Every year at the time of filing of Income Tax Return, I have been asked this question by many people regarding taxability of Futures and Options, hence today I am covering this in article to enlighten you about this topic.
Article explains How to file income tax return in case of profit/loss from F&O trading, Applicability of Audit in case of loss from F&O Trading, Treatment of profit/loss from F&O Trading in the income Tax Return, Applicability of Tax Audit in case of derivative (F&O) Trading, Calculation of turnover in case of F&O Trading, Treatment for Expenses against F&O Income, Maintenance of Books of Accounts in case of F&O Trading, Provisions relating to filing of Income Tax Return for F&O trading income and Carry forward & and set off of Loss from F&O transactions.
Page Contents
- Q: 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?
- Question: What is the treatment of profit/loss from F&O Trading in the income Tax Return?
- Applicability of Tax Audit in case of derivative (F&O) Trading
- Calculation of turnover in case of F&O Trading
- Treatment for Expenses against F&O Income
- Maintenance of Books of Accounts in case of F&O Trading
- Provisions relating to filing of Income Tax Return for F&O trading income
- Carry forward & and set off of Loss from F&O transactions
Q: 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.
Question: 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.
- If the turnover from such trading exceeds Rs. 1 crore but less than 2 crore then the audit can be avoided if we can show the profit at minimum 8% (6%, if all trades are digital).
- Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 8% (6%, if all trades are digital) of the turnover from such transactions.
- Further, please note that any turnover more than 2 crore then audit u/s 44AB will be applicable irrespective of Profit and Loss
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% (6%, if all trades are digital) 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:
- The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
- Premium received on sale of options is to be included in turnover.
- 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.
Treatment for Expenses against F&O Income
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% (6%, if all trades are digital) 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% (6%, if all trades are digital) 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 for F&O trading income
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.
If Tax Audit is not applicable: Due date will be 31st July of the Assessment Year.
Carry forward & and set off of Loss from F&O transactions
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.)
Republished with Amendments
Author Bio
sir i am working in psu company
in 2020 -21 i lost nearly 25lakhs in f&o trading
if i include this details in itr this will make any problem in my company, sir kindly help me sir.
Hi Partik,
Read your article, it is very informative.
I have one question —-Taxpayer is a salaried person, Can we set off F&O(Equity) loss with Short term capital gain(equity), Income from house property during the financial year? and Can carried forward F&O loss also be set off against short/Long term Capital Gain and Income from house property?
The computation of FnO turnover as stated herein this article, is it given in the act or any notification or rules? If yes, where?
f&o turnover above 2 crore
loss 2.5 lacs
business profit under 2.5 lacks
audit is mandatory
f &o turnover above 2 crore
loss 2.5 lacs
business profit under 2.5 lacks
audit is mandatory
In F & O, pur value is 3 cr and sale value is 2.8 cr. Turnover is 2,84,318/- (positive and negative figures total)
For Income tax, while preparing Trading account which figures to be mentioned.
Can you pls explain sir
Sir, ITR-4 is mentioned in your blog for reporting income tax profit and loss for Futures & Options. However, some say you need to file ITR 4 has been changed to ITR 3 after FY 2015-16. Kindly clarify whether ITR3 or ITR4 is used for AY 2019-20 and AY 2020-21. Thanks.
Sir If my turnover from Futures & Options (Non-Speculative Business) is say 60 lacs and my turnover from Intraday Trading (Speculative Business) is say 50 lacs. Will I be liable for tax audit? Since the combined turnover rom both the business is >1cr but individually they do not exceed 1 cr.
Informative!!
Can I get a sample of the Balance Sheet, Trading and Profit and Loss Account of a Futures and Options trader?
In my opinion, Yes
Can a Tax Payer claim expense of profits paid to an Advisory agency for giving advice in F&O trading.
Yes
I have loss in F&O, and I want to file return to carry forward loss for future profits to set off. do I require to audit my accounts?
For the financial year 2018-19 an individual had loss from futures & options trading which was claimed in the ITR which was filled within the due date but the Income Tax Department has not considered the loss from futures & options trading and raised a demand by adding back the same to the total net income, as it was not mentioned in the P/L. As the individual has audited his accounts hence any change in turnover is not possible in P/L. Hence, it will be kind if anyone can guide me with a solution that in which schedule if the ITR its to be mentioned show that IT department allows the same asap.
I have loss on f/o trading (non -speculative) loss of Rs 2,80,000
and
1.speculative profit Rs 2,110
.short term profit on shares Rs 25000
.salary income 450000
.capital gain on property selling
Rs 20lakh
bank interest on s/a
Rs 51000
how I set off non speculative loss and with whom?????
##I got answer that it can set off with any other income except salary income
But
For non speculative loss means (loss in f/o trading) Rs280000
audit. is compulsory?????
sir turn over is not exceeds 1crore, but loss in f/o trading, loss means less than 6per.. income, that’s why my question is audit is compulsory ,what to do plz clarify
The article is too short and difficult to comprehend. It do not speak of Set Off, where Turnover is hardly few lakhs and is at loss, whether need to go for audit?
What about an Assessee in whose case the Taxable income is less than Rs 2.5 lakhs/ out of the Derivative trading? If incurred loss without any taxable incomes, can assess file a return showing the Actual loss and do not go for AUDIT??
What is the Code to be used while filing the returns?
Thanking you,
Bhakthavalsalan
Sir
If tax audit applicable. We need to maintain books of accounts. It would be great if you can share how to pass journal entries for F&O trading so that we can prepare P&L account and Balance Sheet
In the article, Turnover for attracting audit u/s 44AB is mentioned as Rs 1 crore and also declaring income less than 6% or 8% if turnover is not exceeding 2 crores (u/s 44AD). However, if and person having turnover exceeding one crore but less than 2 crores can still avoid audit us/ 44AB by declaring income of 6% or 8% as the case may be.
The Author,
First of all thanks to you for clearing so many doubts in regard of share transactions .
Very informative article
How do I attach commodity transaction profit loss account statement in Form ITR 2
Sir, I trade in stock market & I have other business too.
In trading, my profit in F&O is Rs. 55,000 and total turnover is 12,00,000. (so my profit is less than my 8% of my turnover.)
In my other business I have profit of 3,10,000 and total turnover is 28,00,000.
so my total Income is 3,65,000 and total turnover is 40,00,000. (so my total profit is greater than 8% of my total turnover.)
Now, I want to know if I have to Audit my account or not. I’m confused, Please Help..
Please mention the code which we given our f & o income details
In my opinion Tax Audit will not be required in case of loss as per provisions of section 44AB(e).
Section 2(ac) of SCRA does not cover Trading in Futures and Options. It is covered under Section 2(d) of SCRA.
Section 43(5)(d) refers to S 2(ac) of SCRA to refer to a Derivative for exclusion from Speculative Business.
It does not cover Sec 2(d) of SCRA
I am salaried person and have losses in F&O trading. Turnover, calculated as explained above by you, is less than Rs 1 Crore. Loss percent is 23% of turnover. Is it necessary to show loss of F&O trading if I do not want to set off loss?
Is a call/ put option not a capital asset so as to consider gain/ loss as capital gain/ loss?
In year 2017~18 I have incurred huge losses in trading future stock. I got retired in End June’17 & invested majorly out of my PF & Gratuity. As salary was of 3 months only but huge Tax was deducted against Gratuity. Can some of this loss be adjusted against Tax paid by me against my Gratuity & of 3 month salary. Please advice.