Everything an F&O trader should know about return filing about:reader?url=https://cleartax.

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cleartax.in

Everything an F&O trader should

know about return filing
ClearTax
8-10 minutes

Taxpayers especially those who are salaried but trade in F&O,

make the mistake of not reporting these in their tax return.
While this may happen due to sheer ignorance; reporting all
your sources of income is mandatory. You may receive a
notice from the tax department for non-compliance. And as we
will see below, reporting losses comes with tax benefits!

Trading in futures & options must be reported as a business

unless you have only a handful of trades in the financial year.
Remember this also applies to individuals. You don’t have to
be formally incorporated as a company or some legal entity to
earn business income. Individuals can have business income
too. And have to file ITR-4 to report this income (From FY
16-17, ITR 3 is the new name for ITR-4, so from the said year,
ITR-3 needs to be filed for F&O trading income/losses). You
may have filed ITR-1 or ITR-2 before but you must check ITR
form applicability every year based on each income earned in
that year. Reporting an activity as a business means you can
claim expenses from earnings of your business.

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Easy and Accurate ITR Filing on ClearTax

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3. Expenses that can be claimed by you

The bright spot in filing your return as a business is being able

to claim what you’ve spent on it. Sometimes claiming
expenses can lead to a business loss and that is ok too. Claim
expenses which have been directly and exclusively spent on
the business. Brokerage, broker’s commission, subscriptions
to journals related to trading, telephone bills, internet costs,
consultant charges if you engaged a person or took advice

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from a professional who charged you. Or salary of a person

you hired to help with your business. All of these can be
claimed. Remember to maintain proper record of receipts/bills
and make sure you are spending via cheques or bank
transfers and not in cash. Expenses over Rs 10,000 in cash,
may not be allowed to be claimed. If an expense is both
personal and business, claim a reasonable portion towards
business.

4. Mixed bag of stock trading/investment

As a stock market expert, you may put your hands in many

buckets. Intra-day stock trading or buying shares for short term
or longer term. For tax purposes, you must separate out these
activities. If you do intra-day trading that must be treated as a
separate business from F&O and its income (loss) should be
computed separately. If you have a large volume and high
frequency of short term trading in equity shares that may be
treated as a business too. Choose a basis wisely and
implement it consistently across financial years. If you are a
long term equity investor or have fewer short-term equity share
sales, gains from these may be treated as capital gains. So, in
a financial year, you may have several types of business
income or may have capital gains income as well.

5. Keeping accounting records

Once your activity is treated as a business, there are some

other tax rules that may apply. In case you are running a
business in the capacity of an individual or a HUF, the
requirement to maintain accounting records would arise if your
income exceeds Rs 2.5 lakhs or gross receipts exceeds Rs 25

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lakhs in any of the 3 preceding years or in the first year in case

of a new business.These limits are the enhanced limits w.e.f 1
April 2017. Earlier, the limit was Rs 1.2 lakhs for income and
Rs. 10 Lakhs for gross receipts. However, these limits of Rs
1.2 lakhs and Rs 10 lakhs still hold good for taxpayers carrying
on business other than individuals or HUF. If you are an
individual who’s doing a business, such as F&O trading, these
apply to you as well. Your book keeping will be simpler though.
Keeping your trading statements, expense receipts and bank
account statements shall mostly suffice. From these your profit
and loss account and balance is prepared.

6. Audit and Return filing

 We know that most taxpayers have to file return by 31st July,
but those to whom audit applies, have a return filing due date
of 30th September. Audit applies to a business if its turnover
exceeds Rs 1 crore. If this is true for you, you’ll have to get
your accounts audited via a CA and submit the audit report
along with your tax return. If you fail to maintain books of
accounts, or do not get an audit done, penalties shall be
applicable as per the income tax act. The penalty leviable for
non-maintenance of accounting records could go upto Rs
25,000 under Section 271A. Further a penalty equal to lower of
Rs 1.5 lakhs or 0.5% of gross receipts or turnover can be
levied under Section 271B for not getting books audited under
Section 44AB. Tax audit under Section 44AB also becomes
mandatory for taxpayers who opt for presumptive scheme of
taxation, yet declare an income lower than the presumptive
income and such income (after setting off F & O losses or
other business losses if any) exceeds the maximum amount
not chargeable to tax i.e. Rs 2.5 lakhs.

