Home / Money / Personal Finance /  How to report income from trading in F&O in your I-T returns

The due date to file the income tax return (ITR) for the financial year (FY) 2021-2022 or the assessment year (AY) 2022-23 is around the corner. If you are a trader with income from futures and options (F&O), including intra-day trading, profits from such activity must be disclosed as business income in your returns.

ITR-3 is the applicable ITR form to report income from ‘profits and gains from business or profession (PGBP)’. The tax payable on such income is at the slab rate applicable to each individual.

Reporting business income allows deduction of associated expenses. Thus, costs such as broker’s commission, demat charges, cost of research reports, depreciation of devices used to trade and internet costs can be claimed as expenses from such income.

Set-off & carry forward

Income from trading is further divided into speculative and non-speculative business income. Intra-day trading transactions are deemed to be speculative (since there is no delivery of shares) and other F&O transactions are treated as non-speculative.

While the tax payable on both incomes is the same, the difference arises in terms of disclosure and in particular when any loss is incurred—the latter allows you to use the set-off or carry-forward provisions to adjust loss against income and reduce tax outgo.

If you incur a loss on non-speculative F&O trading, that amount can be used to set off the loss against any head of income, except salary. For example, loss on F&O trading can be set-off against income from your house property or capital gains or income from other sources as well as any non-speculative income. The unutilised loss, if any, can be carried forward for the next eight years and can be set off only against non-speculative business income.

On the other hand, an intra-day trading loss (speculative), can be set off only against speculative income. The unutilised balance, if any, can be carried forward for the next four years to be set off against speculative incomes.

The only condition to carry forward the trading losses is to file the ITR before the due date, according to Neetu Brahma, director, Nangia Andersen India.

Books of account & audit

When reporting business income, the requirement to maintain books of accounts arises “when the turnover is more than 25 lakh or if the net profit is more than 2.5 lakh per annum in case of an individual," said Sandeep Sehgal, partner-tax, AKM Global, a tax and consulting firm.

Stock brokers generally provide a detailed statement of profit and loss of all the transactions carried out during a financial year. “These statements come in very handy for traders but by themselves cannot be considered as books of accounts," added Sehgal.

Also, as per the Income Tax Act, a tax audit is mandatory if the turnover from the business exceeds 10 crore (the limit is 1 crore if cash receipts and cash payments during the year do not exceed 5% of the total receipts or payments). If you chose presumptive income tax, then the tax audit is applicable only if your reported profit is less than 6% or 8% of the turnover.

The calculation of turnover in stock trading is slightly different. For intra-day transactions, the transaction settlement amount—whether positive or negative—is the turnover. Say, you bought a stock ‘X’ at 1,000 and sold it for 1,500, then the difference of 500 is the turnover. The same is true for futures as well. Say, you entered into a future contract value of 1 lakh and later sold it at 95,000, the negative difference of 5,000 is the turnover.

In the case of options, the premium collected on sale of option should also be taken into account. Say, you bought an option on an index of 100 units at 50 and sold it at 60, the turnover is (100 units*( 60-50)) plus the option premium received (100 units*60) which is equivalent to 7,000 (1,000+6,000).


Satya Sontanam

Satya Sontanam is a senior content creator at Mint with a keen interest on data crunching, analysis and the story behind trends. She writes on personal finance including investments, regulations and data stories. Before joining Mint in December 2021, Satya worked as research analyst and also a personal finance writer at The Hindu BusinessLine. Satya is a qualified chartered accountant. In her free time, she enjoys doing yoga and listening to podcasts.
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