For traders, aside from predicting the stock market, reporting income from intra-day trading or Futures & Options (F&O) in the tax returns can be another mind boggling activity. But the rules for reporting trading income are quite straight-forward and seldom change.

Here’s a low-down:

Profits/gains from both intra-day trading as well as F&O must be treated as ‘Business Income’ and have to be reported under ‘profits and gains from business or profession (PGBP)’.

Income from trading, regarded as business income, is further sub-divided into speculative and non-speculative. While the profits/losses from intra-day trading is deemed to be derived from speculative business, profits/losses from F&O is treated as derived from non-speculative business.

Both speculative and non-speculative profits under PGBP will be part of the total taxable income (salary + rental + business + other sources). Tax payable would be the amount calculated on the aggregate taxable income based on the applicable income tax slab rate.

Reporting business income allows you to deduct associated expenses. Thus, costs such as broker’s commission, demat charges and internet costs, incurred on trading, can be claimed as expenses before reporting trading income.

If there’s a loss…
Tax treatment for speculative and non-speculative income differs if one of them is a loss.

If the non-speculative income derived from F&O is a loss, the amount equivalent to the loss incurred can be set-off against income from other heads (except salary) such as rental and interest incomes. The unutilised loss, if any, can be carried forward for the next eight years and can be set-off against non-speculative income (only).

For example, your salary income is Rs 6 lakh per annum and you have a rental annual income of Rs 2 lakh. You also entered into an F&O contract during the year and incurred a loss of Rs 1 lakh. In this case, the total income would be Rs 7 lakh. (6 lakh + 2 lakh – 1 lakh).

In the same example, if the loss incurred is Rs 3 lakh, then only Rs 2 lakh can be set-off against rental income (not against salary). Hence, the taxable income would be Rs 6 lakh ( 6 lakh + 2 lakh – 2 lakh loss on F&O). The balance of F&O loss of Rs 1 lakh- can be carried forward to the future years.

On the other hand, a loss from intra-day trading, which is considered to be speculative income, can be used to set-off only the speculative income and not others. The balance unutilised, if any, can be carried forward to next four years to set-off speculative incomes.

Note that, while non-speculative loss can be used to set-off speculative gain, speculative loss cannot be used to set-off non-speculative gain.

For instance, if there’s an F&O loss of Rs 2 lakh and an intra-day trading profit of also of Rs 2 lakh, both profit and loss can offset each other and the taxable income from trading becomes zero. But this is not possible is not possible if the case was vice-versa --- i.e intra-day trading loss and a profit under F&O.