Reporting F&O Trading and Intra-day Trading in ITR
Futures and Options (F&O) Trading and Intra-day Trading are popular among investors in India. However, reporting these transactions in the Income Tax Return (ITR) can be complex. All trading income, including losses, must be reported in income tax returns. The absence of F&O intraday rates in annual income statements often leads to the misconception that only profitable trades need to be reported. However, due to the high value of these transactions, they must be included in the ITR. Here’s a brief guide on how to report them using examples.
1. F&O Trading
F&O trading involves trading in derivative instruments based on an underlying asset at a fixed price. The income or loss from F&O trading is treated as Business Income. You may also need to maintain books of accounts or get tax audit done under different conditions.
Books of accounts is nothing but a Profit & Loss(P&L) Statement. The P&L is to be made when the F&O turnover exceeds Rs 25 lakh or income exceeds Rs to 2.5 lakh in any of the last 3 financial years. You do not need a CA to prepare this, it can be done using the statement issued by the Broker.
A tax audit, conducted by a Chartered Accountant (CA), is mandatory under two conditions: when the turnover exceeds ₹5 crore or when the taxpayer opts out of the presumptive income scheme. The ₹5 crore threshold is applicable when at least 95% of payments are processed through banking channels. If this condition is not met, the threshold is ₹2 crore for individuals and ₹1 crore for companies and LLPs.
Example:
- Scenario: Mr. Sharma trades in F&O and earns a profit of ₹1,00,000 in the financial year.
- ITR Form: He needs to file ITR-3 or ITR-4 (if using presumptive income scheme).
- Reporting: Mr. Sharma will report this profit under the head “Income from Business or Profession.” He can also claim expenses related to trading, such as brokerage fees, internet charges, etc.
2. Intra-day Trading
Intra-day trading involves buying and selling stocks on the same day. The income from intra-day trading is considered Speculative Business Income. The drawback is that losses from speculative businesses can only be offset against other speculative incomes, such as gambling and horse racing. Additionally, losses from intraday trades can only be carried forward for up to 4 years, as against 8 years under F&O losses. Turnover calculation threshold for bookkeeping and audit as well as expenses to claim for intraday trades are the same as F&O.
If the volume of trades in a FY is limited it can also be categorized as Capital Gain/Losses and reported accordingly.
Example:
- Scenario: Ms. Gupta engages in intra-day trading and incurs a loss of ₹50,000.
- ITR Form: She needs to file ITR-3.
- Reporting: Ms. Gupta will report this loss under the head “Income from Business or Profession” as speculative business income. She can carry forward this loss for up to four years to set off against future speculative gains.
Steps to Report in ITR:
- Download Demat Account Statement: Obtain the statement from your broker or depository, which includes details like buy/sell dates, prices, and profit/loss.
- Select the Appropriate ITR Form: For F&O and intra-day trading, use ITR-3 or ITR-4.
- Fill in Business Income Details: Enter the income or loss from trading under the “Income from Business or Profession” section.
- Claim Expenses: Deduct allowable expenses related to trading activities.
- Submit the ITR: After filling in all details, submit the ITR online through the Income Tax Department’s e-filing portal.
By accurately reporting F&O and intra-day trading activities, investors can ensure compliance with tax regulations and avoid potential notices from the tax department.
