How to File F&O Income in Your Income Tax Returns

Introduction

Since its introduction in the early 2000s, the trade in F&O grew in popularity. With the potential of such a growing segment of financial trade, individuals who trade in F&O may not always be those with financial knowledge. Such ignorance can lead to potentially disastrous situations, even to criminal charges for tax evasions. Few simple steps of research, however, can eliminate any confusion and lead to better-informed decisions.

Calculating F&O income

Calculating F&O trade returns is the first step to filing them in the income tax. Calculation of F&O income involves the following steps:

• Calculation of the total number of favourable trades.
• Calculation of the total number of unfavourable trades.
• Calculations of premiums from the sale of F&O.
• Calculation of differences from reversal trades.

Categorising Income

The Income Tax Act of 1995, in its Section 45(3), has provisions for categorising income into business income or capital gains. Individuals filing income tax returns are required to classify their income according to one or the other. 

Categorising returns under business income has the following consequences:

•  Basic operations income, termed administrative expenditure, becomes deductible.
• Securities Transactions Tax (STT) applicable on F&O trade through exchanges becomes deductible.
• F&O trade loss can be used to negate gains from other income sources except for salaries.
• Loss from tax-exempt sources cannot be used to negate gains from applicable tax sources.
• Tax audit applies on F&O income above Rs 1 crore.

Categorising returns under capital gains has the following consequences:

• Securities Transactions Tax (STT) applicable on F&O trade through exchanges does not become deductible.
• Losses would be categorised as a short-term capital loss, which can be used to balance profit from other capital gains, both long-term and short-term.
• Losses categorised as long-term capital loss can only be used to balance long-term capital gains.

Tax returns filing

The filing of tax returns depends on your income tax category. Based on the types, individuals file one or more of the following forms:

• ITR 3 is filed by individuals and HUF who have income from the F&O trade.
• ITR 4 applies to people whose income does not exceed Rs 50 lakh.

Tax audit

Tax audit refers to an audit of the income tax returns of a person. That is usually done by a Chartered Accountant (CA). Tax Audit is done under Section 44B of the Income Tax Act of 1995. Tax audit is done under the following circumstances:

• An individual’s turnover from business exceeds Rs 1 crore.
• An individual is engaged in a profession, and their Gross Receipts exceed Rs 50 lakhs
• An individual is engaged in a business or profession and covered under Sections 44AD, 44ADA, 44AE, 44AF, 44B, or 44BBB and has claimed income that is lower than the expected profit calculated under the relevant section.

Also Read: How to File Your Income Tax Return?

Conclusion

Filing F&O trade income in income tax returns is essential to managing a legal business or trade. The filing process itself may be complicated, requiring a thorough understanding of income tax law and its relevant sections, but this can be mitigated with the help of tax advisors and income tax lawyers who can simplify these processes. The filing F&O income ultimately benefits the filer since they can balance loss against profits for both short-term and long-term trades and avoid charges of unethical practices such as tax evasion.

Disclaimer

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.