Understanding How To Show F&O Losses In Your Income Tax Return To Stay Tax Compliant

Futures and options (F&O) are financial contracts included in the asset class of derivatives. They are ideal investment instruments for traders who have extensive stock market experience and knowledge about complex instruments such as F&O. Although they can offer high returns, they can also lead to significant losses if the market turns favourable or the trades are not executed at the right time. F&O losses have tax complications that most investors aren’t aware of, leading to tax compliance failure. If you trade in F&O and have incurred losses at any time, it is important to know how to show F&O losses in your ITR.
 

This blog will help you know the process of showing F&O losses in ITR so that you can better comply with taxation laws without incurring any penalties. 

• Futures and Options (F&O) are financial derivatives that allow traders to predict the price movements of assets without owning them.
• F&O losses in ITR are declared as business income losses, which can be carried forward to offset future gains.
• You can claim expenses related to F&O transactions by declaring your F&O losses in ITR.

Section 43(5) of the Income Act Act 1961 defines transactions that are deemed speculative in nature. However, F&O transitions are deemed non-speculative in nature, which means that any loss in F&O incurred by a trader is treated as a business loss. While it is compulsory to show all the income sources in your ITR, the main focus is on capital gains earned from investments, where the loss is adjusted against the overall profits made in the financial year. However, it is mandatory to show all the F&O transitions along with profits and losses made while filing the ITR. Although there is no tax on F&O losses, declaring it in the ITR is beneficial.

Here are the benefits of declaring F&O losses in ITR:
 

• Carry forward: When you declare F&O losses, you can carry them forward for up to 8 consecutive assessment years if you have fully utilised them. This allows you to offset these losses against future profits from F&O trading or other business income.
• Same-year adjustment: If you have earned any other business income in the same year of F&O losses, you can set off these losses against this income. This reduces your taxable income for the current year, leading to immediate tax savings.
• Avoiding penalties: You may be penalised by the Income Tax Department for not disclosing your F&O losses, as they are considered business losses. Properly reporting F&O losses ensures that you remain compliant with tax regulations.

Since business losses are not taxable, there is no tax on losses incurred on F&O trades. However, you can claim some expenses incurred while making F&O trades by mentioning F&O losses in your ITR. Some of the expenses you can claim are:
 

• Rent paid for the places from where you undertook the F&O trades.
• Administration costs incurred by carrying out the F&O trades.
• Salaries of employees hired by you to carry out the F&O trades.
• Brokerage commission paid by you to experts for carrying out F&O trades.
• Depreciation charged for assets used by you for carrying out F&O trades.
   

You have to submit proof of all these transactions through bills and receipts and can only claim expenses up to Rs. 10,000.

For reporting Futures and Options (F&O) trades, you need to file ITR-3 or ITR-4, depending on the nature of your income and the method of accounting. ITR-3 is applicable for individuals and HUFs who have earned income from F&O trades and from other sources. On the other hand, ITR-4 is applicable if you run a business or profession and opt for the presumptive taxation scheme under section 44AD.

You should ensure a tax audit if your total turnover has exceeded Rs. 5 crore. This threshold limit is Rs. 10 crore if the cash transactions are less than 5% of your total receipts or payments. In case you fail to hold a tax audit, you can be penalised under section 44AB.

Futures and options are complex investment instruments, and it is possible that you may incur losses while trading F&O. However, it is beneficial to show F&O losses while filing ITR as it can allow you to claim some expenses and reduce your tax liability along with making you more tax compliant.