CA Pratik Anand

With the due date to file income tax return fast approaching, I have been asked this question by many people.

Question: How to file income tax return in case of profit/loss from F&O trading? Do we get our accounts audited in case of loss from F&O Trading?

I will try to answer all questions relating to F&O Trading through this article so that it can be of help to people in filing income tax returns.

Ques: What is the treatment of profit/loss from F&O Trading in the income Tax Return?

Ans: For the answer to the above question, We have to refer to Section 43(5) of the Income Tax Act’1961,the relevant extract of which is reproduced below:

 “speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:

Provided that for the purposes of this clause—

 (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; 76[or]

[(e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association [, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]]

shall not be deemed to be a speculative transaction.

[Explanation 1].—For the purposes of [clause (d)], the expressions—

(i) “eligible transaction” means any transaction,—

(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and

(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

(ii) “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose;

[Explanation 2.—For the purposes of clause (e), the expressions—

(i) “commodity derivative” shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013;

From the reading of the above it is clear that trading in derivatives including commodity derivatives on a recognised stock exchange will not be considered as a speculative transaction and hence not treated as speculative business.

Therefore since these are not considered as speculative business, therefore income from such transactions will be considered as normal business income and loss from such transactions will be considered as normal business loss.

Applicability of Tax Audit in case of derivative (F&O) Trading

Since income from derivative trading is considered as normal business income, therefore normal rules as applicable to tax audit as stated in section 44AB will be applicable in case of F&O trading also.

Therefore, the applicability of tax audit will be as follows in case of F&O Trading:

1) In case of Profit from transactions of F&O trading

  • In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. 1 crore.
  • Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 8% of the turnover from such transactions.

2) In case of Loss from F&O Trading

In case of Loss from derivative trading, since profit (Loss in this case) is less than 8% of the turnover, therefore Tax Audit will be applicable u/s 44AB read with section 44AD.

Calculation of turnover in case of F&O Trading

Determination of turnover in case of F&O is one of the important factors for every individual for the income tax purpose. Turnover must be firstly calculated, in the manner explained below:

  1. The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
  2. Premium received on sale of options is to be included in turnover.
  3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover.

Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.

Expenses

Expenses such as postage, conveyance and telephone, incurred for carrying on the business can be claimed as business expenses. You can also claim depreciation on assets used for the business or profession.

Maintenance of Books of Accounts in case of F&O Trading

Since income from F&O Trading is considered as normal business income, therefore normal rules for the maintenance of Books of accounts as stated in section 44AA of the Income Tax Act’1961 are applicable. These rules can be summarised as follows:

1) If there is loss in F&O trading or the Net profit is less than 8% of the turnover or the turnover exceeds Rs. 1 crore, then provisions of Tax Audit are applicable and in order to get tax audit done, maintenance of books of account are mandatory.

2) if there is a profit in F&O and the profit is 8% or more of total turnover , then only the income has to be declared as business income and accordingly ITR has to be filed. There will be no need to maintain books of accounts.

Provisions relating to filing of Income Tax Return

Since income from F&O trading is to be treated as business income, therefore an individual filing return with F&O trading income has to file ITR in form ITR 4.

Depending on the requirement to get the accounts audited as per section 44AB & 44AD, the due date for filing the return of income will be as follows:

If Tax Audit is applicable: Due date will be 30th September of the Assessment Year (30.09.2015 for AY 2015-16).

If Tax Audit is not applicable: Due date will be 31st July of the Assessment Year (31st August for the current assessment year i.e 31.08.2015 for AY 2015-16).

Carry forward & and set off of Loss

The set-off and carry forward of loss from F&O transactions is also one of the most important questions asked by people. The provisions relating to set-off and carry forward of F&O Loss are as follows:

If there is a loss in F&O and you are claiming the same in the Income Tax return then:

You should file it before due date to carry forward the loss and set off from income in future.

However, there are case laws which prohibit the carry forward and set-off of loss from F&O transactions stating share derivative transactions carry the character of speculative transactions for section 73 and any loss arising therefrom will be characterised as loss from speculative business and same cannot be set-off against normal business income

As per court section 43(5) defining speculative transaction is only for the purpose defining terms used in section 28 to 41.Section 43(5) has no application over section 73.  (CIT v/s DLF Commercial Developers Ltd.)

