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The F&O Trader Should Know Everything about Income Tax Return Filing

Recently, derivatives trading (futures trading and options or F&O on stocks, currencies and commodities) has become a topic of discussion among investors.

Unfortunately, however, most people do not know much about how these trades are taxed. In addition, many small traders who have lost out on futures and options avoid reporting on their tax returns.

If you are an F&O trader and struggling to figure out how to deal with your taxes, read on.

Your profit (loss) from F&O trade should be reported

Taxpayers, especially those who are salaried but trade in F&O, make the mistake of not including it in their tax returns.

Although this is happening out of sheer ignorance; It is mandatory to report all sources of your income.

You may receive a notice from the tax department for non-compliance. And as we will see below, loss reporting comes with tax benefits!

F&O Trade Report as Business Income

Usually, trading in futures and options should be reported as a business

If you have only a few trades in a financial year (i.e. only 2-3 transactions).

Remember this also applies to individuals. You do not need to be formally involved in the company or any legal entity to earn business income. Individuals can also earn income in business.

Which ITR should be filed to report F&O income

Income from trading in futures and options is considered normal business income/loss. Therefore it is necessary to have ITR-4 to report this income

You may have filed ITR-1 or ITR-2 before but you should check the validity of the ITR form every year based on every income earned in that year.

Reporting an activity as a business means you can claim expenses from your business earnings.

Expenses that can be claimed by you

The bright spot for filing returns as your business can claim what you have spent on it. Sometimes claiming costs can hurt the business, and that's fine too.

Claim expenses incurred directly and exclusively on the business. Expenses such as brokerage, broker's commission, subscription to trading-related journals, telephone bill, internet expenses, and consultant's fees if you seek advice from a professional who charges you or the salary of the person you hire to help with your business. All of this can be claimed.

Remember to keep proper records of receipts/bills and make sure that you are spending by check or bank transfer and not in cash.

Expenditure of more than Rs.10,000 in cash cannot be claimed. If the costs are both personal and business, claim a fair share for the business.

A mixed bag of stock trading/investment

As a stock market expert, you can put your hands in many buckets. Intra-day stock trading or buying shares for short term or long term.

For tax purposes, you must separate these activities.

If you are doing intra-day trading, it should be considered a separate business from F&O and its income (loss) should be calculated separately.

•        If your equity shares have a high frequency of trading and short-term trading, then it can also be considered as business. Choose Aadhaar wisely and implement it consistently throughout the financial year.

·       If you are a long-term equity investor or you sell short-term equity shares, the profit can be considered a capital gain.

So, in a financial year, you can have many types of business income or even capital gains income.

Keeping accounts

Once your activity is viewed as a business, some other tax rules may apply.

If you are running a business with the capacity of an individual or HUF, if your income is more than Rs 2.5 lakhs or in any of the last 3 years or the first year the total receipts If it is more than 25 lakhs, there will be a need to keep accounts.

These limits are extended from 1 April 2017. Earlier, the limit was Rs 1.2 lakh for income and Rs. 10 lakhs for total receipts. However, Rs. 1.2 lakhs and Rs. The 10 lakh limit is still good for individuals or taxpayers doing business other than HUF.

If you are running a business, such as F&O Trading, they apply to you. It will be easier to keep your book.

It will probably be enough to keep your trading statements, expense receipts and bank account statements. This creates your profit and loss account and balance sheet.

Audit and return filing

We know that most taxpayers have until July 31 to file a return, but those who are subject to an audit have a September 30 deadline to file a return.

An audit is applicable if the turnover of a business is more than 1 crore. If this is true for you, you will need to have your accounts audited by the CA and submit an audit report along with your tax return. Failure to maintain or audit the books of account will result in penalties under the Income Tax Act.

Penalties for non-maintenance of accounts under section 271A can go up to Rs 25,000. Further, for non-audit of books under section 44AB, a penalty of Rs 1.5 lakh or 0.5% of the total receipts or turnover may be levied under section 271B.

Section 44AB also makes tax audit mandatory for taxpayers who choose an estimated plan of taxation, yet declare income less than the estimated income and such income (after setting F&O loss or other business loss) is higher than the maximum amount. Non-taxable means Rs. 2.5 lakhs.

Note: It is proposed to increase the threshold for tax audit from AY 2021-22 (FY 2020-21) to Rs 5 crore if the taxpayer's cash receipts are limited to 5% of the total receipts. Turnover, and if the taxpayer's cash payments are limited to 5% of the total payments.

Tax Profit on Losses - Provisions relating to Set Off and Carry Forward

The only important reason to file in F&O Trading is to take advantage of your losses.

If your business is lost, don't worry, report it in your tax return. It can be adjusted from the remaining head's income, such as rental income or interest income (cannot be adjusted from salary income).

Loss without any adjustment can be carried forward for up to eight years. However, in the future, they can only be adjusted from non-speculative income.

F&O trading losses are considered non-speculative losses. Intra-day stock trading is considered a speculative loss. And that can only be adjusted compared to the speculative income. Unplanned speculative losses can go up to four years.

Thus, a tax audit is mandatory and in this case, it is mandatory to file the balance sheet and profit-loss in an income tax return.

If you are a trader and want to file your taxes, contact us on 9769201316

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