INTRODUCTION:

Taxpayers often receive many defective return notices from CPC in case of  having business income in the form of future and option trading income regarding non -filing of balance sheet and profit and loss account or for wrong compliance of Tax Audit u/s 44AD/44AE/44ADA . This article shall try to flag off all the confusions regarding tax compliances with regard to future and option trading.

WHAT IS THE NATURE OF INCOME FROM FUTURE & OPTION TRADING?

After the provisions of Section 43(5) were amended by finance Act 2005, trading in derivatives on a recognized stock exchange fell outside the purview of business of speculation. Therefore, income from future and option transactions will be considered as Non –speculative and treated as a normal business income and loss from such transactions will be considered as normal business loss.

CALCULATION OF TURNOVER FOR F&O TRADERS:

While calculating turnover the following three things should be taken into consideration:

    • The sum of favorable and unfavorable difference shall be included in turnover. Aggregate of both positive as well as negative differences is taken into turnover in case of derivatives, futures and option transactions.
    • Premium received on sale of options is also included in turnover.
    • Any reverse trades entered, the difference should also form part of the turnover.

To make it clearer let’s take an example: Mr. Z buys 5000 units of Futures of ABC Ltd. at Rs. 200 and sells it at  Rs. 180. He also buys 4000 units of futures of XYZ Ltd at Rs 220 and sells it at Rs 300.

Loss made Mr. Z= 5000*(200-180) = 100,000(Negative is ignored in turnover)

Profit made by MR. Z= 4000*(300-220) = 320,000

Therefore, total turnover shall be 4,20,000 although income of Mr. Z is 2,20,000. For computation of turnover of futures, the total of positive and negative or favorable and unfavorable differences shall be taken as turnover.

WHAT ARE THE ALLOWABLE EXPENSES FOR F&O TRADERS?

Expenses that can be claimed by F&O trader are the following associated expenses:

  • Broker’s Commission
  • Subscription to trading journals
  • Internet and telephone charges
  • Depreciation on assets for e.g. computers used for trading
  • Consultancy expenses if any;

MAINTENANCE OF BOOKS OF ACCOUNTS BY F&O TRADERS

The income from F&O trading is normal business income so books of accounts are to be prepared as per the normal provisions of Section 44AA of the Income Tax Act.

Maintenance of books of accounts is mandatory in case turnover from F&O transactions exceeds Rs. 1Crore.

However, if F&O trader has availed presumption scheme under section 44AD,turnover’s limit is extended up to Rs. 2Crores and maintenance of books of accounts is mandatory only if declared profit is less than 6% of Turnover.

NOTE: Since F&O transactions are mainly undertaken through banking channel 6% profit on turnover has been taken in the article instead of 8%.

APPLICABILITY OF TAX AUDIT:

a)  In case turnover from futures and options is more than 1crore, Tax audit is APPLICABLE U/S 44AB.

b) In the case turnover from futures and options exceeds 1crores but up to 2crores,tax audit shall be APPLICABLE if net profit from F&O transactions is less than 6% of turnover and total income is more than minimum exemption limit (Section 44AB R/W section 44AD).

c) If the Assessee has turnover above 2crores, Tax audit is APPLICABLE U/S 44AB irrespective of profit or loss declared.

TAX AUDIT APPLICABILITY IN CASE OF LOSS IN F&O

Even in case of loss, books are required to be maintained and audited only if in the previous 5 financial years we have taken the benefit of Section 44AD i.e. presumptive taxation and now we are not reporting as per Section 44AD by showing losses or lower profit than 6% of turnover. {Section-44AD (4) AND 44AD (5)}. The presumptive scheme of tax is only applicable to traders whose annual turnover is less than Rs. 2 Crores. In case the small trader feels that his income is less than 6%, he would be required to shift to the Normal Scheme of Taxation and prepare all books of accounts and keep copies of all invoices.

CARRY FORWARD AND SET OF LOSSES

F&O trading losses are non-speculative losses and can be set-off against any other head of income except salary income in the same assessment year. So they can be set-off against interest income, rental income, capital gain, but only in the same assessment year.

You can carry forward non-speculative losses to the next 8 years; however, it is important to note that carried forward non-speculative losses can be set-off only against any non-speculative gains made in that period.

For e.g. Miss Supriya has salary income of 5lakhs, interest income 3lakhs, intra-day transactions loss Rs 2lakhs, loss from F&O trading of Rs 4 lacs in FY 19-20. What would be my tax liability?

SOL:  speculative loss (Intra-day loss) =Rs 2,00,000

Non-speculative loss=Rs 4,00,000

Income under head salary=Rs 5,00,000

Income from other sources=Rs 3,00,000

INCOME FROM SALARY 5,00,000
INCOME FROM OTHER SOURCES

INTEREST

3,00,000
LESS: NON-SPECULATIVE LOSS

FUTURE AND OPTION LOSS

(3,00,000)
TOTAL INCOME 5,00,000

F&O loss can be set off from any income other than salary and hence can be set off against interest income. Remaining loss of Rs 1 lacs can be carried forward for next 8 years against only business income. Loss from intra-day trading loss of Rs. 2 lacs is of speculative nature and can be set off only against speculative income. So it can be carried forward to be set off against speculative income for subsequent 4 assessment years.

WHICH ITR FORM IS TO BE FILED?

Since F&O trading is classified under business income we cannot file ITR1 and ITR2. We can use ITR 3 AND ITR4.

ITR3 can be filed for F&O trading income and also if any capital gains are to be reported.

ITR 4 is similar to ITR3 but with a presumptive scheme if you are using Section 44AD. It cannot be used to disclose any capital gains or if losses have to be carried forward under any head of income.

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