1. Futures and options (F&O) are the most common types of asset derivatives traded on a stock exchange.
The income/loss arising from trading in F&O transactions would be treated as a Business Income / Loss for the purpose of taxation and the normal provisions of the Income Tax Act will apply in this case
The rules as applicable to tax audit as stated in section 44AB will be applicable in the case of F&O trading also.
2. STATUTORY PROVISIONS: – SECTION 44AB
| Section 44AB(a) | Every person carrying on business shall get his accounts audited if the total turnover exceeds Rs. 10 crores. |
| ( in the case of F&O 95% or more are digital transactions, hence a threshold of Rs 1 crore is not applicable ) | |
| Section 44AB(e) | The audit is required to be done If subsection (4) of section 44AD is applicable & taxable income exceeds the basic exemption limit |
SECTION 44AD
| Section 44AD(1) | An assesse whose turnover is up to Rs 2 crores can opt to declare taxable income @ 6% of total turnover in the previous year |
| 44AD(4) | An assesse opted for a presumptive tax scheme under sec 44AD (1) cannot opt-out from the scheme for subsequent five years.
In case, he wants to opt-out and declares losses or income at less than the presumptive rate in the current year, the audit is required to be done under section 44AB (e ) |
3. AUDIT REQUIREMENT A question that’s commonly asked is, is audit applicable if a person declares losses or profit at less than the presumptive rate even if turnover is within the prescribed limit of 1 Crore or 10 Crores? The answer is a BIG NO.
Up to the year 2016, there was a clause in section 44AD that required a taxpayer to maintain books and get them audited if he declares income less than the presumptive rate or declares losses.
In Finance Act 2016 this clause was replaced by a new clause. Under the new clause, the audit is required only if a taxpayer has declared income at a presumptive rate in any of the previous five years but wants to declare losses or income at less than the presumptive rate in the current year, provided his total income in the current year exceeds the basic exemption limit.
4. Thus the audit is required to be done in the following cases: –
(a) The businesses whose turnover exceeds 10 crores. (Cash receipts and payments do not exceed 5% of total receipts and payments respectively in case of such transactions, hence threshold limit of 10 crores is applicable)
(b) A person engaged in business who has OPTED for presumptive taxation (8%/6%) in any of the last 5 years but does not opt for the same in the current year.
5. ILLUSTRATION: –
Mr. Anupam started trading in F&O for the first time during PY 2019-20. He OPTED for presumptive taxation scheme and declare income @ 6% of the turnover.
In PY 2020-21, His income from salary is Rs 6 Lakhs, turnover from F&O is 10 lakhs & losses from F&O are Rs 2 Lakhs.
If he wishes to report & carry forward F&O losses, he is required to get a tax Audit in PY 2020-21. Further, he will be ineligible for the presumptive taxation scheme for the next 5 years i.e. up to 2025-26.
In the above example, if Mr. Anupam started trading in F&O for the first time in PY 2020-21 and has not opted for PTS in any of the last 5 years, the tax audit is not required to be done.
6. VALIDATION ERROR IN ITR 3 Be careful and do not tick yes under the heading – Audit Information “Are you liable to get audited under section 44AB “, otherwise there will be a validation error at the time of submitting the return
7. CONCLUSION: It can be concluded that a person who incurred losses in F&O in AY 2021-22 and not opted for a presumptive taxation scheme in any of the last five previous years is not required to get Tax Audit under section 44AB.
Be careful and do not tick on the TAB “Are you liable to get audited under section 44AB “. Otherwise, there will be a validation error at the time of submitting the return
******
Disclaimer: The article is for education purposes only
The author can be approached at caanitabhadra@gmail.com
Author Bio
Hi ,
I have fno loss of 1.5 lakh but turnover does not exceed the 1 CR .
Do i need tax audit if i want to show my fno loss in ITR ? i don’t have profit in fno , its loss only
F&O T/O – 7.33 crore
F/O loss – 95000
sort/long term gain- 73000
no other income source
is audit required?
i filed first time ITR and my filed ITR2 where F/O loss not shown. what should i do?
