Computation of Turnover and applicability of Tax audit for F&O Transactions
Ideally when you deal in Futures and Options, the transaction size is big but profits are too small. Therefore confusion prevails that whether these transactions can be termed speculative transaction or they are business losses or profits.
Further computation in case of business losses, Tax audit limit will apply on transaction value or it applies on margin earned or lost in F&O.
For answering these questions we need to analyze each provision and need to resolve query one by one.
Page Contents
- 1. Whether the F&O transactions can be termed as speculative transaction?
- 2. Whether provisions of Tax Audit under Section 44AB will apply in transaction in F&O?
- 3. How to compute turnover limit in F&O?
- 4. If the transactions are based on delivery, how will the same be treated?
- 5. Can losses be carried forwarded in case of loss in F&O?
1. Whether the F&O transactions can be termed as speculative transaction?
Ans: Section 43 subsection 5 has excluded transaction of future and options as speculative transaction. However exemption is available only for equity. Thus if F&O for commodities are done the same will be termed as Speculative in Nature. Other then commodity trading profit or loss arising out of transaction is treated as Business Loss or profit in nature.
Any expense done in connection to this business will be allowed as expense and can be claimed while preparing Tax computation.
2. Whether provisions of Tax Audit under Section 44AB will apply in transaction in F&O?
Ans:
- In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. 1 crore.
- If the turnover from such trading exceeds Rs. 1 crore but less than 2 crore then the audit can be avoided if we can show the profit at minimum 8% (6%, if all trades are digital).
- Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 8% (6%, if all trades are digital) of the turnover from such transactions.
- Further, please note that any turnover more than 2 crore then audit u/s 44AB will irrespective applicable
3. How to compute turnover limit in F&O?
Ans: In normal business turnover is based on sales and thus reaching the limit takes time. But in F&O it reached easily as each lot is valued high, Limit is reached easily. Therefore computation method need be different. Thus for computing turnover limit Following things should be added:
a. Profits from the trade
b. Loss from the trade
c. Premium received from sale of Options
d. In case of Reverse Trade, difference should also be added
This can be explained by way of illustration. Below are four Components:
a. Profits from the trade – INR 100000
b. Loss from the trade – INR 150000
c. Premium received from sale of Options – INR 50000
d. In case of Reverse Trade, difference – INR 75000
Thus the for the purpose of 44AB, turnover will be 100000+150000+50000+75000 = Rs.375000/-
4. If the transactions are based on delivery, how will the same be treated?
Ans: if the transaction is based on delivery the same will be treated as Capital Gains and provisions of Capital Gains would apply.
5. Can losses be carried forwarded in case of loss in F&O?
Ans: Yes Losses can be carried forward subject to following conditions:
i. Return should be filed on or before due date:
ii. Loss should be disclosed in the return
iii. Set off is not allowed against Salary Income
iv. Loss should not be of Commodity trading.
Conclusion: Based on the above discussion it can be said that F&O from equity cant be termed as speculative loss and provisions related to profit and gains apply. However computation needs to be done carefully in order to avoid the litigation. Further profit margin also need to be identified as if its below 8% (6%, if all trades are digital) same would be liable to tax Audit under section 44AB.
About the Author: The Views Expressed in the article is personal opinion of author. The author is CA and CS by profession and one can reach him on @hemanshow79 on twitter or mail queries on hemanshow79@gmail.com. The article can be said as reference material. However courts can take different opinion based on nature and circumstances of each case.
Tax Audit Limit for Business Rs. 2 Crore & for Profession Rs. 1 Crore
Republished with Amendments
Let’s Assume, That the Turn Over in F&O as calculated above is 2.50 Crore.
Total Agreegare Cash Transaction in the books is Rs. 15,000/- only.
My Question is Whether Tax Audit is applicable in case where Turn Over is Below 5 Crore and the Agreegate Cash Transactions are Below the Threshold of 5% as stated in Section 44AB of Income Tax Act (As amended by Finance Act applicable from 01.04.2020)
Hi,
Kindly let me know whether tax is payable on profit earned or whether tax is payable as % of turnover.
NV.
How to determine purchase values in p & l account to calculate taxable profit?
Respected Sir
Reference to 8% I presume it as 8% of turn over in Future ,trade. Whether it is correct?
Regards
Respected Sir,
Please review my calculation of turnover from option trades for the purpose of applying provisions of sections 44AB and 44AD. All the trades assume quantity traded as one.
