catanuja-gupta-f&o-loss-set-off-save-tax-salaried

F&O loss set off: How Salaried Employees can Save Tax

Who welcomes losses even if they might be the gateway to mastering the art of trading in F&O? Yet, could F&O losses be less daunting if they come with the silver lining of tax savings?

Recently, the Securities and Exchange Board of India (SEBI) issued a report, stating that 9 out of 10 individual traders in the equity F&O segment incurred an average loss of Rs 1.1 lakh during FY22

-SEBI Report

Salaried employees trading in F&O derivatives are also unknowingly carrying on business and often forget to claim this loss while filing your income tax returns and loose this loss set off forever.

Whether F&O Trading is Speculative?

Speculative is day trading, which involves high risk with high return, like intraday purchase and selling on the same day and settling before the day closes to make substantially huge profits due to short-term market volatility and high price fluctuations.

F&O trading is considered to be your regular business profits and gains and not a speculative transaction.

Then,

What is the Benefit of such a Transaction not being Speculative in nature?

catanuja-gupta-f&o-loss-derivatives-set-off

-Set off of F&O loss in the same year against any head of income except salary income.

-Carry forward such F&O loss for set off against business income

-Presumptive Taxation benefit of claiming deemed profits at a flat 6% of turnover up to a turnover of Rs. 3 Crores without tax audit and maintaining any books of accounts.

See, my friend, all speculative losses can be set off only against speculative gains and not allowed to be set off against any other income such as your Salary Income, Rental Income, Capital Gains, Regular Business Income, or Interest and Dividend Income.

F&O Loss Set off against Salary

If you are earning Salary Income, you still have to show F&O incomes/losses while filing your return of income under the head “Profits and Gains from Business and Profession”. You have the option to take the benefit of the Presumptive Taxation scheme for your F&O incomes and compute deemed profits at 6% up to a turnover of Rs. 10 Crores without any tax audit. F&O loss will reduce your total income chargeable to tax if you have incomes other than your salary. Salary Income is not available for set off of F&O derivative losses.

F&O Loss Set off against Rental Income

Yes, Your net rental income if positive will be available for set off of any F&O loss during the year.

F&O Loss Set off against Business Income

If you are running any other business, and have generated profits from such business, then F&O loss will be first allowed to be set off against such Business Income before set off against any other head of income.

If your F&O loss exceeds all heads of incomes in the financial year under consideration, then such F&O loss will be allowed to be carried forward for next 8 years to be set off only against business income.

Even if such Business is discontinued, still such loss will be allowed to be set off against other Business Incomes.

F&O Loss Set off against Capital Gain

If you have sold any capital asset including land, building, or property in less than 24 months and listed shares, or equity-oriented mutual funds in less than 12 months, and your sales value is more than your cost, such capital gains are called short-term capital gains. Any capital gain other than short term capital gain is a long term capital gains. Such capital gains are available for set off of F&O losses in the same year.

F&O Loss Set off against STCG

Short Term Capital Gain is available to set off such F&O Loss in the same year only.

F&O Loss Set off against LTCG

Long term capital gain is available for set off of F&O loss in the same year only.

F&O Loss Set off against Interest Income

You may have earned Interest Income from various investments such as Fixed Deposits. Dividend income may also be a part of your income if you have invested in various companies’ shares. Such incomes are available for set off of F&O loss.

Exempt loss no set-off, as income itself is exempt

As the Income itself will be exempt, therefore any F&O loss is not allowed to be set off against exempt income. F&O loss can be set off only against taxable income.

Tax Audit in F&O Loss Mandatory

Tax Audit is applicable if you have opted for Presumptive Taxation in Year 1 and withdrawn in year 3 and Business Income after preparing regular Books of Accounts, and if your Business Income exceeds Basic Exemption Limit not chargeable to Income Tax, then you will be eligible for a Tax Audit.

Or if your F&O Turnover limit crosses Rs. 10 crores, you have to mandatorily get your accounts audited by a Chartered Accountant.

Set off and carry forward of F&O calculator

Case Study 1:

ParticularsAmount
Income from Salaries1,50,000
Income from Speculation Business60,000
Loss from Non-Speculative Business(40,000)
Short Term Capital Gain80,000
Long Term Capital Loss= Carried Forward(30,000)
Winning from Lotteries20,000
Non Speculative Loss set off against Speculative Income

Solution

Income from Salaries1,50,000
Income from Speculation Business60,000
Less: Loss from Non-Speculative Business(40,000)20,000
Short Term Capital Gain80,000
Winning from Lotteries20,000
Total Income2,70,000
Non Speculative Loss set off against Speculative Income

Case Study 2:

Income from Salary4,00,000
Loss from Self-Occupied Property(70,000)
Loss from Let Out Property(1,50,000)
Business Loss(1,00,000)
Bank Interest(FD) received80,000
Business Loss (F&O loss set off Against Income from Other Sources

Solution

Income from salary4,00,000
Less: Loss from House Property(Max 2Lacs)(2,00,000)2,00,000
(1,50,000+70,000=2,20,000-2,00,000=20,000 c/f)
Income from Other Sources80,000
Less: Business Loss(1,00,000-80,000=20,000 c/f)(80,000)NIL
Total Income2,00,000
Business Loss (F&O loss set off Against Interest Income

Return of Income within due date

You must mandatorily file your return of income within the due date to claim the set off of such F&O loss against your incomes, else such F&O loss will lapse forever.

Conclusion

File Income Tax Returns within due date, claim set off of F&O losses against all heads of income except Salary income, Save Tax and carry forward for set off for 8 assessment years.

If you want any clarifications about set off and carry forward of F&O losses , send your details to [email protected] and your Income Tax Return will be filed as soon as you forward your details.

You can also contact me here

FAQ’s

Can future option loss set off?

Yes, Declaring Future Loss in your Income Tax Returns and claiming set off against all incomes except Salary is allowed. Moreover F&O loss not so set off during the year is allowed to be carried forward for next 8 years.

Can F&O loss be set off against FD interest?

Yes, F&O loss can be set off against FD interest Income in the same year of F&O loss incurred. FD Interest Income is chargeable under the head ” Income from Other Sources” whereas F&O loss being non speculative business income is computed under the head ” Income from Business and Profession”

Is it mandatory to show F&O loss in ITR?

Yes, It is mandatory to show F&O loss under the head ” Income from Business & Profession” in ITR, to claim set off of such loss. If not claimed in ITR, then such loss will lapse forever. Also it is mandatory to show to avoid scrutiny.

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