This article aims to demystify the taxability of Future and Option transactions, shedding light on essential aspects such as business categorization, turnover calculations, audit requirements, and the maintenance of books of accounts.
We know that now a day people have moved toward Share Market and that too in Future and Option transection. Few people know what is future and option. They do not know, that profit and loss of derivative trading is compulsory to be shown in Income Tax Return, whether books of account are to be maintain?
Let’s try to understand about the taxability of these transactions.
Page Contents
1. Business Categorization and Section 43(5):
First of all, trading of future and option is a business transection, as per Section 43(5), of the Income Tax Act, 1961, is considered as non-speculative business income. For this purpose the Institute of Chartered accountants of India has issued a guidance note. When salaried people are doing these types of transections, they do not know this is business activities.
2. Audit Requirements – Section 44AB:
When we considered this activity as business activity, please remember that as per Section 44AB of the Income Tax Act, Every person’s carrying on business shall, if his total sales, turn or gross receipts , as the case may be, in business exceeds rupees one crore rupees in any previous year, get his accounts of such previous year audited by an accountant, before the specified date.
As per the guidance note issued by the Institute of Chartered Accountants, turnover is to be calculated as under:
- Total turnover means amount of Profit or loss
- Premium received on option sale is also to be considered as turnover.
- If there is a reverse trend, the difference will be turnover.
To understand the above in case of Futures turnover is to be calculated as under:
|
Future |
Unit | Purchase | Sale | Total | Total | Turnover | |
| Price | Price | Sale | Purchase | ||||
| A | B | C | D | E=B×D | F=B×C | G | |
| Nifty | 50 | 6800 | 16250 | 812500 | 84000 | -27500 | |
| Tata Steel | 425 | 1048 | 1290 | 548250 | 445400 | 102850 | |
| Bank Nifty | 50 | 35000 | 35000 | 1750000 | 1750000 | – | |
| Total Turnover | 130350 | ||||||
Option Turnover:
| Options | Units | Purchase | Sale Price | Difference | Premium | Turnover |
| A | B | C | D | E=B×D | F=D×B | G |
| Nifty 16000CE | 150 | 325 | 220 | -15750 | 33000 | 48750 |
| Tata Steel 1200PE | 425 | 148 | 190 | 17850 | 80750 | 98600 |
| Bank Nifty 33000CE | 125 | 455 | 405 | -6250 | 50625 | 56875 |
| Total Turnover | 204225 |
The above figures of turnover is only for the income tax purpose, which decide whether audit is required or not. As per section 44AB, turnover of assesse, who is doing business in previous year exceeds rupees one crore rupees, tax audit is necessary. If, under any case cash receipts or cash payments exceed 5% of gross receipts or gross payments, then the limit of rupees one crore will be rupees five crores. From financial year 2021-22 i.e. assessment year 2022-23 limit of turnover is increase from rupees five crore to rupees ten crore.
3. Eligibility for Section 44AD:
Transections of futures and options are also covered as eligible business. Any tax payer comes under the eligible business, then section 44AD, that is approximate income may select for their income. In this types of cases section 44AB (e), audit will require only when their profit is less than 8% or 6% of their gross turnover.
In case of a loss audit is not compulsory but assesse are doing their books of account audited.
4. Books of account to maintain [Section 44AA (2)]
All the assesse, who is doing business and his business income is more than Rs. 1,20,000 or turnover is more than rupees ten lakhs has to main books of accounts. In the case of a Individual or HUF income limit is Rs. 2,50,000 and turnover limit is of rupees twenty five lakhs.
If an assesse choose to declare his income u/s 44AD, he is not required to maintain books of account.
5. Tax Implications of Future and Option Profit/Loss:
Derivative business income is considered business income, subject to normal tax rates. While profits from futures and options are categorized as normal income, losses can be set off against other business income. However, speculative losses cannot be offset against business income or any other income.
6. Treatment of Loss:
Losses in Future and Option transactions can be carried forward under the head “Income from Business or Profession” for up to eight years.
Conclusion:
In conclusion, engaging in Future and Option transactions entails various financial responsibilities, including accurate accounting, audit adherence, and understanding tax implications. This article has aimed to provide a comprehensive guide to navigating these complexities, ensuring individuals involved in such transactions are well-informed and equipped to meet their financial obligations effectively.
Author Bio
Very good compilation Shah sahab for calculation of turnover in case F&O transaction.