Trading in futures & options must be reported as a business income in the financial year. It is treated as Non-speculative business income.

Income from trading in Futures and options (both intraday and overnight) is considered as normal business income/loss. Hence ITR-4 needs to be required for this income for the assessment year 2021-22. F&O is also considered as non-speculative as these instruments are used for hedging and meant for taking/giving delivery of the underlying contracts.

Assessee can also claim expenses from the earnings of your business. Expenses like brokerage, broker’s commission, subscriptions to journals related to trading, telephone bills, internet costs, consultant charges, fee of experts or salary of staff, all of these can be claimed. Assessee need to maintain proper records of all these expenses.

Turnover:

The method of calculating turnover is a debatable issue and what makes it a grey area is that there is no guideline as such from the IT department. One article of great help though is the guidance note on tax audit under Section 44AB by ICAI (Institute of chartered accountants of India, the governing body for CA’s). The article on Page 23, Section 5.12 of this guidance note has a guideline on how turnover can be calculated. It says:

• Delivery based transactions

For all delivery based transactions, where you buy stocks and hold it more than 1 day and sell them, the total value of the sales is to be considered as turnover. So if you bought 100 Reliance shares at Rs 800 and sold them at Rs 820, the selling value of Rs 82000 (820 x 100) can be considered as turnover.

But remember that the above calculation of turnover for delivery trades is only applicable if you are declaring equity delivery based trades also as a business income. If you are declaring them as capital gains or investments, there is no need to calculate turnover on such transactions. Also, there is no need for an audit if you have only capital gains irrespective of turnover or profitability.

• Speculative transactions (intraday equity trading)

For all speculative transactions, aggregate or absolute sum of both positive and negative differences from trades is to be considered as a turnover. So if you buy 100 shares of Reliance at 800 in the morning and sell at 820 by afternoon, you make a profit or positive difference of Rs 2000, this Rs.2000 can be considered as turnover for this trade.

• Non-speculative transactions (Futures and options)

For all non-speculative transactions, the article says that turnover to be determined as follows –

• The total of favourable and unfavourable differences shall be taken as turnover
• Premium received on sale of options is also to be included in turnover
• In respect of any reverse trades entered, the difference thereon should also form part of the turnover.

So if you buy 25 units or 1 lot of Nifty futures at 8000 and sell at 7900, Rs.2500 (25 x 100) the negative difference or loss on the trade is turnover.

In options, if you buy 100 or 4 lots of Nifty 8200 calls at Rs.20 and sell at Rs.30. Firstly, the favourable difference or profit of Rs 1000 (10 x 100) is the turnover. But premium received on sale also has to be considered turnover, which is Rs 30 x 100 = Rs 3000. So total turnover on this option trade = 1000 +3000 = Rs 4000.

Carry forward and setoff of business loss:

Speculative losses (Loss from intraday equity trading) can be carried forward for 4 years and can be set-off only against any speculative gains you make in that period.

Non-speculative losses can be set-off against any other business income except salary income. So they can be set-off against bank interest income, rental income, capital gains, but only in the same year. They can be carry forwarded for the nest 8 years however non-speculative losses can be set-off only against any non-speculative gains made in that period.

Offsetting of losses:

Speculative (Intraday equity) loss can’t be offset with non-speculative (F&O) gains, but speculative gains can be offset with non-speculative losses.