Ma’am until last year I used to file ITR2 as didn’t have any F&O trading but this year I have some small volume of F&O trading, less than 1 lakh turnover so will file ITR3.
I have some Long term capital losses from 2020-21 which I am carry forwarding every year and settling against Long term capital gains. my question is, due to change in ITR form this year from ITR2 to ITR3 – will I be able to carry forward and settle those Balance long term capital losses against long term capital gains this year as well or change of form will cause of problem.
kindly advise.
You can claim LTCG even filing ITR 3
Change of ITR Form will not have any adverse effect on claiming LTCG loss.
Thank you Anita Ma’am
I HAVE F&O T/O OF Rs. 1.5 CR AND PROFIT OF Rs. 5 LAC SHOULD I NEED TO GET TAX AUDITED
mam I have fno turnover of 95 lakh. My total receipts are more than 10 cr for FY 22-23. total profit from fno is 5 lakhs.
Do I need to get books of accounts audited under section 44AB? I have only Fno trading as business.
Gross receipt is not relevant to ascertain Audit Applicability.
If the absolute turnover ( total of profit & losses) exceeds Rs 10 crore, tax audit is required to be done.
Mam,
I was showing my business profit in presumptive scheme till now. This year I have f&o losses as well. Can I continue to show my business profit in presumptive scheme ( turnover > 1 cr) and f&o loss separately or tax audit is required?
Tax Audit is required if you wish to report F&O losses . You can’t continue both :- show business profit in presumptive scheme and F&O loss separately.
Hello Anita Mam
If a person who is filing his ITR of his professional income till earlier years under PTS now in AY he has losses from FnO can adjust this loss from his professional income let say income from profession Rs 10 lacs and losses of FnO Rs 20 lacs net taxable income negative Rs 10 lacs below the maximum basic exemption limit , can law allow him to stay away from Tax audit because turnover is also below Rs 10cr , in my earlier post I ask all same as above but forget to add one point, if audit mandatory in his case is there any provision to save him from audit ……. He is ready to declare his professional income under same PTS as earlier……… Pls suggest
Tax Audit is required. Otherwise he need to considered 50% of his gross professional receipt as income and pay tax ( in spite of having loses ) on it.
Hello Mam
One of my client having income from profession of Rs 12 lacs in AY 2022-23 and losses from F n O business of Rs 18 lacs we are declaring her income from profession till AY 2021-22 under PTS . My question is since we are declaring her income under PTS in earlier years can now we adjusting FnO loss from her profession income result of which Taxable turnover will be in negative (₹ -6 lacs) can file her ITR of AY 2022-23 without tax audit since taxable turnover of current period below maximum basic exemption and turnover from FnO is also below 10 Cr ……. pls suggest
Tax Audit is required
IF Being in PTS you are trying to show profit less than 6/8% or less than 50% in case of profession you have to conduct audit
Hi,
I started trading in FY 20, and has filed trading income as business income (rather than STCG). Till FY 21, I never had sold any stock after holding it longer than 1 yr. In FY 22, I sold shares both with holding period less than 1 yr and more than 1 yr (first time ever). Can I continue to classify former (less than 1 yr) as business income but LTCG for those held for more than 1 yr.
All these transaction are done from same zerodha account.
CBDT vide circular 6 of 2016 clarified that a taxpayer can opt ( only once ) to pay tax as business income or capital gain of his share market transactions.
Once the option is exercised , it can be changed in subsequent years .
You have to report share transactions as business income only.
But as I understand, this is a separate choice for short-term and long term holdings.
I had classified short-term gains as business income, which I will continue to do as before.
I had never classified long-term gains as business income so far. Since this is the first time I am booking long-term capital gains, wouldn’t I get a this first time option for this category?
The circular mentions long-term separately, hence I am making this query
Hi,
The circular says separately about long term capital gains.
