If this article piqued your interest not just your curiosity, it's likely that you trade in Futures and Options (F&O) and have made a loss this financial year. While we do hope you fare better in all future trades, here's the silver lining, using any F&O losses when filing tax returns is indeed possible for non-salaried income. In this article, we address your important queries about F&O loss and its declaration in annual Income Tax Return and whether you need to get a tax audit for F&O loss.
Under which head of the ITR is F&O income/loss stated?
F&O income/loss is reported under the head profits and gains of business and profession. So be careful! Don’t include it in your capital gains and losses. Use ITR-3 to report your income.
Can I off-set my F&O loss against any other income?
Yes, you can reduce your taxable income under any other head except for your salary income. The unadjusted residual F&O loss can be carried forward for 8 years and can be adjusted against business income in the subsequent years.
Is tax audit applicable to you if you incur F&O losses?
Hmm! That’s the most unfortunate part, isn’t it? Undergoing tax audit despite incurring F&O losses can be psychologically troublesome to many; but it’s better to fully comply with the law without any circumvention.
Let’s understand this in more detail.
Section 44AB deals with the conditions of tax audit. An audit is compulsory when the business turnover exceeds Rs 1 crore. This limit is enhanced to Rs 10 crore if 95% of business transactions are through banking channels. For F&O traders, the enhanced limit is applicable since there’s no cash transaction involved.
However, there’s some twist for investors to whom the presumptive taxation scheme is applicable. If their total income exceeds the basic exemption limit, they will have to follow the audit compliance when they report an F&O loss.
What’s the presumptive taxation scheme?
Resident Individuals, HUFs (Hindu Undivided Families) or partnership firms, except LLPs, can opt for presumptive taxation schemes if their total turnover in any previous year is less than Rs 2 crore. The presumptive rate is 6% for cashless receipts, otherwise 8%. So for F&O traders it’s 6%.
How to calculate the turnover?
F&O turnover isn’t the aggregate turnover as per all your contract notes. For income tax purpose, the turnover is the amount of absolute positive value of profits and losses. Sounds confusing? Let's help you simplify it.
Suppose you made gains and losses as given below on five F&O trades
Trade 1: Rs -10,000
Trade 2: Rs 20,000
Trade 3: Rs -30,000
Trade 4: Rs 40,000
Trade 5: Rs -50,000
In this case, your total turnover would be Rs 1.5 lakh. And assuming that these were the only F&O trades you made during the year; your net loss on F&O trades would be 30,000 which is less than 6% of Rs 1.5 lakh (turnover). Hence you will have to get your books audited assuming your total income is taxable.
For the purpose of audit, you will require:
What are the consequences of reporting F&O losses without getting your books audited?
In such a case, your return can be treated as defective u/s 139(9) and may attract a penalty. Moreover, non-compliance on the audit front can also attract a penalty u/s 271B which can be as severe as 1.5% of the turnover or Rs 1.5 lakhs, whichever is lower.
The key takeaways are:
You can adjust your F&O losses against income from all other sources except salary income
For the purpose of taxation F&O turnover is the summation of non-negative values of your profits and losses
Using F&O loss to save on tax does in require audit compliance
It’s noteworthy that you can carry forward F&O losses only if you have filed the income tax return before the due date applicable to you and have got your books audited by a practicing chartered accountant. So do consult your financial advisor before you make a decision.
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