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Tax Filing Guide for F&O Traders

Last Update Date : September 18, 2018

tax filing guide for F&O traders

F&O traders often find it difficult to file their Income Tax return. This is because they are not well aware of the related Income Tax provisions. The biggest confusion the taxpayers face while filing is whether to treat the income from futures and options trading as business income or non-business income. If you are a trader, then this guide by H&R Block India will help you in filling your ITR properly.

Reporting of F&O Trading Income

Futures and Options Trading is almost always reported as a business, unless the number of trades in the financial year is very few, which is generally not the case.

Types of Business Income

When income from trading is declared as a business income, it is classified into two types:

Speculative Business Income

When shares are bought and sold on the same day, it is considered intra-day trading. This kind of trading of equities is considered speculative business as there is no actual exchange of commodity and stocks and the income arising from it is considered speculative business income.

Non-speculative Business Income

  • If the trading of shares lasts more than a day i.e., the shares are purchased on a particular day and sold the next day, then it is considered non-speculative business.
  • Trading of F&O is also considered non-speculative as these instruments are used for hedging as well as for the delivery of the underlying contract.
  • For an F&O trader to be tax compliant, he needs to follow certain procedures as per the provisions of Income Tax Act. Let’s understand them one by one.

Books of Accounts for F&O Traders

Need for the Books of Accounts to be maintained

You need to maintain certain prescribed books of accounts in the following cases:

  • If your income from trading business exceeds Rs 1.2 lakhs or your total sales/turnover/gross receipts exceed Rs 10 lakhs in any of the preceding previous years.
  • If you are a new trader and your income is expected to exceed Rs 1.2 lakhs or the total sales/turnover/gross receipts are expected to exceed Rs 10 lakhs
  • If you are paying tax under presumptive income scheme and you have claimed your income in ITR to be lower than the profits or gains deemed under the said scheme.

List of Books of Accounts to be maintained

A trader needs to maintain the following books of accounts under Section 44AA and Rule 6F of the Income Tax Act.

  • A cash book
  • A journal
  • A ledger
  • Photocopies of bills of receipts and expenses

[Read more: Guide on books of accounts to be maintained and audit requirements]

Penalty against Non-compliance

If you do not maintain the books of accounts, you can end up paying a penalty of Rs 25,000 under Section 271A of the Income Tax Act.

Tax Audit Requirement

An F&O trader will need to get his books of accounts audited before the specified date in the following situations:

  • If the turnover or gross receipts from trading business exceeds Rs 1 crore or Rs 2 crores in cases covered by the presumptive taxation scheme.
  • If you are covered under presumptive income scheme and your income falls below the presumptive income but exceeds the minimum exemption limit.

Audit Report Submission Due Date

If you are required to undergo tax audit, you need to submit audit report in Form 3CA and Form 3CD by 30th of September of the Assessment Year.

Penalty against Non-compliance

If you avoid getting your books of accounts audited, you will end up paying a penalty of 0.5% of the annual turnover/sales/gross receipts. The penalty cannot exceed Rs 1,50,000.

Taxability of Transactions

If you are trading F&O on any recognised stock or commodity exchange, profits or losses have to be considered as business profits or business losses respectively. What this basically means is that if you trade F&O, you have to compulsorily consider yourself as a “Trader” and not an investor.

Calculation of Turnover

It is important for every taxpayer to calculate his income carefully in order to assess his tax liability correctly. If we look at the value of transactions in F&O trading, it is generally very high but profit margins are low. Moreover, transactions in this form of trading are completed without any actual delivery of shares or securities. The transactions are squared up by the payment of differences. The contract notes are issued for the full value of the asset purchased but while making entry in the books of account, only the difference is mentioned. The transactions may be squared up at any time on or before the expiry date. Hence, the turnover calculation should be done in the following manner:

  1. The total favourable and unfavourable trades would be taken as the turnover
  2. Premium received on the sale of options is also to be included in the turnover
  3. In respect of any reverse trade entered, the difference thereon, should also

Advance Tax Payment

Salaried taxpayers generally do not worry about Advance Tax payment because their employers deduct tax from their salary and submit it to the government. However, there is no third party responsible for deducting and paying tax on your behalf from your income from F&O trading. Therefore, you must pay Advance Tax as prescribed by the government.

