How to report
Future and Options (F&O)
trading in
Income Taxpayers who deal in derivatives (example Future and Options), describe their experience with the income tax filing process as vague and confusing.
Here are some basics that can help.
A derivative means an instrument whose value is derived. It has no value of its own. Its price is based on the underlying asset.
Derivatives of stocks / shares and indices can be traded on Indian stock exchanges.
The most popular form of derivatives are futures & options (F&O). A futures contract means an agreement to buy or sell on a future date.
This contract expires on a pre-set date. On expiry, futures are executed by delivery of the underlying asset or / via payment.
Options and futures are alike but when you do an options contract, you can choose to not make the transaction.
Income from F&O deals is almost always treated as business income. This treatment is irrespective of the frequency or / volume of your transactions.
That may come as a surprise if you are salaried and have never run a business.
Taxpayers who have business income have to file ITR-4.
As per Indian income tax laws, incomes are reported under 5 heads
1. Salary,
2. House property,
3. Capital gains,
4. Business and Profession and
5. Other sources (any residual income that cannot be classified in other heads).
F&O trade is reported under the head ‘business’ in your tax return.
Reporting F&O trade as a business means:
** You can claim expenses from your business income
** As a result you may earn a profit or / incur a loss
** Losses must be reported & losses have income tax benefits
** Your total income (from all 5 heads) continues to be income taxed at slab rates (10%, 20% and 30%).
Businesses may be speculative or / non-speculative, and the income tax treatment is different.
The income tax Act says that F & O trade is considered as a non-speculative business.
Intra-day stock trades are treated as a speculative business.
Remember that cost indexation (CI) and capital gains exemptions are only allowed on sale of capital assets like as equity shares, mutual funds, plots of land, house / flats, and others.
Since F&O trades are considered a business, income tax rules of capital gains rules do not apply.
The first hurdle is to prepare your business’s profit & loss details.
To calculate gross income from F & O trades, take your transaction statement for the whole financial year (April 1 to March 31).
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| Archit Gupta, Cleartax.in |
Look at your receipts; these may be a positive or / a negative value. Sum these up for the whole year.
Expenses can be deducted from your gross income. Some expenses that you can deduct include rent or / maintenance expenses of premises used for the business; mobile or / telephone; internet charges; demat account charges; broker commission; depreciation on laptop used for trading; and any other expense directly related to your work.
Business income is calculated for the financial year for which you are filing your return.
You will also have to prepare a balance sheet which is reported in ITR - 4. It is basically a statement of your assets & liabilities.
Several people get confused when they have more than one type of dealing in the share market.
Some do intra-day stock transactions along with F & O trades. Some may hold stocks as long-term investments & also invest in mutual funds.
In such a situation, you should calculate your business income from all of these separately.
F & O trade income and intra-day stock trading will have separate expenses.
Do not worry if you have consolidated expenses; for example, you use the same premises to trade in both, or / use a single phone.
Simply bifurcate these expenses on a reasonable basis. You can allocate them using a ratio based on time spent.
If you invest in shares for the longer run, you can treat them as capital assets.
These will not be reported as business if you do not trade in them often.
There is an element of judgement involved and the main criteria is your intent. So, choose carefully.
If you have some shares that you trade often & some that you hold for longer, you can separate them into business & capital assets.
Remember to choose on a fair basis & apply your choice consistently.
You have to report gains from capital assets under the head ‘capital gains’, which has different income tax rules.
Mutual funds, too, may be treated as investments and taxed separately.
You will end up paying higher income tax if you do not report your losses since losses have income tax benefits & reduce your total taxable income.
Losses from F & O can be set off from income from other heads (except salary income).
Say, your loss from F & O business is Rs.1 lac, salary income is Rs.5 lac, income from rent is Rs.2 lac, and interest income is Rs.50,000. Your total taxable income shall be Rs.6.5 lakh.
If losses are not fully set off in the same year, you can carry them forward for 8 years. However, in the following 8 years, it can only be set off from non-speculative business income.
If you have F & O loss, you must get your accounts audited. Audit is also mandatory if your turnover exceeds Rs.1 crore.
If accounts are not audited, a minimum penalty of 0.5% of turnover may be levied (maximum Rs.1.5 lakh). The due date of filing of tax returns for financial year 2015-16, where audit is mandatory, is 30 September 2016.
About the author..
Mr. Archit Gupta is founder and chief executive officer at Cleartax.in
ClearTax HQ B-3, Lower Ground Floor, School Lane, Naraina Vihar, New Delhi 110 028
India Bangalore office: HSR Layout Sector 1.
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