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7. Tax benefits on losses – Provisions relating to set off

and carry forward

 The single most important reason to file with F&O trading is to

be able to benefit from losses you have incurred. If your
business resulted in a loss, don’t worry, report it in your tax
return. It can be adjusted from income from remaining heads
such as rental income or interest income (cannot be adjusted
from salary income). Any unadjusted loss can be carried
forward for eight years. However in future they can only be
adjusted from non-speculative income. F&O trading loss is
considered a non-speculative loss. Intra-day stock trading is
considered as a speculative loss. And it can only be adjusted
against speculative income. Unadjusted speculative losses
can be carried forward to four years.

8. Determining turnover for applicability of tax audit for F

& O Trading

Turnover for the purpose of determining whether tax audit is

applicable to F & O Trading or not is calculated a little
differently. Read on

Here, it makes no difference, whether the difference is positive

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or negative. All the differences, whether positive or negative

are aggregated and the turnover is calculated.

Example 1: Aditya buys 100 units of Futures @ Rs 200 and

sells at RS 210.

Also buys 200 units of options @ Rs 300 and sells at Rs 290.

This is how his turnover would be determined:

Particulars Calculation Amount

Profit on sale of Futures 100 * 10 1000
2000 (negative
Loss on sale of Options 200*10
ignored)
Premium on sale of
200*290 58000
options
Total Turnover 61000
Example 2: Aditya works with ABC ltd and has earned a
salary of Rs 15 lakh in FY 2017-18.

Aditya opened a trading account with a brokerage firm by

paying Rs 5,000 as enrolment charges. He has to pay 0.02%
as brokerage charges for each F&O trade and paid a total of
Rs 98,000 as brokerage charges during the year. Aditya has
telephone expenses for the whole year of Rs 36,000 and a
review of his past bills indicates about 50% of his bill is
towards his F&O trade. Aditya spends a significant amount of
time researching on the internet which help him improve his
trading skills. His monthly internet bill is Rs 1,200. When
Aditya looked up his trading statement he found that he has
incurred a loss from F&O aggregating Rs 3 lakhs. His total
turnover being Rs. 30 lakhs (determined on the basis of the
method discussed above).

Aditya is unsure if he should report his trading activity from

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F&O or he can ignore it, since there is a loss. Besides, salary

Aditya has Rs 80,000 interest income and Rs 3.5lakhs rental
income. Aditya must report his F&O trading as a business. His
F&O expense detail is as follows.

Expenses of F&O Business

Brokerage enrollment charges 5,000
Brokerage charges paid 98,000
telephone expenses 18,000
internet 14,400
Total 1,35,400
 
Income (loss) from F&O
Loss from F&O Rs 3,00,000
Less: expenses of F&O Rs 1,35,400
Total F&O loss Rs 4,35,400
Total taxable income of Aditya
Salary Income Rs 15,00,000
Rental income Rs 3,50,000
Interest income Rs 80,000
Non-speculative loss Rs 4,35,400
Total taxable income Rs 15,00,000
-Rs 5,400 (-4,35,400 +
Loss to be carried forward
3,50,000 + 80,000)
In the given case, income from business has been declared at
Rs. -5,400. The presumptive income @ 6% of his turnover is
Rs 1.8 lakhs which is more than Rs -5, 400. Further, the total
taxable income is Rs. 15 lakhs which are greater than the
basic exemption limit of Rs 2.5 lakhs. Thus, tax audit becomes

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compulsory and filing of balance sheet and profit and loss in

the income tax return are mandatory in this case. If you’re
trader and want to file your taxes, visit our page on tax filing for
traders.

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