[Read more: Advance Tax payment guide]

Interest Chargeable for Non-compliance

  • Interest payable for deferment in Advance Tax payment is 1% per month of the amount due u/s 234C
  • Interest payable for default in the payment of Advance Tax is also 1% per month of the amount due u/s 234B
  • Similarly, u/s 234A interest is payable if you fail to file the return on time and you have some tax due. Interest is charged @ 1% of the amount due

ITR Filing

After learning how to compute your income correctly and pay Advance Tax on it, it’s time to understand how you need to deal with Income Tax filing as an F&O trader.

ITR Form for F&O Trader

  • An F&O trader may need to file ITR-3 or ITR-4.
  • The return form ITR 3 is applicable to those having income from business and hence applicable to F&O trader.
  • However, the trader must file ITR 4 if he is paying tax under the presumptive income scheme under section 44AD.

Filing Income Tax Return

The Income Tax Return of small businesses can be filed in the Form ITR 3 or ITR 4 either offline or online.

Physical or Offline Filing

Only a small number of taxpayers are allowed to file their Income Tax Return on paper. They are:

  • Individuals with income below Rs 5 lakhs with no refund
  • Super senior citizens

Online or e-Filing

There are three ways of e-filing Income Tax Return. They are:

  • Filing the return electronically under digital signature
  • Transmitting the data electronically and then e-verifying the return
  • Transmitting the data electronically and then submitting a physical copy of ITR-V to CPC Bengaluru.

Note: You must get your return verified within 120 days of e-filing your return.

Reporting, Carry Forwarding & Setting off Loss in ITR

Just like you report your income in the ITR, you should not forget to report your loss as well even though no tax is payable on it. This allows you to carry forward your loss and set it off against the income in the subsequent years under the same head of income. Such loss can be carried forward for the next eight years. However, there have been cases where the court prohibited carry forwarding and setting off losses from F&O transaction. The court stated that share derivative transactions carry the characteristics of speculative transactions for section 73 and any loss arising therefrom will be considered as a loss from speculative business. Therefore, it cannot be set off against normal business income. Now, let’s see how you can claim your trading related expenses in ITR.

Claiming Expenses in ITR

Businesses claim the tax deduction on expenses related to business. Since your futures and options trading is a business activity, you can claim a tax deduction on any expense which is directly related to it. e.g. rent of the place used for trading, mobile or telephone bills, internet bills, broker’s commission, demat account charges, depreciation on laptop etc. Keep the bills safely to claim the expenses. Any expense which exceeds Rs 10,000 and is paid in cash in a single day cannot be claimed as a tax deduction.

Now you know how you can save taxes by filing the return as an F&O trader. Being compliant with your taxes is very important. Non-compliance can have serious penal consequences as explained below.

Penalty against Non-compliance

  • If you fail to file the tax return by the due date of 31st July or 30th September you will have to pay a compulsory late filing fee of Rs 5,000.
  • Further, if you delay filing the return beyond 31st December of the assessment year, you will be liable to pay a late filing fee of Rs 10,000. But in the case of small taxpayers with the income up to Rs 5 lakh, maximum fees shall not exceed Rs 1,000.

How can H&R Block help you?

Saving taxes and filing income tax return accurately becomes very easy when you have professional help. This is where we come into the picture. You can visit any of our retail offices to get your taxes filed and avail year-round support in tax-related matters.

We hope, this guide answers all the questions you had about your taxes as a trader. If you still have any question in mind, you can post it on our TaxForum to get it answered from a tax expert.

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