ITR filings of Futures and Options is mandatory like any other investment income. These days a lot of new investors have entered the stock market. To invest in the stock market, the new entrant must have proper and complete knowledge and understanding of different types of trades and investments. Also, the understanding of how these investments and trades are taxed under the provisions of the Income Tax Act, 1961. More specifically while investing in Future and Options, you must be aware that the taxation of Future and Options is very complex as there is a lot of misconception and misinformation available in different sources.
During the previous year, new investors entered the stock market for Futures and Options and as mentioned earlier, it is important to have proper knowledge and understanding of the taxation of futures and options. As there is a lot of misconception and misinformation available in the market, any sort of wrong information may lead to incorrect ITR filling and ultimately one can get the Income Tax notices from the Income Tax Department which is quite disturbing for an investor or trader in Futures and Options.
It is a wrong interpretation that the income tax return is only filed when an investor makes profits out of his or her investment. It is to be noted that income tax returns should be filed irrespective of profits or losses. In case of loss, one may not require to pay taxes but still has to file an ITR. Filing an ITR in case of loss has two advantages which are as follows:
- A taxpayer can carry forward the losses he or she suffered to the upcoming year
- A taxpayer can save a penalty of up to Rs. 10,00,000 for not filling the income tax return.
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Some Common Misconceptions about ITR Filings of Futures and Options
As mentioned earlier, some misconceptions exist regarding the transactions related to Futures and Options. The details whereof are provided below:
Futures and Options Investment or Trades comes under Speculative Income /Losses
According to the provisions of the Income Tax Act, 1961, Futures and Options are termed as “Non-Speculative” business income provided certain conditions are fulfilled.
An activity being carried out in a normal course of the business depends on so many factors. The complete nature of the transaction and the intention of the individual plays a dominant role in determining the classification of such business activity. These factors include the nature of the businesses, frequency of the transaction, etc. which helps to determine if these transactions are business transactions. While determining the nature of a transaction, the substance of each transaction plays a key role and is also important.
According to the provisions of Section 43(5) of the Income Tax Act, if a transaction of futures and options investment is conducted through a recognized stock exchange then, that transaction of Futures and Options will be termed a “Non-Speculative” business.
It can only be filled when there are Profits
As mentioned earlier, it is one of the common misconceptions that it can only be filled when there are profits. However, it is to be noted that ITR must be filled whether there are profits or losses suffered by the investors of Futures and Options. It was obvious that in case of losses the investor is not required to pay taxes, but he or she must file the income tax return before the due date of ITR filing to show losses to the Income Tax Department.
Filing an ITR will enable the investor to set off and carry forward the losses incurred in the current year to the next upcoming years to set off. In simple words, it will reduce the future income of the investor by claiming the set-off of such losses incurred. Also, the losses suffered from Future and Options transactions can be set off against the other non-speculative business incomes and income from other sources. It is also to be noted that any losses suffered can be carried forward to the next eight years. However, the losses from any business income cannot be set off against the income from salaries.
A Tax Audit is applicable in case there is a net loss from Futures and Options
Again, it is also a misconception regarding the applicability of tax audits concerning Futures and Options. According to the income tax laws, a tax audit is applicable if the investor has suffered a loss from the transactions of Futures and Options and the turnover exceeds the threshold limit. Otherwise, there is no such mandatory provision for audit in case of losses from Futures and Options.
In the case of Future and Options, a tax audit can be applied under the following two conditions:
- When the turnover exceeds Rs.10 crores, their mandatory tax audit will be applicable for Futures and Options as out of 100% around 95% of the transactions in Futures and Options are being done digitally. Thus, the standard threshold limit for audit i.e. Rs. 1 Crore will not be applicable in the case of Futures and Options transactions. (It is to be noted that the mandatory threshold limit for tax audit increased from Rs. 5 Crore to Rs. 10 Crore in Budget 2021)
- Secondly, in case the taxpayer has declared his income at a presumptive rate under Section 44AD of the Income Tax Act, 1961 in any of the last five years, then such a case audit is required. However, if the investor wants to declare the losses or income in the current year at a rate less than the presumptive rate unless his total income exceeds the basic exemption limit in the current year.
It is to be noted that the investor must ensure that the return before the original due date must be carried forward in case of such losses.
Turnover refers to the total transaction value in Futures and Options
Most investors are under the influence that the calculation of turnover for Futures and Options refers to the turnover generated by adding the profits and losses. It is to be noted that the premium received on Options will be added to the turnover. The differences must also be added to the total turnover concerning the reverse trade. All the differences will be aggregated to compute the turnover irrespective of the differences being positive or negative.
From the above analysis and explanation, it can be concluded that there are misconceptions about the filing of ITR concerning income earned from Futures and Options and the same must be clarified so that the investors are aware of the facts regarding the Futures and Options.