Is F&O Income Business Income? Here’s What You Need to Know

Most of the F&O traders incur losses every year and therefore have this misconception that they are not required to file an ITR as they have incurred losses.

However, as per section 43(5) of the Income Tax Act, F&O trading is considered business income. This means both profits and losses from F&O trading must be reported in the ITR. Profits and losses from F&O trading should be reported under the head “Income from Business & Profession”.

If you fail to report such transactions in your ITR, it might result in income tax notices.

Understanding F&O Taxation

Calculation of F&O Income

For calculating income from F&O, you must prepare proper books of accounts. Now add the absolute values of all the gains and losses from your F&O trading during the year.

For example: If you incurred a loss of Rs. 10,000 and a profit of Rs. 20,000 during the year, your total turnover will be (10,000 + 20,000 = 30,000).

Expenses Allowed as Deductions

You can deduct business-related expenses incurred during F&O trading from your income. These expenses include brokerage fees, telephone bills, internet costs, consultancy charges, software subscriptions, and salaries for business assistance.

Set-off F&O Losses Against Other Income

F&O losses can be set off against any other income except salary. For example, if you have rental income of Rs. 5 lakhs and F&O loss of Rs. 1.5 lakhs, then your taxable income after adjustment would be Rs. 3.5 lakhs. If you are not able to fully offset your losses in the current year, then you can carry them forward for the next eight assessment years.

Where to Report F&O Income?

Since F&O income is considered non-speculative business income, F&O traders must report their F&O profits and losses in ITR-3, which is explicitly used by taxpayers having income under the head “Profits and Gains from business profession”. If the F&O trader has opted for presumptive taxation scheme, he/she has to report such transactions in ITR-4.

The profits from F&O trading are added to the total income of the assessee and taxed at the applicable slab rates. Similarly, the losses are either set off from the current year’s income (except salary) or carried forward to the next assessment year (till it is set off).

Are F&O Traders Required to Maintain Their Books of Accounts?

Yes, F&O traders must maintain proper books of accounts, since F&O trading is considered a business activity. F&O traders are required to maintain books of accounts in the following situations -

• Their income exceeds Rs. 2.5 lakhs, or
• Their turnover exceeds Rs. 25 lakhs in any of the three preceding years or the first year for the new businesses.

Therefore, it is important to keep F&O trading statements, receipts for expenses, bank account statements, and receipts for expenses handy to ensure compliance.

Is Tax Audit Mandatory for F&O Trading Under Section 44AB?

The applicability of tax audit for F&O trading under section 44AB depends on the turnover during the year. Given below is the applicability of tax audit in the 3 different cases -

• Turnover upto Rs. 3 crore - If your profits are less than 6% of the turnover and you have opted out of the presumptive income scheme in the past 5 years, then it is mandatory to get your accounts audited under section 44AB(e).
• Turnover Between Rs. 3 crore and Rs. 10 crore: If more than 95% of the transactions are digital, there is no need for tax audit, irrespective of profit or loss.
• Turnover above Rs. 10 crore: A tax audit is mandatory under section 44AB(a), regardless of profit and loss.

Understanding F&O tax rules is crucial to stay compliant and avoid penalties. If you’ve traded in F&O this financial year, you are required to report both profits and losses in your ITR, regardless of the outcome. Since F&O income is treated as business income, it must be filed under ITR-3 or ITR-4.

That said, F&O taxation can be tricky, especially if you're not familiar with the nuances. But you don’t have to figure it out alone. Our experts are here to help you simplify the process, maximize tax savings, and file your ITR accurately, ensuring complete compliance and peace of mind.

Book an Onlline CA Now!