A Comprehensive Guide to Filing ITR for Futures and Options (F&O) Trading in India

Key Takeaways at a Glance:

1. Understanding the Nature of F&O Income

For income tax purposes, gains or losses from F&O trading are treated as non-speculative business income. This is a crucial distinction from speculative income (like intraday equity trading) and capital gains (from the sale of delivery-based shares or mutual funds). Treating it as business income allows you to claim related expenses and set off losses against other business income.

2. Choosing the Correct ITR Form

Your choice of ITR form primarily depends on how you wish to report your F&O income:

• ITR-3: This form is for individuals and Hindu Undivided Families (HUFs) having income from "Profits and Gains of Business or Profession." This is the appropriate form if you are treating your F&O trading as a regular business and wish to claim all eligible expenses.

• ITR-4 (Sugam): This form is for taxpayers who opt for the presumptive taxation scheme under Section 44AD. This scheme allows you to declare your income as a certain percentage of your turnover (6% for digital transactions and 8% for others) without the need to maintain detailed books of accounts. This is a simpler option for traders with a turnover of up to ₹2 crore.

3. Calculating Your F&O Turnover

Accurate turnover calculation is essential for determining tax audit applicability. For F&O trading, turnover is calculated as the absolute sum of profits and losses for each trade.

Formula: Turnover = |Profit from Trade 1| + |Loss from Trade 2| + |Profit from Trade 3| + ...

Example:

• Profit in Nifty Futures: ₹50,000

• Loss in Bank Nifty Options: ₹30,000

• Profit in Stock Options: ₹20,000

Turnover = ₹50,000 + ₹30,000 + ₹20,000 = ₹1,00,000

You can get a summary of your F&O transactions and the calculated turnover from your stockbroker's profit and loss statement.

4. Claiming Eligible Expenses (for ITR-3 Filers)

If you are filing ITR-3, you can deduct various expenses incurred wholly and exclusively for your F&O trading business. These include:

• Brokerage charges

• Securities Transaction Tax (STT) and other transaction charges

• Internet and telephone expenses

• Depreciation on computers and other electronic gadgets used for trading

• Salary paid to any person assisting in the trading business

• Rent of the premises used for trading activities (if any)

• Cost of subscriptions to trading-related journals and software

It is imperative to maintain proper records and bills for all claimed expenses.

5. Tax Audit Requirements

A tax audit by a chartered accountant is mandatory under Section 44AB of the Income Tax Act in the following scenarios for F&O traders:

• If your total sales, turnover, or gross receipts from the business exceed ₹10 crore in the financial year.

• If you have opted for the presumptive taxation scheme (Section 44AD) in any of the last five years but are now declaring an income lower than the prescribed 6% or 8% of the turnover, and your total income exceeds the basic exemption limit.

• If your turnover is less than ₹2 crore, but you declare a profit of less than 6% of your turnover and your total income is above the basic exemption limit.

6. Step-by-Step Guide to Filing Your ITR

Here’s a simplified guide for filing your ITR with F&O income:

Path 1: Filing as a Regular Business (Using ITR-3)

Step 1: Gather Your Documents

• PAN Card

• Aadhaar Card

• Bank Account Statements

• Broker's Profit & Loss Statement (including turnover calculation)

• Details of all trading expenses with supporting bills and receipts

• Form 26AS and Annual Information Statement (AIS) to reconcile your income and TDS.

• Details of other income sources like salary (Form 16), rental income, interest income, etc.

Step 2: Download and Fill the ITR-3 Utility

You can download the ITR-3 utility from the income tax e-filing portal.

Step 3: Fill in Your Personal Information and Part A - General

Enter your personal details, and in the "Nature of Business" section, select the appropriate business code. A commonly used code for F&O trading is 13010 under "Financial Services - Other financial intermediation."

Step 4: Fill Schedule BP (Computation of income from business or profession)

• In this schedule, you need to report your F&O turnover and the net profit or loss.

• The profit or loss as per your broker's statement will be the starting point.

• You will then add back any expenses not allowed and deduct the eligible expenses you have claimed.

Example for Schedule BP:

Step 5: Fill Schedule CYLA (Current Year Loss Adjustment) and BFLA (Brought Forward Loss Adjustment)

• If you have a net loss from F&O trading in the current year, you can set it off against other incomes (except salary income) in Schedule CYLA.

• Any unadjusted loss can be carried forward to the next eight assessment years. You need to report these details in Schedule BFLA in subsequent years.

Step 6: Fill Other Schedules and Complete the Filing

Fill in the details of your other income sources in the relevant schedules (e.g., Schedule Salary, Schedule HP for house property). The software will automatically calculate your gross total income and tax liability. Verify all the details and submit your return.

Path 2: Opting for the Presumptive Taxation Scheme (Using ITR-4)

Step 1: Gather Your Documents

The documentation is simpler here. You will primarily need:

• PAN Card

• Aadhaar Card

• Bank Account Statements

• Broker's turnover statement.

Step 2: Download and Fill the ITR-4 Utility

Step 3: Fill in Your Personal Information and Part A - General

Similar to ITR-3, fill in your personal details and select the appropriate business code.

Step 4: Fill Schedule BP (Computation of income from business or profession)

• In Schedule BP of ITR-4, you need to report your gross turnover from F&O trading.

• You will then declare your presumptive income, which should be at least 6% of your turnover (if all transactions are digital). You can voluntarily declare a higher income.

• You cannot claim any expenses separately under this scheme.

Example for Schedule BP (ITR-4):

Step 5: Complete the Filing

Fill in details of any other income, and the utility will compute your tax liability. Submit your return after verification.

7. Common Mistakes to Avoid

• Choosing the wrong ITR form: Using ITR-1 or ITR-2 for F&O income is incorrect.

• Incorrect turnover calculation: This can lead to issues with tax audit applicability.

• Not reporting losses: Failing to report F&O losses means you cannot carry them forward to set off against future gains.

• Not maintaining proper records: This is crucial, especially when claiming expenses under ITR-3.

• Ignoring tax audit requirements: Non-compliance can lead to penalties.

• Forgetting to pay advance tax: If your total tax liability in a financial year is likely to be ₹10,000 or more, you are required to pay advance tax in quarterly installments.

Filing your ITR for F&O trading correctly is essential for staying compliant and making the most of the available tax provisions. If you find the process complex, it is always advisable to consult a qualified tax professional.