How to Show F&O Loss in ITR, Type of ITR Form & Process

Taxpayers, particularly those who are salaried but trade in F&O, make the mistake of not declaring F&O losses on their tax returns. While this may be due to ignorance, it is mandatory to declare all sources of income. The tax department may issue you with a notice of non-compliance. We don't want that to happen, so this article will give you all the information you need to claim F&O losses in your income tax return. Let's get started!

Type of ITR Form Required to Show F&O Loss 

Before we can know how to show F&O losses in ITR, we need to know exactly which type of ITR you need to show F&O Losses.

ITR-1 Form

This ITR-1 cannot show a loss as it is only required if you have a regular income or a salary, home ownership, or other sources of income. There is no F&O Loss column other than these revenue streams.

ITR-2 Form

Although this ITR-2 form contains a capital gains table, future losses and options losses are treated as business losses, so this ITR-2 form does not show future losses and options losses. 

ITR-3 Form

This ITR-3 is ideal for viewing all F&O and intraday trading losses. The ITR-3 has separate trading income and loss options, allowing you to view your account for trading accounts.  

How to Show F&O Loss in ITR -3

If you have a turnover of ₹10 crore and an F&O loss of ₹20 lakh, you will need a tax audit from the appropriate authority. You will also need to report the F&O loss in ITR-3 to carry forward the losses to the next year.

How To Declare F&O Loss In ITR

The income tax return filed by traders is linked to the income bracket to which they belong. A trader can use ITR-2 if he treats his income as capital gains, and the details of his income are classified under Schedule CG. If the trader treats the income as business income, then he has to file ITR-3. 

Schedule BP is the section where traders must declare their income and expenditure. Form ITR-4 is required for traders who opt for the preemptive tax scheme. The losses are classified as Schedule CYLA and Schedule BFLA.

Benefits Of Declaring Your F&O Loss

A major advantage of declaring a loss is that you can deduct it from any other income you earn. A loss on an F&O trade can be deducted from any income other than your salary. This can include earnings from a business or profession, a home, or any other source. It lowers your total tax liability.

Let us look at an example. Suppose you receive a monthly rent of ₹25,000 for your property. This results in an annual rental income of ₹3,000,000. In addition, you have lost ₹80,000 on your F&O trades during the year. You can deduct this loss from your rental income. This reduces your taxable income down to ₹2,20,000.

Moreover, if you can't set off a loss in the current year, it can be carried forward for the next eight years. However, you can only deduct it from business income for eight years.

Provisions Under Section 43(5) 

Losses on F&O transactions are not taxable. Transactions during Futures and Options trading are deemed non-speculative under Section 43(5). Profits from F&O trading, would therefore be taxed in the same way as profits from any other business transaction. This also assumes that taxpayers can claim tax deductions like any other business. These are the expenses incurred in the course of F&O trading. Some examples of these expenses that can be deducted—set off F&O losses—are:

• Rent is paid to the establishments where the F&O trade is carried out.
• Administrative costs associated with trading, such as telephone and internet bills.
• Salaries of employees or anyone else you've hired to carry out the F&O trade.
• Brokerage commissions or expert consultation fees paid.
• Depreciation on assets used in F&O transactions.

In addition, you may deduct the amount paid as Security Transaction Tax (STT). However, all these transactions must be documented with bills or receipts that are properly filed. Remember that you cannot claim these expenses if they are paid in cash.

Conclusion

Although your F&O loss is unfortunate, you may benefit from it when filing your taxes. Now you know how to claim F&O losses in the ITR. You can deduct it from other income to reduce your overall tax liability. You can also deduct certain direct expenses incurred in trading. To reap the most benefits, you need to be aware of the latest provisions and threshold limits outlined in the Income Tax Act.