Trading in shares and derivatives (F&O trading) is commonplace today. You won't believe that the depositories added approximately 14.3 million new investors during the year that concluded on March 31, 2021. We also cannot ignore the influence of digitalization and the platforms available for stock and derivative market investing.
The majority of people enter it without understanding its taxability or how it will be reported on their income tax return. Is submitting proof of these transactions required? required to keep accounting records? You will receive all of these questions' answers.
Let's examine this in detail. Assuming that everyone is aware of the possibilities. Let's skip the defining section.
Futures and option trading is a commercial transaction. You did indeed read it right. according to the 1961 Income Tax Act's Section 43(5). It is corporate revenue that is not speculative. One may also refer to the ICAI's Guidance Note on Tax Audit, page 25.
Therefore, it is evident that "Future and Option Trading" income is a typical business income.
Salaried individuals who conduct F&O transactions are essentially unintentionally conducting business. Many people are losing money, but some people are also making money.
Before AY 2022- 23, the calculation of turnover for income tax purposes
The 1961 Income Tax Act does not provide a method for calculating turnover. But the following is stated on page 25 of the ICAI's guidance note on tax audits.
(i) Turnover is calculated as the sum of all favorable and unfavorable variations (Profit/Loss).
(ii) Premiums received from option sales must also be counted toward turnover.
(iii) The difference from any reverse trades that are executed should be included in the turnover.
Calculation of revenue for income tax purposes beginning in AY 2022- 23
Laws and regulations must evolve with the times. The calculating technique for turnover has also undergone certain adjustments from the ICAI in order to comply with the Act's requirements.
According to the most recent General Notice on Tax Audit under Section 44AB published by the ICAI, the premium shall be calculated as follows.
(i) Turnover is calculated as the sum of all favorable and unfavorable variations (Profit/Loss).
(ii) Premiums received from option sales must also be counted toward turnover.
However, in cases where the premium earned is taken into account when calculating net profit for transactions, the same shouldn't be taken into account separately.
(iii) The difference from any reverse trades that are executed should be included in the turnover.
Example of futures turnover calculation according to Table 1 above
Example of how the turnover of options is calculated:
When trading options, traders will frequently square off their positions. For example, if a trader purchased a call option and paid the premium, he will sell the option and collect the premium, resulting in a profit or loss.
according to a revised guidance note If the premium is taken into account when computing net profit, it will not be used again in the computation. If it is excluded from the net profit calculation, the premium will be added to the turnover.
Audit requirements
Let me remind you once more that this turnover calculation solely determines the situation under income tax. We determine whether a tax audit is necessary or not based on turnover.
According to Section 44AB of the Income Tax Act of 1961
"Everyone who does business must have their accounts audited by an accountant if their annual revenue exceeds one crore.
If the percentage of cash payments and receipts is less than 5%, 1 crore will be translated into 5 crore. This 5 crore cap is increased to 10 crore for the financial year 2021- 2022."
Due to the fact that F&O trading is also an eligible business. Therefore, if the assessee is also an eligible assessee, income may also be indicated under section 44AD of the Income Tax Act of 1961 on a presumptive basis.
In this scenario, an audit pursuant to subsection (e) of section 44AB of the Act will only be necessary if declared profits are lower than 8% or 6%, as applicable, of total turnover.
Note: Auditing losses is not always necessary. It varies from case to case. However, this technique was adopted in general practice and to deal with pending lawsuits.
Maintaining Account Books
According to the 1961 Income Tax Act's Section 44AA(2),
Every person conducting business is required to keep books of accounts if their revenue exceeds Rs. 1,20,000 or their annual sales surpass Rs. 10 lakh.
(The limit for individual income and HUF (Hindu Undivided Family) turnover is Rs. 25 lakhs.)
A person who declares income in accordance with Section 44AD of the Act is exempt from the requirement to keep books of accounts.
However, if his income exceeds the basic exemption limit, which is Rs. 2,50,000, and earnings are not reported in accordance with section 44AD, then he must keep books of accounts and have them audited under section 44AB.
Tax on Income, Setoff, and Losses Carried Forward
Because it is regarded as typical corporate revenue. Profit from F&O trade will be taxed at the assessee's regular tax rate.
Losses can be offset against intra- and inter-head revenue, but not against speculative business income or salary income.
For the following 8 assessment years, a loss may be carried forward as "Loss from Business & Profession" and may be modified with business and professional profit and gain.
The author has 6+ years of experience in GST, Income Tax, Auditing and Financial Planning. He can also be reached at ajaakarshjain16@gmail.com
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