According to tax laws, F&O income is classified as non-speculative business income under Section 43(5) of the Income Tax Act.
This means it must be reported under the head “Profits and Gains of Business or Profession” (PGBP) in the Income Tax Return (ITR).
The special tax rates applicable to capital gains do not apply here.
CA Shefali Mundra, Tax Expert, ClearTax, explained, “Income from F&O trading is considered non-speculative business income. It should be
Common mistakes taxpayers make
Mundra outlined several pitfalls that taxpayers should avoid while reporting F&O transactions:
- Turnover miscalculation: Turnover in F&O is calculated as the sum of the absolute values of profits and losses from each trade. Errors here can distort tax liability.
- Ignoring books of accounts:
If turnover exceeds ₹25 lakh in any of the three preceding years, or income crosses ₹2.5 lakh, books of accounts must be maintained under Section 44AA. Failure to do so can attract penalties.
- Not reporting losses: Unreported losses cannot be carried forward. To claim future set-offs, taxpayers must report them within the due date.
- Using the wrong ITR form: F&O income requires ITR-3 for individuals and Hindu Undivided Families (HUFs) reporting business or professional income. Filing through ITR-2 or ITR-1 is not valid.
Salary plus F&O income
For taxpayers with both salary and F&O trading income, ITR-3 remains the correct form. Mundra stressed the importance of accurate reporting across all heads of income.
“Individuals must disclose both salary and F&O income in ITR-3 to remain compliant. In some cases, if turnover crosses audit thresholds, a tax audit under Section 44AB may also apply,” she added.
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