Usually, trading in futures & options must be reported as a business unless you have only a few trades (say if only 2-3 trades) in the financial year.
Remember this also applies to individuals. You don’t have to be formally incorporated as a company or some legal entity to earn business income. Individuals can have business income too.
The income arising from trading in Futures and options is considered as normal business income/loss. Hence ITR-4 needs to be to report this income
You may have filed ITR-1 or ITR-2 before but you must check ITR form applicability every year based on each income earned in that year.
Reporting an activity as a business means you can claim expenses from the earnings of your business.
The bright spot in filing your return as a business is being able to claim what you’ve spent on it. Sometimes claiming expenses can lead to a business loss and that is ok too.
Claim expenses that have been directly and exclusively spent on the business. Expenses like brokerage, broker’s commission, subscriptions to journals related to trading, telephone bills, internet costs, consultant charges if you took advice from a professional who charged you, or salary of a person you hired to help with your business. All of these can be claimed.
Remember to maintain a proper record of receipts/bills and make sure you are spending via cheques or bank transfers and not in cash.
Expenses over Rs 10,000 in cash, may not be allowed to be claimed. If an expense is both personal and business, claim a reasonable portion towards business.
As a stock market expert, you may put your hands in many buckets. Intra-day stock trading or buying shares for short term or long term.
For tax purposes, you must separate out these activities.
So, in a financial year, you may have several types of business income or may have capital gains income as well.
Once your activity is treated as a business, there are some other tax rules that may apply.
In case you are running a business in the capacity of an individual or a HUF, the requirement to maintain accounting records would arise if your income exceeds Rs 2.5 lakhs or gross receipts exceeds Rs 25 lakhs in any of the 3 preceding years or in the first year in case of a new business. These limits are the enhanced limits w.e.f 1 April 2017. Earlier, the limit was Rs 1.2 lakhs for income and Rs. 10 Lakhs for gross receipts. However, these limits of Rs 1.2 lakhs and Rs 10 lakhs still hold good for taxpayers carrying on business other than individuals or HUF.
If you are an individual who’s doing a business, such as F&O trading, these apply to you as well. Your bookkeeping will be simpler though.
Keeping your trading statements, expense receipts and bank account statements shall mostly suffice. From there, your profit and loss account and balance are prepared.
We know that most taxpayers have to file return by 31st July, but those to whom the audit applies, have a return filing due date of 30th September.
Audit applies to a business if its turnover exceeds Rs 1 crore. If this is true for you, you’ll have to get your accounts audited via a CA and submit the audit report along with your tax return. If you fail to maintain books of accounts or do not get an audit done, penalties shall be applicable as per the income tax act.
The penalty leviable for non-maintenance of accounting records could go up to Rs 25,000 under Section 271A. Further, a penalty equal to a lower of Rs 1.5 lakhs or 0.5% of gross receipts or turnover can be levied under Section 271B for not getting books audited under Section 44AB.
Tax audit under Section 44AB also becomes mandatory for taxpayers who opt for a presumptive scheme of taxation, yet declare an income lower than the presumptive income and such income (after setting off F & O losses or other business losses if any) exceeds the maximum amount not chargeable to tax i.e. Rs 2.5 lakhs.
NOTE: The threshold limit of Rs 1 crore for a tax audit is proposed to be increased to Rs 5 crore with effect from AY 2021-22 (FY 2020-21) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments.
The single most important reason to file with F&O trading is to be able to benefit from losses you have incurred.
If your business resulted in a loss, don’t worry, report it in your tax return. It can be adjusted from income from remaining heads such as rental income or interest income (cannot be adjusted from salary income).
Any unadjusted loss can be carried forward for eight years. However, in the future, they can only be adjusted from non-speculative income.
F&O trading loss is considered a non-speculative loss. Intra-day stock trading is considered a speculative loss. And it can only be adjusted against speculative income. Unadjusted speculative losses can be carried forward to four years.
Turnover for the purpose of determining whether tax audit is applicable to F & O Trading or not is calculated a little differently.
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.
Example 1:
Aditya buys 100 units of Futures @ Rs 200 and sells at RS 210. Also buys 200 units of options @ Rs 300 and sells at Rs 290.
This is how his turnover would be determined:
Particulars | Calculation | Amount |
---|---|---|
Profit on sale of Futures | 100 * 10 | 1000 |
Loss on sale of Options | 200*10 | 2000 (negative ignored) |
Premium on sale of options | 200*290 | 58000 |
Total Turnover | 61000 |
Aditya works with ABC ltd and has earned a salary of Rs 15 lakh in FY 2017-18.
Aditya opened a trading account with a brokerage firm by paying Rs 5,000 as enrolment charges.
He has to pay 0.02% as brokerage charges for each F&O trade and paid a total of Rs 98,000 as brokerage charges during the year.
Aditya has telephone expenses for the whole year of Rs 36,000 and a review of his past bills indicates about 50% of his bill is towards his F&O trade. Aditya spends a significant amount of time researching on the internet which helps him improve his trading skills.
His monthly internet bill is Rs 1,200. When Aditya looked up his trading statement he found that he has incurred a loss from F&O aggregating Rs 3 lakhs.
His total turnover is Rs. 30 lakhs (determined on the basis of the method discussed above). Aditya is unsure if he should report his trading activity from F&O or he can ignore it since there is a loss.
Besides, salary Aditya has Rs 80,000 interest income and Rs 3.5lakhs rental income. Aditya must report his F&O trading as a business.
His F&O expense detail is as follows.
Brokerage enrollment charges | 5,000 |
Brokerage charges paid | 98,000 |
telephone expenses | 18,000 |
internet | 14,400 |
Total | 1,35,400 |
Loss from F&O | Rs 3,00,000 |
Less: expenses of F&O | Rs 1,35,400 |
Total F&O loss | Rs 4,35,400 |
Salary Income | Rs 15,00,000 |
Rental income | Rs 3,50,000 |
Interest income | Rs 80,000 |
Non-speculative loss | Rs 4,35,400 |
Total taxable income | Rs 15,00,000 |
Loss to be carried forward | -Rs 5,400 (-4,35,400 + 3,50,000 + 80,000) |