(The author is a CA in practice at Delhi and can be contacted at: E-mail: contact@capratikanand.com, Mobile: +91-9953199493)

Author Bio

Qualification: CA in Practice
Company: Pratik & Associates
Location: New Delhi, New Delhi, IN
Member Since: 10 Jun 2017 | Total Posts: 52
Pratik Anand is the founder of youronlinefilings.com, an online startup for business registrations, annual business compliance services, Tax filings, book keeping, legal consultancy etc. He is a Chartered accountant by profession and has special flair and expertise in the area of direct Taxation. H View Full Profile

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55 responses to “Income tax return filing in case of Futures & Options (F&O) trading”

  1. Urmi Sood says:

    My only income is from F&O Trading, intraday trading and delivery based trading. The income for the FY 2016-17 is 2 lacs. Since the total income is less than 2.5 lacs, do I require to file income tax return.

    The other querry is as regards to calculation of turnover in F&O. suppose I bought a call of a share for Rs. 2 and sold it at Rs. 3. Lot size is 6000. I earned Rs. 6000. What will be the turnover?

  2. b s raju says:

    i have made a loss of 9000 in long term capital loss in shares. can i carry farward to next.

  3. Namit says:

    Sir, I do intraday trading and do short term delivery trading apart from F&O trading. I have profit in F&O of 8 lakh but loss of 5 lakh in delivery and in intraday trading. So can I adjust my short term loss of 5 lakh with 8 lakh profit in F&O? Please advise. Regards

    • Amit says:

      Yes you can adjust if you routed your derivative trading though recognised stock exchange. It is one of required provision as per Sec 43(5).
      Short term capital loss can be adjusted against short term capital gain

  4. jose says:

    Sir, If I have a loss of 1.5 lakhs from f&o and I have remuneration of 5 lakhs from partnership firm can I set off the loss from the business income from the firm and become non-liable to audit

  5. Palanisamy J says:

    Sir,
    I have trading F& O in stock Market.
    I have get some profit how much I pay Tax, and How to calculate TurnOver. How to calculate tax % please help.
    Details below…
    Total Profit in Future Trading = Rs.1592922
    Total Loss in Future Trading = Rs. -554718.
    This is my Trading profit loss How to calculate please help sir…

  6. CHAITHANYA KRISHNA says:

    In F& O, my broker is providing a P&L statement, which includes every day transactions. Lets say for example I have Rs. 25,000/- as opening balance for trading.Once I trade in F&O that amount of 25K, the statement shows -25,000. If I get profit of 10K after few days, it will show as +35K. then if I invest 35K or 30K it will again show as -30K. So, my question is if I keep on re-investing the returns the statement won’t show any net profit. Then how to calculate income and tax ? How to calculate net profit ?

    And what would be the tax for profit in trading.

  7. SURESH says:

    MY QUESTION IS RELATED TO SET OFF OF LOSS CARRIED FORWARD AS SPECULATION LOSS, WHICH IS NOW TREATED AS NORMAL BUSINESS IN CASE OF F & O TRANSACTION OF RECOGNIZED STOCK EXCHANGE.
    I HAVE CARRIED FORWARD LOSS AS SPECULATION LOSS FOR A.Y. 2012-13 FROM COMMODITY EXCHANGE. NOW SUCH TRANSACTION ARE TREATED AS NORMAL BUSINESS TRANSACTION AND I HAVE PROFIT FROM DERIVATIVE TRANSACTION OF RECOGNIZED (SAME) COMMODITY EXCHANGE IA A.Y. 2015-16.
    CAN I SET OFF MY CARRIED FORWARD LOSS OF A.Y. 2012-13, WHICH WAS C/F AS SPECULATION LOSS AS WAS TREATED EARLIER.

    • CA Ruchit Sheth says:

      You can carry forward and set off the speculation loss against speculation gain only. The loss can be carried forward for 4 years. CA Ruchit Sheth – 9664287945

  8. Rohan says:

    Sir, I have loss of 3lacs from F&O trading and 10 lacs from my proprietorship Engineering Business. Can I set off this Loss from my Business Income or should I pay tax on 10 lacs income and carry forward the loss.

    • CA Ruchit Sheth says:

      You can set off your F & O loss against the normal business Income as F & O is considered as normal business. For more details call CA Ruchit Sheth – 9664287945

  9. umasankar says:

    Futures turnover 2737977.50

    Futures realized profit -1887702.50

    no other source of income except short term capital loss of equity

    do i get tax audit

    • CA Ruchit Sheth says:

      Tax Audit is applicable either if the turnover exceeds 1 crore for AY 16-17 or there is loss and the other income exceeds the basic exemption limit & you wish to carry forward the loss. CA Ruchit Sheth – 9664287945.

