The popularity of Futures and Options (F&O) trading has surged in recent years, with individual traders in F&O growing by about 540% from the financial year 2019 to 2022, as per a report by the Securities and Exchange Board of India (SEBI). While F&O trading can be exciting and profitable, it is essential for traders to understand the tax implications and avoid common mistakes when reporting F&O trading details in their Income Tax Return (ITR).
Common Mistakes When Reporting F&O Trading
As the deadline for filing ITR approaches, F&O traders must be aware of the potential mistakes that can have significant financial consequences during tax filing.
Here are some common mistakes to avoid when reporting your F&O trading in your ITR:
- Inaccurate reporting: Failure to accurately report your F&O transactions can result in penalties and legal issues. It is crucial to maintain detailed records of all trades, including purchase and sale dates, transaction prices, and contract specifications. Additionally, incorrect reporting may lead to underpayment or overpayment of taxes.
- Losses are transferable: F&O trading carries risks, and traders may incur losses, especially small traders. However, these losses can be adjusted against other sources of income such as interest, rentals, and capital gains, but not against income from salaries. Furthermore, if the losses are not fully adjusted in a year, they can be carried forward for up to eight fiscal years.
- Mandatory audit beyond permissible limit: If the trading turnover exceeds Rs 10 crore in a financial year, it is advisable for the individual heading a business to maintain accounts of all purchases and expenses. In such cases, the individual must get their accounts audited by a chartered accountant, and the audit report should be submitted along with the tax return during ITR filing.
- Choose the right form for ITR filing: Salaried taxpayers who earn business income through F&O trading cannot use ITR 1 or ITR 2 for tax submission. They should use ITR 3, as the income will be reported as professional or business income. Similarly, individuals running a business and filing tax under the presumptive income scheme should use ITR 4 to file their tax return.
By avoiding these common mistakes, F&O traders can ensure accurate reporting of their trading details in their ITR and prevent penalties and legal troubles. It is essential to stay informed about the tax regulations and consult with a tax professional if needed to ensure compliance and minimize the risk of errors in tax filing.