Yes, it is mandatory to report F&O (Futures and Options) losses in your Income Tax Return (ITR). Many F&O traders, especially those who have incurred losses, mistakenly believe that they do not need to report these transactions in their ITR. However, this is not the case. Failing to report F&O transactions can lead to penalties and notices from the Income Tax Department.

Why is it mandatory to report F&O losses?

The Income Tax Act of 1961 classifies F&O trading as 'non-speculative business income' under Section 43(5). This means that both profits and losses from F&O trading are considered part of your 'business income'. Therefore, they must be declared under the head 'Profits and Gains from Business and Profession (PGBP)' when you file your ITR.

Benefits of reporting F&O losses:

• Tax Deduction: Reporting F&O losses allows you to deduct them from other income sources, except your salary, reducing your overall tax liability. This includes income from business/profession, house property, or other sources.
• Carry Forward of Losses: If you cannot fully adjust your F&O losses in the current financial year, you can carry them forward for up to eight assessment years. This allows you to set them off against future business income, including F&O profits, reducing your tax liability in subsequent years. Note that carried forward F&O losses can only be set off against non-speculative business income in the subsequent years.
• Tax Compliance: Declaring F&O losses ensures that you comply with income tax laws and accurately report your financial transactions.
• Avoid Penalties: Failing to report F&O transactions can invite a notice from the Income Tax Department for default.
• Audit Requirement: Declaring F&O losses in your tax return can help you avoid tax audit requirements.

How to report F&O losses in ITR:

• File ITR-3 or ITR-4: F&O income is treated as business income, it must be filed using ITR-3 or ITR-4, depending on your eligibility. ITR-3 is the designated form for individuals with PGBP (Profits and Gains from Business or Profession) income. If you are filing under the presumptive income scheme, you can use ITR-4.
• Report under "Income from Business or Profession": You must report F&O losses under "Income from Business or Profession" in ITR-3.
• Mention the Business Code: Mention the proper business code for F&O trading. Usually, the F&O code is 14013. However, there is no specific business code designated for F&O trading. A generic business code like 09028 (Retail sale of other products) can be used in the absence of a specific F&O code.
• Calculate Net Profit or Loss: Compute the total profit or loss from all your F&O transactions for the financial year.
• Maintain Records: Maintain accurate records of all your F&O transactions, including bank statements, contract notes, and other relevant documentation.

Tax Audit Applicability

A tax audit under Section 44AB of the Income Tax Act may be necessary depending on your turnover and profit. Tax audit is mandatory if turnover exceeds Rs 10 Crore irrespective of profit or loss declared.

Key Takeaways

• It is mandatory to report both profits and losses from F&O trading in your ITR.
• F&O losses are treated as non-speculative business losses.
• Reporting F&O losses allows you to reduce your tax liability, carry forward losses, and avoid penalties.
• File ITR-3 or ITR-4 and report the losses under "Income from Business or Profession".
• Ensure accurate record-keeping and determine if a tax audit is applicable.