How to report F&O trading in your income

tax return
Income from F&O deals is almost always treated as business income, irrespective
of frequency or volume of transactions

Taxpayers who deal in derivatives, describe their experience with the tax filing process as
vague and confusing. Here are some basics that can help.

A derivative means an instrument whose value is derived. It has no value of its own. Its price
is based on the underlying asset. Derivatives of stocks and indices can be traded on Indian
stock exchanges. The most popular form of derivatives are futures & options (F&O). A
futures contract means an agreement to buy or sell on a future date. This contract expires on a
pre-set date. On expiry, futures are executed by delivery of the underlying asset or via
payment. Options and futures are alike but when you do an options contract, you can choose
to not make the transaction.

Income from F&O deals is almost always treated as business income. This treatment is
irrespective of the frequency or volume of your transactions. That may come as a surprise if
you are salaried and have never run a business. Taxpayers who have business income have to
file ITR-4.

As per Indian tax laws, incomes are reported under five headssalary, house property,
capital gains, business and profession and other sources (any residual income that cannot be
classified in other heads). F&O trade is reported under the head business in your tax return.

Reporting F&O trade as a business means:

*You can claim expenses from your business income

*As a result you may earn a profit or incur a loss

*Losses must be reported and losses have tax benefits

*Your total income (from all five heads) continues to be taxed at slab rates.

Businesses may be speculative or non-speculative, and the tax treatment is different. The
income tax Act says that F&O trade is considered as a non-speculative business. Intra-day
stock trades are treated as a speculative business.

Remember that cost indexation and capital gains exemptions are only allowed on sale of
capital assets such as equity shares, mutual funds, land, house, and others. Since F&O trades
are considered a business, tax rules of capital gains rules do not apply.
The first hurdle is to prepare your businesss profit and loss details. To calculate gross income
from F&O trades, take your transaction statement for the whole year. Look at your receipts;
these may be a positive or a negative value. Sum these up for the whole year. Expenses can
be deducted from your gross income. Some expenses that you can deduct include rent or
maintenance expenses of premises used for the business; mobile or telephone; internet
charges; demat account charges; broker commission; depreciation on laptop used for trading;
and any other expense directly related to your work.

Business income is calculated for the financial year for which you are filing your return. You
will also have to prepare a balance sheet which is reported in ITR-4. It is basically a
statement of your assets and liabilities.

Many people get confused when they have more than one type of dealing in the stock market.
Some do intra-day stock transactions along with F&O trades. Some may hold stocks as long-
term investments and also invest in mutual funds. In such a situation, you should calculate
your business income from all of these separately. F&O trade income and intra-day stock
trading will have separate expenses. Dont worry if you have consolidated expenses; for
example, you use the same premises to trade in both, or use a single phone. Simply bifurcate
these expenses on a reasonable basis. You can allocate them using a ratio based on time spent.

If you invest in stocks for the longer run, you can treat them as capital assets. These will not
be reported as business if you dont trade in them often. There is an element of judgement
involved and the main criteria is your intent. So, choose carefully. If you have some stocks
that you trade often and some that you hold for longer, you can separate them into business
and capital assets. Remember to choose on a fair basis and apply your choice consistently.
You have to report gains from capital assets under the head capital gains, which has
different tax rules. Mutual funds, too, may be treated as investments and taxed separately.

You will end up paying higher tax if you do not report your losses since losses have tax
benefits and reduce your total taxable income. Losses from F&O can be set off from income
from other heads (except salary income). Say, your loss from F&O business is Rs.1 lakh,
salary income is Rs.5 lakh, income from rent is Rs.2 lakh, and interest income is Rs.50,000.
Your total taxable income shall be Rs.6.5 lakh.

If losses are not fully set off in the same year, you can carry them forward for 8 years.
However, in the following 8 years, it can only be set off from non-speculative business
income.

If you have F&O loss, you must get your accounts audited. Audit is also mandatory if your
turnover exceeds Rs.1 crore. If accounts are not audited, a minimum penalty of 0.5% of
turnover may be levied (maximum Rs.1.5 lakh). The due date of filing of tax returns for
financial year 2015-16, where audit is mandatory, is 30 September 2016.

Archit Gupta, founder and chief executive officer, Cleartax.in