How to File Income Tax Return for Futures and Options?

Reporting of F&O Gains And Losses

Citizens particularly those who are salaried yet exchange F&O, commit the error of not reporting these in their government form. While this may occur because of sheer ignorance; reporting every one of your sources of income is mandatory. You may get a notice from the duty division for non-compliance. What's more, as we will see below, reporting losses comes with tax reductions. 

Trading in futures and options must be reported as a business except if you have only a few exchanges (state if only 2-3 exchanges) in the financial year. Recollect this also applies to people. You don't need to be formally incorporated as a company or some lawful element to acquire business income. People can have business income too. What's more, need 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 should be filed for F&O trading income/losses). You may have filed ITR-1 or ITR-2 before yet you should check ITR form pertinence consistently dependent on every income acquired in that year. Reporting a movement as a business implies you can guarantee costs from profit of your business.

How To Report F&O Trades?

As a stock market master, you may place your hands in numerous containers. Intra-day stock trading or purchasing shares for short term or longer term. For charge purposes, you should isolate out these exercises. If you do intra-day trading that must be treated as a different business from F&O and its income (loss) should be computed independently. If you have a large volume and high frequency of short term trading in equity shares that might be treated as a business too. Choose a premise shrewdly and execute it consistently across financial years

Expenses You Can Claim and Income Computation

Increases from F&O are not considered capital gains however business income. As these are considered non-theoretical business gains, income charge is collected according to the material expense chunk rates. 

Under this framework, the income is computed on genuine premise and the citizen is needed to keep up a record and invoice for every single cost made. Moreover, he is also needed to keep up all the books of accounts, profit and loss account just as the asset report. It can become exceptionally difficult for a small entrepreneur to keep up so numerous records and to keep a copy of the apparent multitude of invoices. 

Returns are completed electronically on screen-based frameworks through a stock broker or sub-broker or such other middle person enlisted under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) as per the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

Accounting Requirements

As such transactions in the F&O Market on the Stock Markets would be treated as Non Speculative Transactions, they would be burdened simply like some other business income. The costs acquired for the purpose of Business like Telephone Expense, Internet Expense and so forth would also be allowed to be guaranteed in the income government form. 

The value of transactions in F&O is typically extremely high yet the profit edge is fairly low. Although, the assessment review is required only in situations where the where the yearly turnover is more than Rs. 1 Crores, however if there should be an occurrence of Traders who bargain in the F&O Market, they are effectively ready to produce such turnover in a month. Although the turnover is exceptionally high however the profit edge is fairly low. 

Moreover, the transactions in F&O Market are completed without the conveyance of shares or securities. The transactions are also settled by installment of differences. 

Audit And Return Filing

For this understanding, we can take two cases:

1) if there should be an occurrence of Profit from transactions of F&O trading 

On account of profit from subsidiary transactions, charge review will be pertinent if the turnover from such trading surpasses Rs. 1 crore. 

If the turnover from such trading surpasses Rs. 1 crore however under 2 crore then the review can be avoided if we can show the profit at least 8% (6%, if all exchanges are digital). 

Assessment review u/s 44AB r/w section 44AD will also be appropriate, if the net profit from such transactions is under 8% (6%, if all exchanges are digital) of the turnover from such transactions. 

Further, if you don't mind note that any turnover more than 2 crore at that point review u/s 44AB will be material independent of Profit and Loss 

2) in the event of Loss from F&O Trading 

In the event of Loss from subordinate trading, since profit (Loss for this situation) is under 8% (6%, if all exchanges are digital) of the turnover, therefore Tax Audit will be pertinent u/s 44AB read with section 44AD.

Tax Benefits: Losses Can Be Set-off And Carried Forward

Loss under F&O Trading can be guaranteed if Tax Audit u/s 44AD is performed by a professional Chartered Accountant practically speaking. The loss can be carried forward and set off against future profits to decrease the income tax risk. 

Since loss from F&O Trading is a Non-Speculative Loss, it tends to be carried forward for a very long time. It very well may be set-off against both Speculative Business Income and Non-Speculative Business Income.

For instance, your pay income is Rs 10 lakh for every annum and you have a rental yearly income of Rs 4 lakh. You also went into a F&O contract during the year and caused a loss of Rs 2 lakh. For this situation, the total income would be Rs 12 lakh. (10 lakh + 4 lakh – 2 lakh). 

However if the loss caused is Rs 5 lakh, at that point only Rs 4 lakh can be set-off against rental income (not against compensation). Subsequently, the taxable income would be Rs 10 lakh ( 10 lakh + 4 lakh – 4 lakh loss on F&O). The parity of F&O loss can be carried forward to the future years.

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