I had only treated short term capital gain as business income so far, and continue to this.
Wouldn’t I get this option to chose for long term also as I am first time selling shares after holding for more than a year
I HAVE F&O T/O OF Rs. 2.8 CR AND PROFIT OF Rs. 4.8 LAC SHOULD I NEED TO GET TAX AUDITED?
Tax Audit is not required
Very well summarised.. Appreciate the effort of author..
This article helps clarify very basic but common doubts on interplay of sec 44AB with 44AD, for which even many professionals didnt seem to have clarity about. Wishing the best to you, Anita Bhadra ji..
Thanks a lot Sir for your humble comment.
Dear MAM, Following is a part mentioned by you in Article –
In Finance Act 2016 this clause was replaced by a new clause. Under the new clause, the audit is required only if a taxpayer has declared income at a presumptive rate in any of the previous five years but wants to declare losses or income at less than the presumptive rate in the current year, provided his total income in the current year exceeds the basic exemption limit.
My question is that what relevance of last line i.e. “provided his total income in the current year exceeds the basic exemption limit”.
Read more at: https://taxguru.in/income-tax/tax-audit-requirement-f-o-transactions.html
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If total income itself is less than basic exemption limit ( of Rs 2,50,000) , Return filing and tax Audit will loss its relevance .
It is not mandatory to file return / get tax Audit for a person having total income less than basic exemption limit
Thank you very much Ca Anita ji. for your good guidance on tax audit requirement for F&O transactions.
Thank you Sir for your humble comment .
1.)2L from salary.
2.)3.8L approx from coaching fees which i file under 44AD every year.
This year i traded in options on intraday basis with a turnover around 5 Cr.(Calculated using total receipt from sale + total of all profit and loss balance excluding negetive sign), i have incurred loss around 3.5Lakhs .
I have skipped the options part while filing the return as i don’t want to carry loss.
My question is that is it ok to skip the options part from return filing if i dont want to carry forward losses. Moreover AIS, TIS,26AS did not showed any info regarding my turnover of options.
And what is the correct way of determing turnover in options trading
Please advise
ITR under 44AD this year also as you had opted presumptive tax scheme and paid tax under 44AD till last year.
You wish to opt out from the scheme, books of account are required to be maintained and also you are liable for tax audit.
It is not OK to skip the option part from return filing in tax audit cases.
For options, apart from the absolute profit (addition of profit and loss), the premium received on sale is also added to derive total turnover
mam do we still need to add the premium part for the option t/o as all the brokerage firm providing their tax pnl is only taking profit and loss in absolute terms for calculating the t/o and even ICAI has clarified it ?
Hello Mam
Appreciate the way you clarified this critical topic..
Thanks for sharing your knowledge with us.
Thanks a lot for your humble comment . It really motivates to do even better.
Respected mam, I m a central gov employee. My FnO turn over is 5 crores and loss is 8 lakhs and my income is 6.3 lakhs. Is audit required since loss is more than income? And if audit happens , my employer ll know about it by CA or IT or vigilance dept ? Wat are the auditing charges? Kindly reply mam🙏 I ll be grateful for u.
Audit is not required . Audit has nothing to do with the fact that profit is more than loss or vice versa .
Hello Mam,
Really Appreciated your knowledge.
I am totally confused and required your guidance.
I am salaried person having salary 2.4lacs.
having business income around 2.30 lacs
this year incurred F & O (commodity) loss Rs.2.25lacs
short term capital gain from equity and mutual fund is Rs.13296
can you please guide
is i have to report F & O loss in business and profession?
is i have to go for tax audit?
I dont want to take set off losses.as i dont have more income.
i have not opted in any year for presumptive basis.
your prompt reply is appreciated.
(a) You have to report F&O losses in Business – Profession (ITR 3 ).
(b) Tax Audit is not required
(c ) Do not skip reporting F&O losses as anyway you are having business income and need to file ITR 3 ( Your income from business will be set off against F&O losses & you can save a lot of tax )
Dear Madam,
I have to declare F&O loss of 2.5L with turnover of 5.67L and total income (other sources, interest/dividend etc of more than 3L) and it is more than exemption limits.