  10. sankar says:

    Futures turnover 2737977.50
    and Futures realized profit -1887702.50

    no any other source of income except short term capital gains do i get tax audit

  11. John Corner says:

    Govt doesn;t care of you. wheater you are in loss or profit you need to have audit . it only means you must pay R.s 16000 to CA .
    if u don;t then after 3 yrs those will come to u asking penalty of 100K 🙂 simple as that and upon paying that too they will not let u caryy forward loss

  12. Adarsh says:

    So the TURNOVER is not calculated as per the value of the UNDERLYING entity??

  13. Kamal says:

    If there is loss in F&O and total income is less than BEL then he dont have to do audit as per 44AD(5)
    “Notwithstanding anything contained in the foregoing
    provisions of this section, an eligible assessee who claims that his profits
    and gains from the eligible business are lower than the profits and gains
    specified in sub-section (1) and whose total income exceeds the maximum amount
    which is not chargeable to income-tax, shall be required to keep and maintain
    such books of account and other documents as required under sub-section (2) of
    section 44AA and get them audited and furnish a report of such audit as
    required under section 44AB”

    Q. Whether Audit is applicable or not when there is loss in F&O?

  14. shiv mittal says:

    My total turnover in future & option is 563370.00 and other charges is 1459.61. total loss is 216322.00. i have all details. Is this figure sufficient for audit. Details are in excel sheet.

    • Ishita Guha says:

      Can i adjust the loss from F&O trading of 2013-14 during current year income from interest? I didnt file ITR 2 or 4 ever.

  15. Timo says:

    If my turnover is around 60k and I made a loss of 10k. Is there a problem if I report a gain of 8% instead of the loss in order to avoid the audit (I have a salary and my liability is more than 2.5lk)

  16. Ruchit Sheth says:

    You will have to be open to 44A and 44AB as 44AD is presumptive taxation scheme wherein you have to compulsorily show profit of 8% or more. If you show profit of less than 8% of turnover or loss you are bound to get the books audited under section 44AB read with Sec 44AD. Hope you will find this helpful.

  17. Ruchit Sheth says:

    Hi Rajendra, You would be required to get your books audited to carry forward & set off the losses. For any further queries call me CA Ruchit Sheth – 966427945

  18. M.Vijayan says:

    what is the turnover to be adopted while drawing the profit and loss account for tax audit purpose ? turnover for the purpose of section 44AB cannot be adopted.Please elucidate.

    • Ruchit Sheth says:

      In case of tax Audit u/s 44AB the assessee would be required to maintain the books of accounts & thereby turnover needs to be derived.

  19. MITESH says:

    DEAR SIR

    PL SHARE THE MORE DETAILS OF MORE SECTION REGARDING ABOVE MATTER

  20. ankita says:

    In case of future option & commodities turnover means what…..whether total sales amt or sales Less buy amt i.e net amt

  21. Lalit Kumar says:

    Hi Prateek.. Can you please tell me the tax treatment in case of “Short sell” and further in which year the income will be taxable in case when the short sell and purchase of shares not occur in the same financial year….!!!!!!

  22. CA_Kantijain says:

    Very nice article!!!

  23. manoj prasath says:

    Wonderfully Explained. Bang on at each main points. Thank you Sir !!!

  24. V K Vishnoi says:

    Dear Pratik
    Explained very nicely.
    Well done.
    Keep it up.
    Thanks
    V K Vishnoi

  25. sanjeev reddy says:

    Sir, I got scrutiny notice for not auditing the accounts and defective return file for AY 2013-14, I am ajob holder and done some intra day trading, total sales cost of intraday share trading is entered as turn over and so i have declared a turn over of morethan 1cr during return file.bcoz unaware of konwledge turn over was calculated in wrong manner,in this case assesing officer want fine for not getting acount audited and penalty 0.5% of turn over(>1cr),in this case i explained for wrong computation of turn over for intraday share trading,but he was not accepting and want to give demand of rs 25000 audit penalty and rs.50000 as turn over penalty.So pl suggest me how to procede further to aviod this penalty sir..
    Reply

  26. rajendra says:

    sir i incureed a loss of 3 lacs in f& o trading i dont know how to nshow this in itr please guide me.

  27. sanjeev reddy says:

    Sir, I got scrutiny notice for not auditing the accounts and defective return file for AY 2013-14, I am ajob holder and done some intra day trading, total sales cost of intraday share trading is entered as turn over and so i have declared a turn over of morethan 1cr during return file.bcoz unaware of konwledge turn over was calculated in wrong manner,in this case assesing officer want fine for not getting acount audited and penalty 0.5% of turn over(>1cr),in this case i explained for wrong computation of turn over for intraday share trading,but he was not accepting and want to give demand of rs 25000 audit penalty and rs.50000 as turn over penalty.So pl suggest me how to procede further to aviod this penalty sir..

