Taxpayers especially those who are salaried but trade in Futures & Options (hereafter referred to as “F&O”), make the mistake of not reporting these in their tax return. You may receive a notice from the tax department for non-compliance.
Trading in F&O must be reported as PGBP income unless you have only a few trades in the financial year which classifies under the head Capital Gains. Reporting an activity as a business means you can claim expenses from earnings of your business as well.
Keeping Accounting Records:
Once your activity is treated as a business, there are some other tax rules that may apply. In case you are running a business in the capacity of an individual or a HUF, the requirement to maintain accounting records would arise if your income exceeds Rs 2.5 lakhs. Keeping your trading statements, expense receipts and bank account statements shall mostly suffice.
Tax Audit Implications:
Determining Turnover for applicability of Tax Audit for F&O trading :
Turnover for the purpose of determining whether tax audit is applicable to F & O Trading or not is calculated quite divergently as follows:
1. The total of favorable and unfavorable differences shall be taken as turnover.
2. Premium received on sale of options is also to be included in turnover. (Call or Put Premium paid/received)
A salaried taxpayer who trades in F&O can fall into Tax Audit provisions (sec.44AB) in two scenarios:
Scenario 1: Taxpayer do not opt for presumptive taxation u/s 44AD (i.e. having turnover more than Rs. 1Cr.)
Scenario 2: Taxpayer opting for presumptive taxation u/s 44AD but declare an income lower than the presumptive income and such income (after setting off F & O losses or other business losses if any) exceeds the maximum amount not chargeable to tax i.e. Rs 2.5 lakhs.
Example for Scenario 1:
Mr. Jhunjhunwala buys 10,000 units of Futures @ Rs 250 and sells at RS 970. Mr. Jhunjhunwala also buys 500 units of options @ Rs 20,000 and sells at Rs 19,900. This is how his turnover would be determined:
| Particulars | Calculation | Amount |
| Profit on sale of Futures | 10,000 * 720 | 7,20,000 |
| Loss on sale of Options | 500*100 | 50,000 (negative ignored) |
| Premium on sale of options | 500*19,900 | 99,50,000 |
| Total Turnover | 1,07,20,000 | |
In the above example, since the turnover exceeds Rs.1Cr. Tax Audit is applicable to the assessee as per sec. 44AB.
Example for Scenario 2:
Mrs. Nirmala works with BCG Ltd and has earned a salary of Rs 12 lakh in FY 2019-20. Mrs. Nirmala opened a trading account with a brokerage firm. When Mrs. Nirmala looked up his trading statement she found that she has incurred a loss from F&O aggregating Rs 2.8 lakhs. Her total turnover being Rs. 40 lakhs (determined on the basis of the method discussed above). Mrs. Nirmala is unsure if she should report her trading activity from F&O or she can ignore it, since there is a loss. Mrs. Nirmala must report her F&O trading as a business. Her F&O expenses detail is as follows:
| Income (loss) from F&O | |
| Loss from F&O | Rs 2,80,000 |
| Less: expenses of F&O | Rs 1,04,400 |
| Total F&O loss | Rs 3,84,400 |
| Total taxable income of Nirmala | |
| Salary Income | Rs 12,00,000 |
| Non-speculative loss | Rs 3,84,400 |
| Total taxable income | Rs 12,00,000 |
In the given case, there is a business loss of Rs. 3,84,400. Mrs. Nirmala had opted for presumptive taxation u/s 44AD in the last year i.e. FY 2018-19. Thus, it becomes mandatory for her to opt presumptive tax u/s 44AD. The presumptive income @ 6% of her turnover i.e. Rs. 40 Lacs that comes to Rs 2.4 lacs which is more than loss of Rs 3,84,400. Further, the total taxable income is Rs. 12,00,000 which are greater than the basic exemption limit of Rs 2.5 lakhs. Thus, Tax Audit becomes compulsory and filing of balance sheet and profit and loss in the income tax return are mandatory in this case.
Non-Compliance:
If an assessee fails to maintain books of accounts, or do not get its audit done, penalties shall be applicable as per the Income Tax Act. The penalty leviable for non-maintenance of accounting records could go upto Rs 25,000 under Section 271A.
Further a penalty equal to lower of Rs 1.5 lakhs or 0.5% of gross receipts or sales or turnover can be levied under Section 271B for not getting books audited under Section 44AB.
We would love to help you out in any of these areas and make your tax compliance more user-friendly and less cumbersome.
Please feel free to contact us at hitarth.sheth@bhaskara.in/info@bhaskara.in
Research & Publishing Team:
CA Hitarth Sheth (Partner at BCG)
Hitanshu Sheth (Intern at BCG)
The article is very informative and upto to the point
Thanks a lot, Dhairya. We hope, the upcoming articles do serve the purpose of being informative too.
Very informative article, just one query is if I purchase Futures today and square off it on 10th day–then
Each day end MTM in absolute terms to be taken for turnover calculation till my position is open or purchase day and 10th day should compare for turnover?
Very informative article, just one query is that if I have purchased futures today and I square off it on 10th day–then whether to take absolute differences of daily MTMs for turnover till my position is open or purchased day and 10th day will have to compare for absolute difference?