If you dabbled in stocks and equity funds during the previous financial year and made capital gains, you are not eligible to use the simple Sahaj ITR 1 to file your tax return. But if you also played the derivative market and made money (or incurred losses) in futures and options, get ready to use the more complicated ITR 3. Tax rules treat gains from F&O trading as business income and not capital gains. “Taxpayers trading in F&O have to use ITR 3 to file tax returns,” says Vishvajit Sonagara, Founder of tax filing portal Quicko.com.

ITR 3 is meant for self-employed professionals and individuals with business income. Even if you are a salaried person or the F&O trading is not your primary business, you have to use ITR 3 to file your return. “You can deduct expenses, such as broker commission, demat account charges, telephone and internet charges, related to your F&O business from the total turnover,” says Archit Gupta, CEO and founder of Cleartax.in. If you have incurred losses, you can set them off against and interest income but not against salary.

There is more pain in store for F&O traders. If the total trading turnover during the year exceeded Rs 2 crore or if there are losses to be set off or carried forward, the taxpayer will have to get his accounts audited by a chartered accountant. Turnover for futures is the absolute profit made on trades, i.e., the sum of both profit and loss made on your various transactions throughout the year. In the case of options, the premium received on sale of options is also added to the absolute profit to derive at the total turnover.

Let us understand this with an example. Ashish purchased one lot of X futures for Rs 10 lakh and sold them for Rs 10.5 lakh. He has made a profit of Rs 50,000. He bought one lot of Y options for Rs 15 lakh and sold them for Rs 14.9 lakh. He has made a loss of Rs 10,000. On the face of it, Ashish has made a net profit of Rs 40,000. However, the total turnover of his transactions will be Rs 50,000 + Rs 10,000 + Rs 14.9 lakh = Rs 15.5 lakh.

Experts say that sales proceeds added to absolute profits can easily push the trading turnover above Rs 2 crore for someone who had multiple F&O trades in a year. “Compulsory tax audit for turnover of above Rs 2 crore or in the case of net losses increases the overall compliance cost for the taxpayer,” says Sonagara. A taxpayer who fails to get his accounts audited can be slapped with a penalty of up to Rs 25,000.