Trading in derivatives i.e. futures and options segment of the stock market has been taken up by both full time traders as well as those who expect to make quick gains out of such trade. But for your knowledge, there are tax implications of such trade and gains or losses made on account of such dealing needs to be reported while filing ITR. Here is elaborated in detail both the aspects for your understanding:
Taxation of F&O trade
For the income tax purpose, trading in F&O unlike intra-day trading is not considered a speculative business and so the rules that apply to any other normal business become applicable here too. Further, the nature of income earned from derivatives trading is dependent on the volume as well as the frequency of trade. For instance, a regular trader who engages in F&O trading, his income out of it shall be chargeable to tax as a business income while for another salaried class individual who engages in such a trade on an occasional basis, his or her income drawn out of it will be classified as capital gains only.
So, notably any person involved in F&O trading needs to report his or her losses or gains out of it. Also, in both the cases, i.e. where the income is treated as business or capital gains income, expenses pertaining to the trade are allowed deduction. Say for instance, brokerage can be reduced from the income being treated as capital gains.
Rate of taxation on income earned from F&O trading
If the nature of income from F&O trade is business income or short term capital gains, individual will be taxed as per the income tax slab rate he or she falls under. Else in the case of long term capital gains, a flat tax at the rate of 20% is charged.
Losses from Futures and Options Trading
Losses from F&O or derivatives trading if being classified as a business loss is allowed to be set-off against any of the source of income such as rent, interest etc. but not the salary income. Also, such losses can be carried forward for up to eight assessment years for set off only against business income.
Further losses from such trade if classified under the capital gains head can be set off only against capital gains income. Also, the losses that have not been set off are allowed to carried forward for upto eight assessment years for set off against only capital gains income.
Losses under the head capital gains can be set off only against capital gains income. Losses that have not been set off can be carried forward for upto eight assessment years for set off only against capital gains income.
Reporting of F&O Gains or Losses In ITR
Depending on the nature of income, you need to select the prescribed ITR form, in case the income is being treated as business income, you need to report such income in ITR 3. All details in respect of business income and expenses need to be reported in Schedule BP.
If the income is being reported as capital gains, you need to choose ITR 2 and under the schedule CG you can provide all the details of such income. Losses if any are to be reported in Schedule BFLA and Schedule CYLA.