  28. rahul sant says:

    does explanation section 73 is applicable only for companies?
    can a individual tax payer setoff derivative loss against business profit according to section 43 (5)

  29. TV SUBRAMANIAN says:

    I have a peculiar problem. I am having salary income but I also have INTRA DAY TRADING SPECULATIVE LOSS to the extent of approx. Rs.2 Lacs(I am not into any other business for which books of account are mandatory-but simply operate from my Laptop). The JAVA UTILITY ITR4 DOES NOT ALLOW NEGATIVE INCOME IN P&L A/C item 51 and the ITO only believes in ADDING my SPECULATIVE LOSS as my INCOME. How do I RECTIFY THIS ISSUE in ITR4?

  30. Arun Kumar Kushwaha says:

    after searching alot i found ur Blog..
    and found it Awesome as i have Nil knowledge about Taxation and ITRS..

    sir i have few doubts how to do and what exactly i have to do??
    Plz help me out Thanks to you in Advance..

    i and my Father both do online trading in F&O only..
    and both are in Loss..

    let me tell u lill bit in details..
    1. Arun Kumar…….

    i took 3 Lacs from my brother for trading purpose(he got 3 lacs as LOAN from SBI)
    i invested 3 lacs + 1 lacs from my father into market and got loss of 1.60 lacs in FY 14-15 and i withdrawaled 2 Lacs partially for expenses… throughout the year..
    rest 50K is balance in my trading account…

    so i need to Fill ITR4 right..
    1. but how to fill there are several tabs in excel sheet of ITR4… ?
    2. as i got loss and it’s less than 8% profit i need AUDIT…. what is the process of Audit and how much will be the charges for Audit? and from where i can have my Audit.

    3. as books of accounts what i should keep.. all the contract notes and P/L statement provided but Broker…?

    2….. MY father..
    he is retired Army personal..
    and invested capital in trading and made a loss of 2.78 Lacs
    1. he got pension of 24000 monthly.
    2 has housing loan of 4 Lacs from LIC HFL. and paying premium of 4492.
    3. also he has Personal loan of additional 2 Lacs and paying 2440
    4. another loan from Central bank he has 2 Lacs and paying 5000 for it.
    5. he is also having some Insurance policy for that he Pays 20 Thousand annually..

    Sir, Previously we didn’t paid any taxes and Didn’t Filled ITRS as we didnt know in loss also we have to file ITR..

    and for tax we don’t have that much of income…

    plz help me out how to do it.. where to fill all the data in ITR4.
    ur Guidance will be highly helpful.
    Thanks..

  31. sourav says:

    i have purchased copper worth rs.8000000/- & get profit 50000/-, so what should i have to do, do i have to fill income tax return… please tell me as soon as possible.

  32. sanjay maheshwari says:

    Res. Sir,

    Please note,I seen Your Valuable note for the Prov. for filling ITR in the case of Business income and Losses and wish to have Your valuable opinion .

    Please support me and give me Your Valuable advice and opinion on my matter i.e

    I had in Future and Option i.e in shares Derivatives business had loss figure is Rs.9,50,000.00 and profit figure was Rs.419600.00,so the balance was Loss on Derivative business of Rs. 536400.00 ( 419600-956000)

    Long term Capital gain on sale -Buy Back of shares Hind Unilever of Rs 3,29,200.00,so cant be claimed Tax Free Long term Cap. Gain.

    and insurance Commission taken Rs.31,616.00 without maintaining the books.

    I filled the I.T. R on 31st July 2014 Loss Return and claimed –

    1) Profit and gains from from business and prof. RS. RS.

    —————————————————————— ————————— ————————-

    commission income without books 31,616.00

    Share Trading income LOSS – 5,36400.00

    – (5,04,784.00)

    2.) Capital Gains 3,29,200.00 3,29,200.00

    3.)Income from other Sources 5,640.00 5,640.00

    ————————————

    Total Income – ( 1,69,944.00 ) as UnAbsorbed Loss Carry forwarded

    Total Taxable income Nil

    TDS 5,609.00

    Refund 5,609.00

    I asked the same to my CA and a CA from Hyderabad who confirmed that I filled the ITR correct .

    Please confirm whether that the Filled ITR -4 is right

    kindly do guide and give Your Valuable advice. I will be highly obliged in getting Your Valuable opinion.

