Set off of losses in certain cases

a) Can losses in F&O be set off against profits from short-term trading gains or vice versa?

b) Can profits from intraday trading be set off against losses in F&O or vice versa?

c) Is the profit from STCG and F&O added to my salary income to calculate the tax slab?

d) What charges can I book as expenses to calculate my tax liability?

In all cases, STT is paid and excluded to arrive at a profit or loss.

a) According to the provisions of Section 43(5) of the Income Tax Act, 1961, the gains or losses from an eligible transaction in ‘Options’ and ‘Futures’ will not be treated as a speculation gain or loss, and it will be taxed as Income from Business/Profession.

In case of the business loss not being a speculative loss, it can be set off against income from other sources or other heads. It cannot, however, be set off against income under the head ‘Salaries’. The balance, if any, can be carried forward and set off against business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.

Thus, losses incurred in the F&O business can be set off against short-term trading gains.

b) Income from intraday trading in shares is treated as speculative business income as the transaction is settled without delivery. Accordingly, it is charged under the head ‘Profit and gain of business or profession’. As per Section 43(5) of the Income Tax Act, 1961, speculative transaction means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips.

However, trading in derivatives, referred to in Section 2(ac) of the Securities Contracts (Regulation) Act, 1956, carried out on a recognised stock exchange is not deemed to be a speculative transaction. Recognised stock exchanges are NSE, BSE, the MCX Stock Exchange and the United Stock Exchange of India. The transaction will be treated as non-speculative business income.

It may be noted that though loss from a non-speculative business, i.e. F&O loss can be set off against income from speculation business i.e. Profit from Intra Day trading, but loss from a speculative business cannot be set off against income from non-speculation business.

c) Short Term Capital Gains (STCG) on capital assets other than Securities Transaction Tax (STT) is paid as well as profit from F&O are taxed at normal rates. Hence, the same will be added to your salary income, and the tax would be determined after taking into account the slabs as applicable to non-specified individuals. However, if STT is paid on STGC on the sale of shares, a tax rate of 15 per cent is payable on such STGC as per the Income Tax Act.

d) While you can get only deduction in respect of profession tax paid/deducted by the employer in respect of your income from Salaries, the deductions under the other heads of income are allowable as follows:

Short Term Capital Gains – The cost of acquisition/cost of improvement incurred on the capital asset.

Income from Business – Generally speaking, any expenditure is allowed as deduction under this head of income provided that:

  • The expense is in the nature of revenue expenditure (capital nature only if specifically allowed by the provisions of the Act).
  • The expense is not a personal expense of the assessee.
  • The expense is laid out or expended wholly or exclusively for the purpose of the business.
  • The expense relates to the income earned.
  • The expense is incurred in the previous year.
  • The expense is not for a purpose which is an offence or which is prohibited by law.

Thus, expenses such as postage, conveyance and telephone etc. incurred by you for carrying on the business can be claimed as deduction. Further, you may also claim depreciation on assets used for the business or profession.

e) STT is allowable as a deduction, as it is a direct expense.

f) Long Term Capital Gains (LTCG) in respect of securities for which STT is paid are exempt, and hence not taxable.

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