ITR filing: How to report F&O trading income in your income tax returns

Futures and Options (F&O) are financial derivatives that allow traders to speculate on or hedge against the volatility of underlying assets, such as stocks, commodities, indices or currencies.

Once you engage in F&O trading, it's imperative to understand how these activities will impact your tax obligations.

Also read: Hike in STT on F&O trades a dampener, impact to be felt with a lag, say traders

Classification of income and ITR forms

Income classification: As per Section 43(5) of the Income Tax Act, 1961, income or loss from F&O is classified as non-speculative business income and must be reported under ‘Profits and gains of Business or Profession’ (PGBP) in the income tax returns.

Those opting for the presumptive taxation scheme under certain conditions might use ITR-4, simplifying tax calculations by declaring profits at 6 percent of your turnover (8 percent in the case of non-digital transactions and 6 percent in case of digital transactions).

ITR forms: F&O income falls under the category of non-speculative business income, people with F&O incomes/ losses should report it in ITR-3, which is for individuals/HUF. Those opting for the presumptive taxation under Section 44AD have to file ITR-4.

Audit applicability

Every F&O trader must get his accounts audited if the turnover exceeds Rs 10 crore. However, you can opt for presumptive income under Section 44AD if your turnover is less than Rs 3 crore and declare 6 percent of your turnover.

Also read: Tax filing and Section 44ADA: Why presumptive taxation scheme might work for professionals

Tax rates and turnover calculation

Tax rates: The tax rate for individuals and HUFs is as per the applicable income tax slabs.

Turnover calculation: Turnover for F&O Trading is equal to absolute profit. It is calculated by summing up all the positive and negative differences in trades.

Advance tax liability for F&O traders

Traders with tax liabilities exceeding Rs 10,000 must pay advance tax in four installments - 15 percent by June, 45 percent by September, 75 percent by December and 100 percent by March. For F&O traders, who have opted for presumptive taxation, you must pay the entire amount of advance tax in a single installment on or before March 15.

STT applicability on Futures and Options

The STT on Futures has been increased from 0.0125 percent to 0.02 percent and on Options (Premium) from 0.0625 percent to 0.1 percent. The increase in STT could impact trading costs and profitability for traders in these financial instruments. This change is effective from October 1, 2024.

Deductions and set-off of losses

Eligible deductions: Traders can deduct expenses directly related to the trading activity, such as brokerage fees, broker's commission, subscriptions to trading-related journals, telephone bills and internet costs.

Likewise, they can also deduct expenses related to consultant charges if they have sought professional advice and were charged for it or the salary of an individual they might have hired to assist with your business. All of these expenses are eligible for deduction.

Treatment of losses: Losses from F&O trading are considered non-speculative business losses and can be set off against any other business income, except salary income. These losses can be carried forward for up to eight assessment years and set off against future business income.

As the percentage of F&O traders rises every year, a thorough understanding of tax implications on trading income is important for adhering to income tax regulations.

This includes recognising how F&O transactions fit into tax brackets, the importance of proper income classification, the necessity of adhering to audit requirements for substantial turnovers, and the strategic use of deductions and loss set-offs to optimise tax liabilities.

Remember, a well-informed trader not only tries to maximise returns but also adheres to tax regulations, making every trade count.