reporting F&O income, such as your source of income, residential status, and the nature of your transactions. Mostly, individuals engaged in F&O trading will file either ITR-3 or ITR-4, depending on their eligibility.

How is F&O Turnover Calculated ? 

Determining F&O turnover is crucial for assessing whether a Tax audit is necessary. We calculate turnover for Futures & Options (F&O) trading by looking at Absolute Profit, which is the sum of profits and losses from various transactions.

In simple terms, Absolute Profit is equal to the sum of positive and negative differences resulting from your trades. This calculation gives us a clear picture of your trading activity and helps in evaluating whether you meet the turnover thresholds that triggers a tax audit requirement.

Who is Eligible for an F&O Trading Tax Audit, and Under What Circumstances?

Understanding whether you qualify for an F&O trading tax audit depends on various factors. 

  1. Scenario 1: Trading Turnover Upto 2Cr

    If your trading turnover generates a profit of 6% or more, and you have chosen presumptive taxation, you get free from a tax audit. However, if you've incurred a loss or your profit is less than 6% of your trading turnover, and your income crosses the exemption limit, a tax audit is necessary.
  2. Scenario 2: Trading Turnover more than 2Cr and Upto 10Cr

    If you've incurred a loss or your profit is less than 6% of your trading turnover, a tax audit is required. But if the profit is equal or exceeds 6% of your trading turnover, and you haven't opted for presumptive tax, a tax audit would be implied. On the other hand, if your profit equals or exceeds 6% of your trading turnover, and you've chosen presumptive tax, you're free from a tax audit.
  3. Scenario 3: Trading Turnover More Than 10Cr

    Tax audit is mandatory in all cases, regardless of trading turnover.

Which Expenses can be Deducted from Futures and Options Income?

From your gross income, certain expenses such as brokerage fees, transaction charges, and other related expenses are all deductible in the course of F&O trading, and it's essential to maintain proper documentation to support your claims for deductions.

Handling F&O losses in your ITR requires attention to detail and an understanding of tax regulations. You can determine how F&O trading affects your overall tax liability by accurately reporting your losses and claiming tax benefits. You can also seek personalized guidance by consulting with a tax professional or financial advisor, ensuring compliance and maximizing tax efficiency. One can also use the blinkX online trading app to keep track of market trends and engage in derivatives trading. 

FAQ for How to show F&O in Income Tax Return

Documents required to show F&O losses in ITR are account statements, bank statements, contract notes from brokers, and ledger statements.

Yes, it is possible to set off F&O losses against other gains, such as revenue from a business or capital gains from the sale of assets.

It is unlimited, but only gains in the same category may be deducted from the losses; that is, short-term losses can be deducted from short-term profits

Yes, F&O losses can be set off against FD interest but it is subject to certain conditions and limitations.

Yes, it is mandatory to show F&O losses in your Income Tax Return (ITR) if you want to claim them for tax benefits.