Navigating Income Tax Returns for Traders: Filing ITR 1 vs. ITR 3

When one engages in trading and incurs losses, the confusion over which type of Income Tax Return (ITR) to file can be overwhelming. This article aims to clarify the guidelines and correct procedures for filing returns, particularly for those who mistakenly filed ITR 1 despite having business income from trading.

Understanding the Current Scenario

For individuals and Hindu Undivided Families (HUF) who have incomes or losses from trading activities related to the Financial Year (FY) 2023-24 and Assessment Year (AY) 2024-25, there is still time to rectify the situation. It's advised to file a revised ITR using the appropriate form by the deadline of December 31, 2024. If this form is not applicable to the financial year in question, no further action is required, and any missed income should be reported through a tax challan to avoid penalties.

Consequences of Incorrect Filing

It's important to note that if you discover that your initial filing was incorrect and you have missed out on the correct form to declare your losses, your ability to claim a set-off for the year is permanently lost. This means that you will not be able to offset your trading losses against other income for that financial year, which could potentially result in higher tax liability.

Identifying the Correct ITR Form

There are two primary forms of ITRs—ITR 1 and ITR 3—that deal with different types of income. For traders who have no income from trading and only losses, ITR 1 is the appropriate form to file. However, for those who engage in actual trading activities that result in both income and losses, ITR 3 is necessary.

It's critical to understand that trading, including intraday trading, swing trading, and day trading, all fall under the category of business income. This includes regular holding positions as well as trading in options and futures. Each of these activities can affect the form you should use to file your tax return. ITR 1 is suitable if you have no income from trading but have losses. Conversely, ITR 3 should be used if you have both income and losses from trading activities.

Important Considerations for Intraday Trading

Intraday trading can be complex due to the nature of intra-day gains and losses, which are treated differently from longer-term capital gains and their set-off rules. The decision to square off positions before the end of the financial year can significantly influence the form you need to use for your tax return. Proper advice and documentation are crucial to ensure accurate reporting and avoid any potential issues with the tax authority.

For individuals who engage in frequent intraday trading, it might be advisable to set-off STT (Securities Transaction Tax) involved in each deal to arrive at the final position. This step can be particularly relevant when determining whether to file ITR 1 or ITR 3.

Final Advice

It is advisable to seek the assistance of an experienced tax professional to ensure compliance with the current tax regulations. Tax return preparers should not charge exorbitant fees for corrections if they are filing revised returns. Instead, they can charge a nominal fee to avoid possible hassles in processing your return.

By staying informed and taking appropriate actions, you can navigate the complexities of filing your income tax returns accurately and avoid any unintended tax obligations.