    Thanks,

    Best Regards,

    Sanjay M

  33. Ravi khanal says:

    44AD comes into question when:
    I have less than 1 crore turnover.
    I dont want to claim any expd or dep.
    I dont want to setoff or carry fwd losses

    Then i can assume 8% of my gross turnover as taxable income.

    Now under same provisions if i claim that i have less than 8% profit or say loss… i have to comply 44aa and 44ab.

    My question is

    1. I want to claim expd
    2. I want to claim dep.
    3. I want to carry fwd loss.
    4. I dont want to avail option of 44ad.

    Then why i will be open to 44aa and 44ab if i have loss under fut and options transactions.

    • Rajesh says:

      You are perfectly right. Section 44AD is about presumptive income and it is optional for businessmen who have turnover less than the prescribed limit, i.e. 1 crore for 2016-17,to show their income under that section and the benefits are they don’t have to maintain books of A/C. If you maintained the needed books of A/C and you have a loss in F&O trading, then you can show is normal business loss (instead of presumptive income). The need for audit comes only when the limits mentioned in Section 44AB are crossed. Many CAs are wrongly reading Section 44AB and 44AD together The latter is applicable only when there is no books of A/C and hence you need to show a minimum presumptive income which is 8%. When presumptive income option (Section 44AD) is not chosen there shouldn’t be any need for getting tax audit done for losses.

      • Kirankumar says:

        Hi Rajesh
        For AY 2017 -18
        If F&O turnover was less than 2 crores
        Can I pay tax on 6% of turnover ( as every thing in F&O was routed through banking channel )..irrespective of actual profit earned by me ?

  34. Ravi khanal says:

    In case of loss why sectio 44AD is mandatorily applied sir ??

    44AD is presumptive taxation which assumes 8% of turnover as the net taxable income.

    Suppose i dont go by 44AD and i have a loss too, why i ll be prone to tax audit?? I could bot understand sir.

    44AD says if i am choosing not to maintain books of accts and want to avail presumptive tax but i claim that i have a loss than i have to get books maintained and audit thereof.

    If i dont want to go by presumptive taxation under section 44AD, want to claim expd .. and want to carry fwd losses as well. Can you please cite which section or case law makes me to take shelter under 44AB sir ??

  35. Sanjiv Mehta says:

    Thank you, very good information. Please let me inform site name or article which mention how to keep records of F&O transaction in our books.

  36. DharmeshShah says:

    Guidance note of Icai on audit u/s 44ab

  37. MITHU says:

    some one is copying your contents simpletaxindia.in/2015/08/all-about-income-tax-return-filing-in.html

  38. Sidharth Bafna says:

    Attention of all is also drawn towards this article https://taxguru.in/income-tax/loss-return-turnover-1-croreno-audit-44ab.html

  39. Sanjay says:

    Dear sir,

    1. If a person decides not to carry forward losses owing to F&O trading since he decides not to trade further, are still tax audits and filing in ITR 4 form necessary ? Can’t filing in ITR2 form suffice ? What are the implications from tax compliances point of view ?

    2. Suppose 2 / 3 years down the line, person again do some F&O trading and due to gains, files return in ITR4 form now and get books audited / not required as per requirement, is there any mandatory provision to give previous years’ data during the tax filing or can it all start like clean slate?

  40. CA Krishna BAngad says:

    Good One Pratik..
    complete and exhaustive information shared on the above topic (derivative).

  41. HK.Khandelwal says:

    Dear Sir
    Kindly let me know whether Premium paid under LIC Varistha Pension Bima Yojana & LIC JEEVAN AKSHAY-VI ENTITLED FOR CLAIM Rebate U/s 80C and 80CCC or any other deductions as per In-come Tax Provision.

  42. Karthik says:

    Hi,

    Who are doing speculation business (purchasing and selling shares same day – Intra day trading) and got loss around (94k) so is it require to do audit even the turnover (sales – purchase (both positive and negative amounts)) is less than 1 cr. Please advise.

    Thank you.

  43. Rahul says:

    If there is a loss then the provision of 44AB read with 44AD will not apply as you have read section 44AD wherein it is clearly mention that as long as there is no income exceeding the basic exemption limit, tax audit provision is not applicable even if your profit is less than 8%. Correct me if wrong.
    Thanks for the article.

  44. shubham agarwal says:

    Dear sir, could u please give any reference where the manner of calculating turnover as above is given.

  45. shubham agarwal says:

    Dear sir, could u please give any reference where the manner of calculating turnover as stated above is provided.

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