Those who trade in Futures & Options find tax filing a big hassle. Many do not report if they have F&O losses. But not reporting F&O gains or losses can be a reason for the taxman to send you a notice. Besides, F&O losses come with tax benefits. Let’s understand tax filing with F&O trading in detail.
Report F&O trading as a business – F&O trading is usually reported as a business in your tax return. When you report a source of income as a business, you can claim expenses which you have incurred for this business. The first step to reporting a business is calculating your total income. Look up your transaction statement from your broker for the financial year. Your receipts may be a positive or a negative value. Sum these up for the entire year. You may end up with a positive or a negative (loss) value as income. From this income deduct expenses which are directly related to your F&O business. These include the broker’s commission, demat account charges, rent of the premises you use for carrying on your work, telephone and internet costs, any subscriptions you use for your business etc. If there are expenses which have been spent for both personal and business, you can allocate them to the business based on an appropriate ratio. This ratio can be arrived at by reviewing actual usage in detail for past couple of months. Now deduct these expenses from income calculated above. This shall be your gain or loss from F&O trading activity.
File ITR-4 – Anyone who has earned a business income must file ITR-4. Here the profit and loss and balance sheet of your business must be reported. If you have more than one business, calculate gain/loss for each separately. Say when you have intra-day stock trading activity or any other type of business, you must calculate income from all of these separately. You can use ClearTax’s self-filing tech enabled ITR-4 filing or seek professional help with your return.
Report your losses – Incurring a loss may be worrying but reporting it is a must. Since losses have tax benefits. Business losses are classified as a speculative or a non-speculative loss. And the tax treatment varies depending upon which type of loss it is. Non speculative losses, such as F&O loss, are allowed to be set off from income from other heads (except salary) in the year in which they are incurred. If any loss remains unadjusted it can be carried forward to 8 succeeding years, and in those following years it can only be set off from non-speculative income. Speculative losses such as loss from intra-day trading activity can be set off only from speculative income and unadjusted losses can be carried forward for 4 years.
Keeping accounting records – It is recommended that all businesses must keep a record of their activity. Accounting records are mandatory for a business, when its turnover is in excess of Rs 10lakhs in the first year (for a new business) or in all 3 preceding years for an existing business. Or where income exceeds Rs 1.2lakhs in the first year or in all the 3 preceding years. You can keep these records in your computer. Separately keep a folder which has all your trading statements, bank account statements, expense receipts, bills and your profit and loss statement alongwith your balance sheet.
Audit of accounting records – The income tax act says that if your turnover exceeds Rs 1crore in a financial year, you have to get an audit done. To calculate turnover, sum up the value of your positive and negative trades. Say if you have a positive F&O trade of Rs 40,000 and negative trade of Rs 36,000, your income is Rs 4,000 but your turnover shall be Rs 76,000. Businesses which have to get their accounts audited have a return filing due date of 17 October. For tax filings of FY2015-16 this due date has been extended to 17th October. By this date you must file your return and submit your tax audit report.
This article was published in Money Today on 20 September 2016.