Dealing in F&O has become a very common investment option for investors now days. Unfortunately not many people know about the tax treatment and reporting of these transactions in their income tax returns. Failing to report these transactions in your income tax return may lead you to the problems in future hence it is very important to understand how these transactions are taxed and reported in the Income Tax Return.

FAQs on taxation and reporting of F&O transactions;

  1. What all we need to report?

There is a misconception amongst the small investors trading in F&O that small transactions are not required to be reported in the income tax return. This is just a myth and every gain/loss from the transactions done in F&O are required to be reported in the Income Tax Return and failing to report these gains/losses may lead you to the assessment proceedings under Income Tax Act.

  • Under which head income from F&O trading is taxed?

Usually the transactions from Futures & Options are reported as business income unless you have only few transactions. If the transactions entered during the financial year are only few say 2 or 3 it will be reported under Capital Gains/Capital Loss depending upon the nature of income/loss.

  • Who is required to report the F&O transactions?

Every person dealing in the F&O is required to report these transactions in the Income Tax Return. You are not necessarily required to be a company or LLP even if an individual is making F&O transactions it needs to be reported in your income tax return besides your regular income.

  • Are there any expenses allowed to be deducted from the gain earned from F&O trading?

The expenses incurred in the course of business of trading under F&O are allowable as deduction under income tax act. Some of the examples of allowable expenditures are brokerage, commission, salary, telephone bills, internet bills etc. You have to maintain the proper receipts and the amount paid must be within the limits prescribed under the Income Tax Act.

  • What is the return filing deadline?

As we know in case of audit assesses the due date for filing return of income is usually 30th September of the relevant assessment year and in case of non audit assesses its usually 31st July of the relevant assessment year.

  • Is there any applicability of Audit?

Audit is applicable under Income Tax Act if the turnover of the business exceeds Rs. 1 Crore.

This is to be noted here that the threshold of Rs. 1 Crore is proposed to be increased to Rs. 5 Crore with effect from the FY 2021-22 if the cash transactions of the business is limited to 5%.

This is to be noted here that Tax audit u/s 44AB r/w Section 44AD  will be applicable if the turnover is below Rs. 2 Crore and net profit from such transactions is less than 8% (6% in case of digital transactions) that also includes no income or losses.

  • How to calculate turnover of the business in case of F&O trading?

The calculation of turnover in case of F&O trading is a little different from a usual case. No effect to the negative transactions is given in calculating the turnover of an F&O trading business. Hence weather favorable or non favorable balances both are required to be added. Apart from this premium received on sale of options and in respect of any reverse trades entered the difference thereon is required to be added to reach the turnover.