Four Common ITR filing Misconceptions about Futures and Options (F&O)

Many new people enter the stock market now and then. The new entrants need a proper understanding as various types of investments and trades are taxed differently under the Income Tax Act.

Also, there exist much misinformation and misconceptions around some peculiar transactions such as Futures and Options (F&O). Let us see some of them in this piece:

1. Misconception 2- F&O trades are ‘speculative income/losses’

First and foremost, futures and options transactions are considered as ‘non-speculative’ business income according to the Income Tax Act, 1961, provided some conditions are met. 

Suppose an activity is a normal business or would depend on many factors. The entire nature of transactions and the individual’s intention would help determine the classification. Many factors, like frequency of transactions, nature of other businesses conducted, etc., would also determine if such transactions are business transactions. The substance of the transactions is also vital in determining the nature of the transaction.

As per the provisions of Section 43(5) of the Income Tax Act, F&O transactions will be treated as a non-speculative business if such a transaction is conducted through a recognized stock exchange.

2. Misconception 1- You have to file ITR only when you make profits

This is a misconception amongst many individuals. However, Income Tax Return (ITR) needs to be filed irrespective of whether you make profits or losses. Of course, in the case of loss, one need not pay any taxes, but one must report such loss by filing the return before the due date. This is because reporting your loss in your ITR will enable you to set off and carry forward the loss to future years for set off. This means you can reduce your future income by claiming the set-off of such a loss. 

The loss from F&O transactions can be adjusted from other non-speculative business income, income from other sources such as interest income. Any unabsorbed loss can be carried forward for eight subsequent years. However, please note that loss from any business income cannot be adjusted from salary income.   

3. Misconception 3- Tax Audit become applicable if there is net loss from F&O

This is a widespread misconception, and we get a lot of queries around this. Let’s make it simple; the audit will become applicable only if you have incurred a loss from your F&O transactions and your turnover crosses the threshold; otherwise, the audit is not mandatory.

Tax Audit in the case for Futures & Options (F&O) is applicable in the below two scenarios:

1. The turnover is higher than Rs.10 crores (audit applicability increased from Rs.5 crores to Rs.10 crores in Budget 2021). The threshold of Rs.10 crores is applicable for F&O as 95% of the transactions are digital. Hence, the standard audit threshold of Rs.1 crore is not applicable in the case of F&O transactions.
2. The audit is required only if a taxpayer has declared income at a presumptive rate (Section 44AD) in any of the previous five years but wants to declare losses or income at less than the presumptive rate in the current year, provided his total income in the current year exceeds the basic exemption limit.

Make sure your file your return before the original due date to carry forward such a loss.

4. Misconception – Turnover means the total transaction value in F&O

Many investors believe that turnover calculation for F&O transactions means the total transaction value, again a misconception. In the case of an F&O transaction, turnover is derived by adding all the positives (profits) and negatives (losses). Premium received on option selling is to be included in turnover. The difference is also to be added to the total turnover regarding reverse trades. Irrespective of the differences being positive/negative or favourable/unfavourable, all the differences are aggregated to calculate the turnover. 

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in