Investing just in companies has become something that has been there for quite some time now. Today, we see a lot of newer investors diving into F&O trading. Derivative trading – that is, investing in F&O stocks, currencies, and commodities have become quite a hot topic among investors. However, most people know a little about how they trade and are taxed. Besides, various small traders that have losses from futures & options skip reporting them in their tax returns.

When you are – or are planning on becoming an F&O trader and are coping with how to understand and tackle your taxes. Then do not worry – we have got your back. Just read on.

Every F&0 Trader Needs to File Returns

Taxpayers, particularly salaried individuals who trade in F&O stock, make the error of failing to mention these in their tax returns.

While this may occur due to a lack of knowledge, you must record all of your sources of income. The tax authorities would send you a notice for non-compliance. And, as we’ll see below, declaring losses has tax advantages!

Unless you have quite a little too few amounts of trades (say, only 2-3 trades) in a financial year, trading in futures and options is usually required to be recorded as a company.

It’s critical to remember that this applies to individuals as well. To earn business income, you don’t need to be formally incorporated as a company or some other legal body. Individuals can also make money from their businesses.

Also, you do not just have to do this for your FNO stock trading; this tip is quite useful for you – no matter what you are doing.

How to File Returns for F&O Trading?

Trading in futures and options generates income and losses that are treated as typical business income and losses. 

As a result – ITR-4 is required to declare this income.

You may have already filed an ITR-1 or ITR-2, but you must review the ITR form’s applicability each year for any income produced during that year.

When you report the activity as a business, you can deduct expenses from your company’s earnings.

What are the Perks of Filing Returns?

You may be able to profit from losses suffered while trading futures and options. One of the most important reasons to file your ITR with F&O trading information is to avoid penalties. Your income streams, such as rent or interest, can be used to offset any losses you may have incurred in your F&O firm. 

However, it cannot be deducted from your pay. If you opt not to adjust your F&O losses for the current assessment year, you can carry them forward for an additional eight years for adjustment purposes. 

However, in the future, you will only be able to offset your losses against non-speculative sources of revenue.

In order to do all of this and file returns, there is one thing that you cannot overlook – and that is calculating your turnover. 

How to Calculate F&O Turnover

You must consider the following factors when calculating your F&O business turnover:

  • For the given evaluation year, the overall profit and loss from trading in F&O.
  • For the specified assessment year, the premium you paid or got while dealing in options.
  • The total number of reverse trades made and the profit or loss on those deals.
  • Total futures income (for all trades in a certain assessment year) = Total revenue minus total losses

Total option revenue (for all transactions in a given assessment year) = total profit – total losses + total premium received for option sales – the total premium paid for option purchases.

You need to be aware that depending on whether you produced more profit or losses, your total F&O business income could be positive or negative. After that, add up the differences and figure out your turnover.

But, what would be the tax implications on your F&O returns? Let’s find out.

Tax Implications from your F&O Returns

  • Expenses for administration are deducted.
  • Tax on Securities Transactions is deducted (STT).
  • Offset losses from F&O trading with other sources of revenue, such as rental, other businesses, and so on (besides your salary).
  • If your F&O business is profitable and your income exceeds Rs 1 crore, you will be subject to an obligatory tax audit.
  • If the net profit from your F&O transactions is less than 8% of the total F&O sales, your tax audit will be relevant. In the case of digital transactions, the restriction is 6%.

Pointer:- Remember to keep track of your receipts and bills, and make sure you’re spending via checks or bank transfers rather than cash.

The Bottom Line

The best way you can save taxes through your F&O trading would be by filing them. It might seem like an added task to do if you have not been doing it, but it is worth the work. Moreover – the benefit comes to you. The benefit of filing your return as a business is that you may claim the money you spent on it. Claiming expenditures can sometimes result in a business loss, which is ok.