1. Short Sell option contract1 for value Rs 100. The option expired worthless (hence effective buy price = 0). Turnover = ABSOLUTE (100 – 0) = 100
2. Buy option contract2 for value Rs 50. The option expired worthless (hence effective sell price = 0). Turnover = ABSOLUTE(0 – 50) = 50
3. Short Sell option contract3 for value Rs 100. Five days later, Buy it back for Rs 10. Turnover = ABSOLUTE(100 – 10) = 90
Total Turnover = 100 + 50 + 90 = 240 Please provide the correct calculation if I am making a mistake
Because the guidelines as per IT act for all non-speculative transactions say that turnover to be determined as follows:
The total of favorable and unfavorable differences shall be taken as turnover
Premium received on sale of options is also to be included in turnover
In respect of any reverse trades entered, the difference thereon should also form part of the turnover.
Some are saying the Turnover should be calculated as follows:
4. Buy option contract4 for value Rs 50. Five days later, Sell it back for Rs 70. Firstly, the favorable/unfavorable difference or profit/loss ABSOLUTE(70 – 50) = 20 is the turnover. But premium received on sale also has to be considered turnover, which is Rs 70. So total turnover on this option trade = 20 +70 = Rs 90.
5. Short Sell option contract5 for value Rs 100. Five days later, Buy it back for Rs 10. Turnover = Firstly, the favorable/unfavorable difference or profit/loss ABSOLUTE(100 – 10) = 90 is the turnover. But premium received on sale also has to be considered turnover, which is Rs 90. So total turnover on this option trade = 90 +90 = Rs 180.
I think for derivatives trading the turnover is defined as Settlement profits or losses (in case of futures and in case of option again same) unless you write the option and receive premium then premium amount is turnover where the 2nd clause of the guidelines comes into effect “Premium received on sale of options is also to be included in turnover”.
Please let me know if Examples 1,2,3 are correct or Examples 4, 5 are correct for calculation of Turnover ?
Appreciate your quick response on this query!
As far as equity/commodity derivative transactions entered through stock exchanges in India are concerned, there is lot of confusion amongst the members as regards identification of speculative transactions for the purpose of I.T. Act. Here is the key-
A] Following stock exchanges are notified as recognized stock exchanges for the purposes of clause (ii) of Explanation (1) to clause (d) of proviso to section 43(5)(w.e.f. A.Y. 2006-07):
(1) NSE & BSE Notification No. SO 89(E), dated 25-1-06.
(2) MCX stock exchange Ltd. Notification No. SO 1327(E), dated 22-5-09
(3) United Stock Exchange of India Ltd. Notification No. 12/2011, dated 25-2-11
Therefore, eligible transactions (in equity or commodity derivatives) entered into in the above stock exchanges shall not be treated as ‘speculative transactions’ for the purpose of I.T. Act in view of saving clause (d) of section 43(5). The date of recognition of stock exchanges is irrelevant and all the eligible transactions entered therein w.e.f. 1-4-2006 shall be nonspeculative for the purpose of Incometax Act.
B] Following stock exchanges are notified as recognized ‘associations’ for the purposes of clause (iii) of Explanation(2) to clause (e) of proviso to section 43(5)(w.e.f. A.Y. 2014-15):
(1) National Commodity & Derivative Exchange Ltd. Notification No. SO 3513(E), dated 27-11-13.
(2) Universal Commodity Exchange Ltd. Notification No. SO 3514(E), dated 27-11-13.
(3) Multi Commodity Exchange of India Ltd. Notification No. SO 3539(E), dated 29-11-13.
(4) Ace Derivatives & Commodity Exchange Ltd. Notification No. SO 843(E), dated 20-3-14.
Therefore, eligible transactions [Chargeable to CTT] entered into in the above recognized ‘Associations’ shall not be treated as ‘speculative transactions’ for the purpose of I.T. Act w.e.f. A.Y 2014-15 in view of saving clause (e) of section 43(5).
[Note: Agricultural commodities which are not liable to CTT are almond, barley, cardamom, castor seed, channa/gram, copra, coriander/dhaniya, cotton, cotton seed oilcake/kapasia khali, guar seed, isabgul seed, jeera, kapas, maize feed, pepper, potato, rape/mustard seed, raw jute, red chilli, soya bean/seed, soymeal, turmeric, wheat]