Read on to learn the documentation required, which ITR form to select, and the step-by-step process to show your F&O loss and claim deductions related to your trading activity.

What is F&O Transactions?

Futures and Options, popularly called F&O, are financial derivatives that are actively traded on the stock exchanges. These mechanisms allow traders to speculate on the future price of stocks and commodities without owning them.

For example, you can trade in Nifty futures to benefit from the expected rise or fall in Nifty in the coming months. Or you can buy call or put options to hedge your existing investments from downside risks.

While F&O trades offer the lure of high profits, the risk of losses is also high due to the speculative nature of these bets.

Are F&O Losses Taxable?

As per Income Tax laws, the loss incurred on F&O transactions is treated as a business loss and not a speculative loss. So, it can be set off against other income heads like salary, house property rental income, capital gains from investments etc.

This is a big benefit compared to treating it as a speculative business loss, which can only be set off against speculative business profits.

Why You Should Declare Your F&O Losses?

1. Set off losses against overall income

Declaring your F and O loss in ITR allows you to set off these losses against other heads of income and reduce your tax outgo.

For example, if you have a rental income of ?5 lakhs and an F&O loss of ?1 lakh, your net taxable income reduces to ?4 lakhs. So, your tax outgo comes down.

2. Carry forward loss for 8 years 

If you are unable to adjust the entire F&O loss in a financial year against positive incomes, the unadjusted loss can be carried forward for the next 8 assessment years.

This loss can be adjusted against business income in subsequent years, reducing your tax liability during those years.

3. Claim expenses relating to F&O

If you are involved in F&O trading, you may be eligible to claim deductions on expenses that you incur while carrying out this activity, like:

1. Rent of premises

2. Salary of staff

3. Advisory charges

4. Internet charges

5. Brokerage fees

6. STT paid

By declaring your turnover in F&O loss ITR filing, you can reduce taxable business income.

Which ITR Form to Use For F&O Income?

If your only speculative business is F&O trading, you should file ITR 3. This form allows you to declare incomes under various heads like salary, house property, and other sources, along with profits/losses from speculative business.

In case you have other business income apart from F&O trading, you can use ITR 3 or ITR 4, depending on your eligibility to use the presumptive taxation scheme under Section 44AD.

Documents Required to Show F&O Income

Keep copies of these convenient before filing ITR:

1.Contract notes for all your trades!

2.Ledger statement from your broker

3.Bank passbook/statements showing fund transfers between trading and bank accounts.

For turnovers exceeding ?1 crore, it is necessary to have your accounts audited by a Chartered Accountant and subsequently file the audit report.

How To File F&O Loss in ITR 3?

ITR 3 has a separate schedule to report your speculative incomes and losses from trading in derivatives.

Follow these steps:

1.Go to Schedule BP and fill out details of turnover/gross receipts from F&O trading and related expenses.

2.Calculate net profit or loss from these activities during the year.

3.Disclose this profit or loss figure in Schedule CYLA under incomes chargeable under the head Profits and gains from business or profession.

4.A total of CYLA will come to Schedule BFLA. Set off the F&O loss here against other incomes.

5.Unadjusted amount can be carried forward to Schedule CFL for set off against future business incomes.

Let's understand this with an example.

Example:

Rohit incurred an F&O loss of ?1.5 lakhs in FY 2022. His other incomes are: 

Salary: ?8 lakhs

House rent: ?3 lakhs

He paid ?40,000 brokerage for his F&O trades.

His taxable income and loss set off would be calculated as:

F&O turnover (Schedule BP) = ?2 crores 

Net F&O loss (Schedule BP) = ?1.46 lakhs (after deducting ?40,000 brokerage)

Salary = ? 8 lakhs

House Rent = ?3 lakhs

Gross Total Income in BFLA = ?11 lakhs

Less: Set off F&O loss u/s 71 = (?1.46 lakhs)

Total Income after set off = ?9.54 lakhs

Balance F&O loss of ?1.46 lakhs can be carried forward u/s 73(1) for set off against future business income.

Maintaining proper documentation and adjustment in F&O losses in ITR can lead to good tax savings.

Conclusion

Traders need to disclose any losses in F&O trading when filing their income tax returns. By properly offsetting these losses against other income, they can receive tax relief. However, claiming expenses can actually increase the reported loss. If the loss isn't offset, it can be carried forward for up to 8 years. To ensure reporting accuracy and optimize income tax, traders must maintain proper accounts and documents and comply with tax audits.