In a recent case reflective of the risks and nuances of derivatives trading, an assessee incurred a loss of ₹25 lakh in the Futures & Options (F&O) segment during FY 2024-25.
However, a unique twist arose when the share broker compensated Rs. 15 lakh of the total loss due to an undisclosed arrangement or potential execution error. This case has brought attention to how such transactions must be reported under Indian tax law, especially while filing the Income Tax Return (ITR).
Understanding the Tax Implications
F&O Trading: Treated as Business Income
Under the Income Tax Act, trading in F&O on recognized stock exchanges is treated as non-speculative business income. Therefore, any gains or losses from such trading are to be reported under the head “Profits and Gains from Business or Profession” in ITR.
Breakdown of the Case:
- Total F&O Loss: ₹25,00,000
- Broker Compensation: ₹15,00,000
- Net Loss to Assessee: ₹10,00,000
Here, Rs. 15 lakh received from the broker cannot reduce the gross loss directly without declaration — it must be separately accounted for as business income, as it represents compensation, not a reversal of the loss.
How to File in the ITR
Appropriate ITR Form:
The correct form to use is ITR-3, which is designed for individuals and HUFs having income from business/profession.
Schedule BP (Business and Profession):
- Report total trading turnover and the gross loss of ₹25 lakh under business income.
- Declare the ₹15 lakh compensation from the broker as “other business income”.
- The net business loss, therefore, will be ₹10 lakh.
Schedule CFL (Carry Forward of Losses):
If the net loss of ₹10 lakh cannot be set off against any other business income (excluding salary), it can be carried forward for up to eight assessment years, subject to return filing before the due date.
Audit Requirement:
If total turnover exceeds ₹10 crore (or ₹2 crore in some cases), or if the profit declared is below the threshold under Section 44AB, a tax audit by a Chartered Accountant is mandatory.
Legal & Compliance Takeaways
- Broker compensation must be backed by documentation and shown clearly as income to maintain transparency.
- Misreporting this income or simply netting it off without disclosure may attract notices or penalties under scrutiny.
- Ensure audit trails, trade confirmations, and written agreements (if any) regarding the compensation are available.
Expert Comment
“This case underlines the importance of disclosing both income and losses accurately, even when recoveries occur post-trade. With AI-assisted scrutiny and pre-filled ITRs becoming more intelligent, reporting anomalies can lead to compliance risks,” says a tax expert at a leading consultancy.
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