A Simple Guide To Tax Filing For Futures And Options

Here's how to avoid unexpected losses when filing ITR for futures and options

Tax filing
  • Avoid tax troubles: Report all gains and losses in futures and options.
  • Tax mistakes to avoid: Misconceptions about audits and reporting losses.
  • Carry forward losses: Unadjusted losses can be carried forward for up to eight years.

What are Future And Options (F&O)?

Most stock derivatives traded in a share market are futures and options. To trade a stock asset at a predetermined price at a later date, these contracts are signed by two parties. These contracts attempt to mitigate the market risks associated with stock market trading.

Retail participation significantly increased during and after the COVID-19 pandemic. And according to recent updates, The Securities and Exchange Board of India (SEBI) proposes limiting price movements and extending trading suspensions to limit extreme price movements in shares on which futures and options trade.

How does tax work for F&O?

Taxpayers, particularly salaried individuals who engage in F&O trading, frequently neglect to include this information in their tax returns. It is required of you to report all of your sources of income. The tax department might notify you if you don't follow the rules. Additionally, there are tax advantages to reporting losses.

Also ReadWhat Is F&O In Stocks & Indices?

Tax filing mistakes associated with F&O

  1. It's a misconception that an audit is required if F&O transactions result in a net loss. But, as long as your F&O turnover is below the specified limit of INR 1 crore, you are not required to conduct an audit if you only have losses from F&O transactions. File your ITR before the deadline to carry this loss to subsequent years.

  1. Trading turnover must be calculated to determine whether or not the Tax Audit is necessary. It is essential to keep in mind that tax liability is independent of turnover. Tax Audit under section 44AB (e) applies if the taxpayer has opted out of the presumptive taxation scheme in any of the past five immediate years. 

  1. To file returns, a salaried taxpayer cannot use ITR 1 or ITR 2 if they have a business income from F&O trading. This income will be shown as professional or business income, so they should use ITR 3. But, they should use ITR 4 to submit their income tax return if they own a business and declare tax under the presumptive income scheme.

  1. If the business brings about a loss, you can adjust it for profit that might come from various heads. These include rental pay, interest pay, and preferences, except for any compensation paid in the derivatives market

Unadjusted losses can be carried over for an additional eight years. However, they can only be adjusted in the future using income from non-speculative investments.

Also ReadITR Filing Form Updates For F&O Profit & Loss

When filing your income tax returns, you must report all your gains and losses to avoid penalties and IT department notices if you are a trader or have retail participation. Additionally, seeking expert guidance and staying updated on tax regulations can provide actionable insights for optimising tax planning strategies. By taking proactive measures, traders can navigate complexities, maximise savings, and achieve their financial goals.

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Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.


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