I have not used presumptive taxation in past 5 years.
I filled up ITR3 with option of maintaining accounts (as per 44AA) as Yes and I had selected “Are you liable to get audited under section 44AB?“ as NO.
Finally ITR3 shows validation error “You have claimed income less than 8% of Gross Turnover and audit information is not filled up” and I stopped myself uploading the ITR3 further to avoid any future issues with IT.
I don’t know why system is throwing this error as we did not even fill Gross Turnover anywhere in F&O declaration and we did not select Yes for audit option.
Does it mean audit is mandatory in my case?
Thanks in advance
Section 44AB(e) of the Income Tax Act clearly states that Audit of Account is required only if provision of 44AD(4) is applicable and 44AD(4) is applicable when a person had opted for presumptive scheme in any of the last 5 years.
Still in some cases , the portal is showing the error .
The option available with the taxpayer is to say “No” for option of maintaining Accounts and enter the loss from F&O amount in P&L Schedule under the head ” Other Exp Debited to P&L Account ”
( Disclaimer : this is my view based on analysis and interpretations of I tax Provisions)
Madam,
I have to declare F&O loss of 2.5L with turnover of 5.67L and total income (other sources, interest/dividend etc of more than 3L) and it is more than exemption limits. I have not used presumptive taxation in past 5 years.
I filled up ITR3 with option of maintaining accounts (as per 44AA) and without audit option, Finally ITR3 shows validation error “You have claimed income less than 8% of Gross Turnover and audit information is not filled up” and I stopped myself uploading the ITR3 further to avoid any future issues with IT.
I don’t know why system is throwing this error as we did not even fill Gross Turnover anywhere in F&O declaration.
Does it mean audit is mandatory in my case?
Thanks,
Raghu
Hi
I have salary income 12 L
F&O loss 14L turnover 37 L
LTCG & STCG total below 1 L.
Othersource 50000
Is it required to do tax audit.
Tax Audit is not required.
but mam while filing ITR 3 its showing a message that income declared less than GP. Shall i ignore the same
Select the correct option ” No Audit / No Account .
Enter the Loss/ Profit amount in P&L
in ITR 3 i shown receipt from trading as income and reported corresponding purchases and expenses. Is i right mam
Technically , it is right but this may lead to validation error .
In case , you find validation error , enter the net loss/ profit directly in P&L Account.
Its not taking loss in business income in P&L. and if entering more expenses than profit than not taking expenses further… taking maximum loss to zero.
Hello Ma’am,
1. Senior citizen having pension income and is less than 3,00,000/
2. Loss from options business of 67,000/ and turnover is 32,00,000/ .
Filed ITR 3 and showed it under normal business with Profit and Loss and Balance sheet. Is this treatment correct?
Yes Sir
It is correct .However enter pension amount also in ITR 3 in the Schedule Salary.
Madam
Filled ITR -1 in assesment year 2021-22
I have salary incom 11 lac
Start F n O This year,
Turn over 56 lac
Loss 5 lac
Is audit applicable?
Which option I have to chosses 44 AA or 44 AB?
I HAVE TO MAINTAIN P & L ACCOUNT OR NOT
I have a client who is a doctor earning professional income and also salary separately. I showed his prof receipts under 44ADA until last year but in current year he have F&O loss of 6lakhs.
Can i opt out of 44ADA and show loss- Is tax audit required?
44AD will not allow you to report losses as in presumptive scheme for professionals , tax is to be paid on 50% of gross receipt ( even if there is a loss)
You have two options :(a) pay tax on 50% of gross receipt and file ITR 4
(b) File ITR 3 and go for Tax Audit ( As you had opted presumptive scheme last year )
Hi Anita,
Salary income 9.90lakhs
Options losses 5.5 lakhs
Options turnover 4.5 crore.
Tax To Paid 65000.
