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trading and, Derivative trading (F & O trading) is normal now a days. You will
not believe nearly 14.3 million new investors added by the depositories in the
year ended 31 march 2021. Further, we cannot deny the role of digitalization
and platforms available to invest in stock and derivative market.
Most
of people step-in into it without having knowledge about its taxability and how
it will be show in their Income tax return? Is it compulsory to show these transactions in
return? Require to maintain books of accounts? You will get answer of all of
these questions.
Let’s
dig deep into this. Assuming you all know about the future and option. Let’s not
go into the definition part.
Trading
in Future and option is a business transaction. Yes, you read it correctly. as per section
43(5) of the income tax act, 1961. It is non-speculative business income. One can also refer Guidance Note
on tax audit by ICAI pg 25.
So,
it is clear that Income from “Future and option trading” is a normal business
income.
Salaried
people who are doing F&O transaction are actually doing business
unknowingly. Many are incurring and
losses and some are in profit too.
Calculation
of turnover for the Income tax purpose
Method
of calculation of turnover is not provided under the income tax act, 1961. But given
in Guidance
Note on tax audit by ICAI pg 25 as follows.
(i)
The total of
favourable and unfavourable differences (Profit/Loss) shall be taken as
turnover.
(ii)
Premium
received on sale of options is also to be included in turnover.
(iii)
In respect of
any reverse trades entered, the difference thereon, should also form part of
the turnover.
Table 1 : Example of calculation of turnover of
Futures:
|
Future |
Units |
Buying Rate (C) |
Selling Rate (D) |
Total Sell |
Total Buy |
Turnover |
|
(A) |
(B) |
(E=BxD) |
(F=BXC) |
(G) |
||
|
Nifty |
50 |
₹ 6,800 |
₹ 16,250 |
₹ 8,12,500
|
₹ 8,40,000 |
₹ -27,500 |
|
TataSteel |
425 |
₹1,048 |
₹ 1,290 |
₹ 5,48,250
|
₹ 4,45,400
|
₹ 1,02,850
|
|
BankNifty |
50 |
₹ 35,000 |
₹ 35,000 |
₹ 17,50,000
|
₹ 17,50,000 |
₹ -
|
|
Total Turnover |
₹ 1,30,350 |
|||||
Table
2 : Example of calculation of turnover of Options:
|
Options |
Units |
Buying Rate (C) |
Selling Rate (D) |
Difference |
Premium Received |
Turnover |
|
(A) |
(B) |
(E=(B-)xD) |
(F=DXB) |
(G) |
||
|
Nifty
16000CE |
150 |
325 |
220 |
₹ -15,750 |
₹ 33,000 |
₹ 48,750 |
|
TataSteel 1200 PE |
425 |
148 |
190 |
₹ 17,850 |
₹ 80,750 |
₹ 98,600 |
|
BankNifty 36000 CE |
125 |
455 |
405 |
₹ -6,250 |
₹ 50,625 |
₹ 56,875 |
|
Total Turnover |
₹ 2,04,225 |
|||||
Requirement
of Audit:
Let
me remind you again this calculation of turnover is only to determined that what
will be the position under income tax. On the basis of turnover, we decide tax
audit is required or not.
Section
44AB of the Income tax act,1961 provides that:
Every
person carrying business shall, If his turnover is exceed one crore in
any previous year, require to get his accounts audited by an accountant.
In
case cash receipts and cash payments does not exceed 5% of total payments or
receipts 1Crore will be read as 5Crore. For Financial Year 2021-22 this 5Crore
limit is further extended to 10Crore.
As
F&O trading is also falls under the category of eligible business (turnover
limit is Rs. 2Crore). So, income can also be shown under section 44AD of the
income tax act, 1961 on presumptive basis if assessee also is eligible assessee.
In
this case audit under section 44AB clause (e ) of the act, will be required only if declared profits are
less than 8% or 6% ( As the case may be) of the total turnover.
Note:
In all the cases of loss audit is not mandatory. But in general practice and to
deal with future litigation this practice followed.
Maintaining
Books of Accounts:
As
per section 44AA(2) of the income tax act, 1961,
Every person carrying business, require to
maintain books of accounts the Income from the business exceeds Rs. 1,20,000 or
the turnover exceed Rs 10Lakh.
(Limit
for Individual and HUF (Hindu Undivided Family) of Income is Rs. 2,50,000 and for
turnover is Rs25 lakhs.)
One
who declaring Income according per section 44AD of the act not require
to maintain books of accounts.
But
If his income exceed the basic exemption limit not chargeable to tax i.e. Rs. 2,50,000
and profits are not declared according to the provisions of section 44AD
then require to maintain books of accounts and also get them audited U/s
44AB.
Can
be conclude as
|
Case |
Opted for 44AD |
Declaring profit |
Remark |
|
1 |
Yes (Turnover is less than Rs. 2Cr.) |
According to 44AD |
Neither require to maintain books of accounts nor audit |
|
2 |
Yes (Turnover is less than Rs. 2Cr.) |
Less than 8% or 6% as the case may be or declaring loss |
Require to maintain books of accounts and audit. |
|
3 |
No (Turnover is less than limit given under 44AB) |
Profit or loss whatever is the case |
No audit, maintain books of accounts if limit of 44AA is
crossed |
|
4 |
No (Turnover is more than limit given U/s 44AB) |
Profit or loss whatever is the case |
Audit and maintaining books of accounts is mandatory |
Accounting
Entry for transactions:
One
can do accounting on the basis of differences. Let’s take Table 1, Nifty transaction as an example.
Transaction
incurred loss of Rs. 27500, Journal entry will be as follows:
Future
and options Profit and loss A/c Dr. 27,500
To Stock Broker A/c 27,500
(Being
loss incurred on Nifty Future transaction)
In
case profit entry will be reversed.
Or one can also keep record by maintaining inventory.
Keep in mind turnover for Income will not match with accounting turnover. Cause
to calculate turnover under Income tax absolute figures are considered.
Tax on Income, Set-off and carried forward
of losses:
As it is considered as normal business
income. Profit from F&O trading will be taxed at normal tax rate applicable
to assessee.
Loss can be set off from intra head income
except speculative business income and inter head income except salary income.
Loss can be carried froward as “Loss from
Business & profession” for next 8 assessment years and can be adjusted with
profit and gains for business and profession.
Disclaimer:
This
article is solely for educational purpose and cannot be construed as legal and
professional opinion. It is based on the interpretation of the author and are
not binding on any tax authority. Author is not responsible for any loss
occurred to any person acting or refraining from acting as a result of any
material in this article. You can reach author at caharshalisalvi@gmail.com