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Futures and Options, commonly referred to as F&O, are financial derivatives instruments traded on the stock exchanges. These are contracts signed by two parties for trading a stock asset at a predetermined price on a later date. They are agreements that allow investors to speculate or hedge their positions based on the future price movements of underlying assets such as stocks, commodities, currencies, or indices.
Benefits of Declaring Your F&O Loss
Declaring your Futures and Options (F&O) loss while filing your income tax return can provide several benefits, including:
Tax Deduction: A prime benefit of showing the loss is you may set it off against any other income earned by you. A loss on an F&O trade can be adjusted against all income apart from your salary. This may include income from house property, business or profession, or any other source. It reduces your overall tax liability. This can help in lowering your tax liability.
Carry Forward: If your F&O losses exceed your total income in a particular financial year, you can carry forward the unabsorbed losses to future years. These losses can be set off against F&O gains in subsequent years, reducing your tax liability in those years.
Tax Compliance: Declaring F&O losses ensures that you are in compliance with the income tax laws and accurately reporting your financial transactions. Non-disclosure of losses can lead to penalties and legal consequences.In case you have loss from F&O trading, there are tax benefits associated with reporting losses.
Audit Requirement: If you have F&O losses, declaring them in your tax return can help you avoid tax audit requirements. Tax audit is mandatory for certain taxpayers whose turnover or gross receipts exceed a specified limit. Properly declaring losses may keep you below that threshold.
Documentation for Future Reference: Properly declaring F&O losses provides you with a record of your financial transactions, which may be useful for future references, such as loan applications or financial planning.
Adjustment against F&O Gains: If you have both F&O gains and losses in a financial year, declaring the losses allows you to offset them against the gains, reducing the overall tax liability on F&O transactions.
What is the Tax Treatment for F&O Profits or Losses?
Futures and Options trading under Section 43(5) are considered as non-speculative transactions. This means any income that comes from F&O trading is taxed in a similar way as that of business transactions. Therefore, any F&O loss is treated as a business loss.
Such loss on F&O transactions is not subject to tax. However, reporting it in the ITR lets you claim certain expenses that have been incurred while conducting the F&O trade. Given below are some expenses you can claim as a deduction -
Rent of the premises where F&O trade is conducted.
Administration expenses for the trade. For example, telephone bills and Internet.
Salaries of the employees or individuals you have hired for the F&O trade.
Brokerage, commission, or charges of experts.
Depreciation on the assets used for F&O transactions.
Note: It is necessary for you to have proof of all these transactions in the form of bills and receipts which are filed properly. However, cash expenses exceeding Rs.10,000 cannot be claimed. In addition to this, you can also deduct the amount paid as Securities Transaction Tax (STT).
How to show F&O Loss in ITR?
In the F&O loss scenario, transactions can be set off against all other income sources except salary. This is a prime benefit. These income sources could be a business or profession, house property, or other sources.
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