F&O boom comes with tax traps: Traders urged to file ITRs before September 15

Futures and Options (F&O) trading has become increasingly popular in India, engaging nearly 95.8 lakh individuals seeking to benefit from market fluctuations. Despite the potential for substantial earnings, the sector presents significant tax compliance challenges, with traders having experienced losses amounting to Rs 74,812 crores in FY24. Failure to report these losses or gains in Income Tax Returns (ITR) can lead to penalties and missed tax benefits.

“Many taxpayers engaged in F&O trading often overlook reporting their trading income in their tax returns. This is usually due to lack of awareness, but failing to declare all sources of income can lead to penalties,” stated Sujit Bangar, Founder of TaxBuddy. He also noted, “The tax authorities now have detailed information regarding transactions on the stock market, so it is not difficult to detect discrepancies.” These developments underline the importance of accurate reporting.

Under the Income Tax Act, F&O income is classified as non-speculative business income. Unlike intraday trading, which is speculative, F&O income falls under “Profits and Gains of Business or Profession” and is taxed at the individual’s applicable slab rate. “It’s neither capital gains nor speculative income like intraday. It’s business income and needs to be reported as such,” Bangar emphasised.

Properly reporting F&O transactions allows traders to offset losses against other business income, such as profits from a shop or freelancing. “Since F&O income is non-speculative business income, losses can be set off against other business income, such as profits from a shop, freelancing, or consultancy. Moreover, losses can be carried forward for eight years if the ITR is filed within the due date,” Bangar noted.

There are two primary set-off mechanisms: intra-head set-off, where F&O losses can offset non-speculative business income, and inter-head set-off, where F&O losses can be adjusted against income from other heads such as capital gains. “Missed profits this year? Don’t worry. F&O losses can be carried forward and set off against any business income in future years, including F&O. But only if the ITR is filed before the September 15 deadline in cases not requiring a tax audit,” Bangar highlighted.

A tax audit is mandatory only when the turnover exceeds Rs 10 crore, calculated as the sum of absolute profits and losses, premiums on options, and differences in reverse trades. “A tax audit is required only if the turnover exceeds Rs 10 crore. However, in F&O trading, turnover isn’t the contract value—it’s calculated as the sum of absolute profits and losses, premium on options, and differences in reverse trades,” Bangar explained.

Filing the correct ITR form is crucial, even for salaried individuals engaged in F&O trading. “Even salaried individuals trading in F&O must file ITR-3 because F&O income falls under business income. Filing ITR-4 would be incorrect,” Bangar cautioned. This ensures compliance and maximises potential tax benefits.

Ultimately, maintaining proper records and understanding tax implications are essential for F&O traders. “Maintain proper records, file on time, and understand the tax implications. That’s how you protect your trading profits—and avoid unwanted surprises from the tax department,” Bangar advised. With the looming September 15 deadline for FY25, traders must act swiftly to secure their financial interests.