Future and Options is a derivative tool which was designed to hedge a portfolio but we all are aware that it has become one of the most traded instruments for regular gains. Hence Income Tax has realized the above and the Income from Future and Options is taxable under the head ‘Income from Business and Profession’ (PGBP) under normal business income.
India has become one of the biggest markets where options are traded as per NSE Data.
Whenever we trade options especially when we sell an option the value of the transaction is very much high hence what should be considered as Turnover is a million-dollar question.
Formula to calculate Turnover in F&O.
- We need to download the P&L/ Tax P&L summary from your brokers website , in that we shall go to realized P&L.
2.Copy and paste all the gains / losses from the summary and remove the minus sign in case of a loss.
- Your Gains + Losses (after minus sign has been removed) shall be your turnover for the year.
For example, there are 4 trades in a year in which gains and losses are as follows –
Rs. 2,50,000, Rs. 7,50,000, Rs. -1,50,000 and Rs. -75,000.
Remove the minus sign above hence the turnover shall be (Rs. 2,50,000 + Rs. 7,50,000 + Rs. 1,50,000 + Rs. 75,000) = Rs. 12,25,000.
When is Tax Audit Required?
Tax Audits are required in 2 cases –
- If you have losses in a financial year trading F&O.
- If your turnover exceeds Rs. 5 crores in a Financial Year (From FY 2020-21). (Upon fulfilment of certain conditions.)
If any of the case is applicable for you then you require your books to be audited by a Chartered Accountant in Practice, otherwise Income Tax can levy a penalty equal of Rs 1.5 lakhs or 0.5% of turnover whichever is lower under Section 271B for not complying with section 44AB.
Also, a penalty of Rs. 25,000 can be levied u/s 271A for non-maintenance of books of accounts.
- What happens to your Loss if same has been declared while filing the return along with Tax Audit Report?
You are eligible to carry forward the unadjusted losses to 8 A.Y and can be adjusted only from Non-Speculative Income.
In Current year it can be set off from any head except salaries and speculative income and some other special business incomes.
- What if assessee is also engaged in Intraday Equity Trades and Equity Trades where holding period is more than 1 day.
In the above-mentioned case if Intraday is also carried on (should have significant transaction) then the income / loss from above shall be declared in the head “PGBP” as speculative income. Their losses are carry forwarded to 4 A.Y and can only be setoff with speculative income. Similar to F&O in case of loss Tax Audit is mandatory, also tax audit is mandatory in case turnover is more than 5 crore (after fulfillment of certain conditions), however turnover calculation is different in above mentioned case. If the number of transactionsis limited like say 10 in whole year it can also be clubbed under “Capital Gain”.
In case equity is held for more than 1 day it shall be taxed under head Capital Gain and it may be short term capital gain or long-term capital gain depending upon holding period. Tax Audit is not required in case of short term or long-term capital loss from sale of equity shares.
- Can we claim expenses of trading while filing the return?
Yes, you can claim expenses like brokerage, internet bill, turnover tax, STT and other related charges as expenses. You should have justification that the expenses are related and are incidental to the business.
e.g., Internet Bills, Brokerages, Stamp Duty, STT, Fines and penalties levied by exchanges are some of the general expenses related to trading in cash or F&O.
- Is Digital Signature Token Compulsorily Required?
If your books are required to be audited by a chartered accountant then you compulsorily require a digital signature token to upload the return and accept the Tax Audit Form.
Minimum of Class 3 Signing DSC is required. If you have a DSC which is of higher version it will sustain the purpose and it can be used.
- What if you have a turnover and which is not substantial and that is only source of Income – is Tax Audit Required in that case?
According to our opinion if you have a loss of less than 2 lacs and that is only source of income, then you might proceed without tax audit declaring the income u/s 44AD (6% Case) provided the turnover is not substantial, say less than 20 lacs as no income tax shall be payable in that case, also in next year you can have an income till 5 lacs so that you don’t have to pay any taxes.
Name: CA Akhil Kumar
Qualification: CA in Practice
Company: Akhil Amit And Associates