Can I file my fno loss and reduce my Tax?
F & O losses can be set off from all the incomes other than Salary Income . ( Cannot be set off from Salary Income)
If you have any other income , the F&O losses can be set off otherwise it can be carry forward and set off in next 8 financial years from F&O income
Hello,
I have incurred a Loss of Rs. 2500 in FO Transactions during FY 2021-22 AY 2022-23 and FO turnover is 1.7L during this period. My other income is above 2.5L. Do I need to go for Tax Audit? I have never opted for presumtive scheme before.. How do I file my return for FO?
You are not required to go for Tax Audit .
File ITR 3 and report F&O transactions in P&L Schedule
For FY 2021-22 FNO turnover 55 lakh FNO loss 1.5 lakh Salary income 6.5 lakh per annum(have form 16) Which ITR need to be filled ? Is Audit required ? If yes,What are the total charges applicable?
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ITR 3 is to be filed .
Audit is not required unless you had opted Presumptive Tax Scheme in any of the last 5 financial years.
This comment is just to applaud and appreciate the efforts of this CA lady and I must say, this article is GOLD.
I had been searching for the answers if I really need to go for an audit or not and this article has answered my queries like ABCD.
Thank you dear Anita for such a detailed and Lehmann language explanation.
and special thanks for mentioning that ITR-3 people getting that audit popup is actually a glitch/error. that doubled my confirmation and confidence while submitting ITR without audit.
I wish you a lot of success and glory.
Is it possible for you to share your email id/contact details so that I can get in touch with you in the future if needed for professional services!!
Big thanks!
Thank you so much Sir for your humble comment . It really means a lot to me. I will certainly try to do even better.
My e mail id is caanitabhadra@gmail.com
Since I am not practicing CA and working for PSU under MOD , use of mobile is restricted.
Feel free for any further queries through e-mail.
Hi Anita,
Professional income 4.5lakhs
Interest income 3 lakhs
Options losses 3.7 lakhs
Options turnover below 1 crore.
Form to be filed?
Can I opt for pts for professional income and normal losses for options?
Is tax audit mandatory in this case.
You can opt for PTS and and pay tax on 50% of your gross receipt (Professional Income + Interest + F&O sale Value)
ITR 4 is required to be filed and Tax Audit is not required
mam what do you mean by f&o sale value here , is it f&o turnover in absolute terms or Total F&O sale value ?for eg i bought an option and sold it for 5 lacs ( both purchase + sale i am saying) and profit was lac , which value to be used as per your saying F&O sale value ?
I have minor losses from F&O trade, turnover is also very small. But I had chose PTS in the last five years for my consultancy work.
In the current year, I have only income from Salary and Other sources, can I simply choose to declare income @6% for F&O Turnover and file ITR4, or I need to compulsorily declare F&O loss and go for tax audit, thanks for your answer.
Consultancy business is considered as profession . You can report 50% of total gross receipt ( including income from other sources ) as income and pay tax under sec 44AD.
Tax Audit is not required in that case.
Anita ji,
I read all the comments/queries and according to these, audit is not required if someone has F&O losses but his total income (salary+other sources) is higher than basic exempt limit.
is that accurate?
Thanks.
These are two different aspects of taxation . If Salary and other income is more than exemption limit , one has to pay tax and file return .
Audit is not required if your turnover is less than Rs 10 crores , even if there is a loss from F&O Business .
In case , you had opted presumptive in any of the 5 preceding years and now would like to report losses in F&O , Tax Audit is required
I have FO loss to declare and total income (other sources) is more than exemption limits. I have not used presumptive taxation in past.
I filled up ITR3 without audit option and finally it shows validation error “You have claimed income less than 8% of Gross Turnover and audit information is not filled up”
Does it mean audit is mandatory in my case?
Providing F&O loss numbers for your accurate guidance…
I have to declare F&O loss of 2.5L with turnover of 5.67L and total income (other sources, interest/dividend etc) is more than exemption limits. I have not used presumptive taxation in past 5 years.
