Synopsis
F&O gains and losses must be reported in your tax return. Here is a look at how these will be taxed and what taxpayers need to do.
Sudhir Kaushik
CEO and Founder, Taxspanner.com
F&O gains (or losses) are business income
Income from trading in derivatives is treated as business income by the tax authorities. Even if the investor is a salaried taxpayer, a partner in a company or a pensioner, the gains (or losses) from futures and options will be treated as business income. Accordingly, the gains will be added to the total income of the individual and taxed at the normal slab rate. Keep in mind that in case of loss, the return must be filed by the due date.
Expenses incurred are deductible
Since it is business income, the investor can claim deduction for expenses towards F&O trading. This typically includes the brokerage paid, any subscription fee of the trading portal, telephone and internet charges, and even the fees of training courses or financial guidance taken by the individual. One can also claim deduction for equipment bought for the purpose of trading.
Audit is mandatory if turnover exceeds Rs.10 crore
But this also means stiff compliance requirements. The individual running a business will have to keep books of accounts detailing all purchases and expenses. Also, if the trading turnover in a financial year exceeds Rs.10 crore, the individual will have to get his accounts audited by a chartered accountant. The audit report is submitted along with the tax return at the time of filing. Even if the turnover is less than the audit limit of Rs.10 crore, if the individual opted for presumptive taxation (8% or 6%) in any of the past five years but does not opt in the current year to declare losses in F&O, an audit by a chartered accountant is mandatory.
Losses can be carried forward
Futures and options is a risky field, and often small traders incur losses. Fortunately, these losses can be adjusted against other heads of income such as rentals, interest and capital gains, but not against salary income. If not fully adjusted in a year, the losses can be carried forward for up to eight financial years. This provides a cushion for the investor.
Don’t use ITR 1 or ITR 2 to file return
If a salaried taxpayer has business income from F&O trading, he cannot use ITR 1 or ITR 2 to file his returns. He will have to use ITR 3 instead. This income will be shown as income from business or profession. However, if he runs a business and declares tax under the presumptive income scheme, he should use ITR 4 to file his tax return.
Deposit advance tax on gains
If the individual has gained more than Rs.10,000 from F&O trading during the financial year, he is liable to pay advance tax on the income. As per the tax calendar, at least 15% of the total tax due should be deposited by 15 June, at least 45% by 15 September, at least 75% by 15 December and the entire balance by 15 March.
(The author is CEO of tax filing portal, Taxspanner.com.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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