Introduction
It's crucial for you to accurately report your futures and options (F&O) losses in your income tax returns (ITR). There has been considerable interest in F&O trading over the years, and therefore, it's essential to understand how to report its loss in ITR. How to do it? Let's find out.
Tax Treatment of F&O Losses
Before understanding the process of showing F&O losses in ITR, let's see the tax treatment of F&O losses. Note that any loss incurred in F&O is treated as a business loss. This is because F&O trading comes under the purview of non-speculative transactions.
Losses incurred in F&O transactions aren't subject to taxation. That said, reporting it while filing your tax returns allows you to claim a deduction on a specific expense you incurred while conducting an F&O trade. These include:
- Administrative expenses and the costs incurred on rent of the premises on which you conducted the F&O trade
- Salary you pay to individuals hired for F&O trade
- Charges and commissions paid to experts
Showing F&O Loss in ITR
If you incur any loss in F&O, you can set off the transaction against all your income sources, barring salary. The income sources could be from a profession or business, house property, or other sources. Let's understand it with an example. Suppose you receive a monthly rent of Rs 10,000. It means you receive an annual rent of Rs 1.2 lakhs.
Suppose you incur a loss of Rs 50,000 in F&O trading. In such a scenario, you may offset this loss against the rental income you receive. In this case, your taxable income will come down to Rs 70,000 (1.2 lakhs - 50,000).
The ITR Form to Use While Reporting F&O Losses
It’s crucial to choose the right ITR form to report F&O loss. Not doing so can result in your filing being rejected by the income tax authorities. Note that the ITR form depends on the nature of your activity and the losses suffered. The table shows the type of form you should use to report losses based on income:
| Type of Activity / Loss |
ITR Form |
| Business Loss |
ITR 3 |
| Not a business loss or if you run a business or are into a profession |
ITR 4 |
| Investment activity |
ITR 2 |
Method of Reporting F&O Losses
Let's now see the method of reporting F&O losses. These include:
-
Gathering the necessary documents before reporting. This includes having all the trading statements, transaction details, and contract notes on F&O transactions you've made in a particular financial year.
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Once you've gathered the documents, compute F&O losses once you've gathered the documents. It involves determining the losses from each transaction. You can consider the difference between the contract's purchase and sale prices. Also, expenses such as brokerage fees should be factored in. The result reflects the total F&O loss incurred during the financial year.
Benefits of Showing F&O Losses in ITR
There are several benefits of reporting F&O losses in your ITR. Some of them are as follows:
-
Provision to Carry Forward
If your F&O losses surpass your entire income in a certain financial year, there are provisions to carry forward those losses in the subsequent years. You can offset them against the earnings you make in the future. This helps lower your tax outgo.
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Avoid Obligations of Tax Audit
When you declare your F&O losses in your tax returns, you can avoid tax audit obligations. If your income surpasses a certain threshold, you need audits. Declaring losses helps you keep below that threshold.
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Serves as a Reference Document
When you declare your F&O losses, it acts as a vital reference document for the future. Going forward, this can help you apply for loans and help with financial planning. More importantly, it helps avoid getting a tax notice from the income tax authorities when they pick up your return for assessment.
In Conclusion
While incurring losses in F&O trading is not good news for any investor, reporting the losses incurred in your tax return can help you reap some benefits. If you find it difficult, seek help from a professional tax consultant.
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