I filled up ITR3 with option of maintaining accounts (as per 44AA) and without audit option, Finally ITR3 shows validation error “You have claimed income less than 8% of Gross Turnover and audit information is not filled up”
Does it mean audit is mandatory in my case?
I have a query on presumptive tax.
Lets say if I have a turnover of 50lakh and profit of 10lakh on option trading.. Then, can I opt for presumptive tax and pay tax only for 6% of turnover, i.e, 3lakh profit and do away with the rest?
Apparently Yes , but there are number of rules and provisions with Pros & Cons are attached with Presumptive Tax Scheme.
In your example , if say next year you incurred a loss , then either need to pay tax @ 6% or go for Compulsory Tax Audit
Hi Anita,
Thank you very much for your inputs.
May I know where can I read the provisions, Pros & Cons associated with Presumptive taxation option. Kindly share a document or url where I can find the details.!!
My mail id:avinashpv.83@gmail.com
An excellent article covering all the aspects of presumptive taxation scheme – e- mailed to you.
Hi – Can you please me the documentation which talks about the need for auditing and presumptive tax details in a business income involving F&O (non- speculative) transactions?
For FY 20211-22
options loss of 3.5lacs
Turnover is around 4.3cr
Is Audit required in this case?
Audit is not required unless you opted Presumptive taxation in any of the last 5 years
For FY 20211-22
FNO turnover 2.5 crore
FNO loss 6 lakh
Salary income 6.5 lakh per annum(have form 16)
Which ITR need to be filled ?
Is Audit required ?
If yes,What are the total charges applicable?
ITR 3 is required to be filed.
Tax Audit is not required
i have fno income of 2.5 lacs and turnover of 1.5cr. for FY2021-22 which i did for first time. I have never opted for presumptive taxes before. do I need audit? I fall under 20% tax bracket if i add above income to my salary.
Audit is not required , but you can not add the amount in Salary . You need to report it as Business Income n ITR 3
mam,
FOR filing of F&O which schedule is to be filled in ITR 3 FOR REPORTING THE RELEVANT DATA LIKE TURNOVER, PROFIT AND LOSS AND DEDUCTABLE EXPENSES?
(for both cases, presumptive income is not opted and opted
PL ADVICE.
ITR 3 is required to be filed
Thanks for your humble comment .
Get your Accounts Audited by a Chartered Accountant and submit report along with you I T Return
Tax Audit is not applicable .
ITR 3 is required to be filed
I am a salaried person. I have started trading in F&O in FY 2020-21. My F&O turnover is 4.08 crore and i booked loss of 3.70 lakhs in FY 2020-21. Is tax audited applicable to me? Also which ITR is applicable to me?
On most of the places you will see that audit is compulsory in your case. But after reading this article you can see that audit is not applicable and ITR-3 is applicable for you.
Feel free to contact in case you need any assistance in filing your ITR.
8979471599
One of my clients f&o turnover is 17 crore and he booked loss of 20 lakhs, how can his books get audited.
where does income from investment in mutual funds added ,under business head or capital head?
does transaction cost added to turnover?
Big thanks for clarifying tax audit doubts!!
Profit or loss on redemption / sale of mutual fund units is taxable under Capital Gain.
Transaction cost will not be added to the turnover.
Thanks for your humble comment.
Can you clarify more clear for Debt & Equity, for short term gains.
Debt is added to income slab right for resident & non resident and not 15% correct? if above or below BEL?
Equity short term MF gains is tax free if below BEL and 15% if above BEL both res. & NRI?
Your understanding is correct . Gain on Debt funds will be added in total income and will be taxed as Slab rate.
For Equity Funds , STCG and LTCG can be adjusted against income Basic Exemption Limit and on balance amount applicable rates will be applicable
These are applicable to NRI also . The only difference is that in case of NRI , TDS is applicable whereas for residents , there is no TDS on such gains.
Good Clarification CA Anita Ji!! Thanks