Table of Contents
What is Tax Audit and Future and Options Trading?
Tax Audit is defined under section 44AB of the Income Tax Act. Click here for the full text of this section.
Future and Options Trading is also called derivative Trading. Please click here for a brief explanation.
Every Trader trading in Future and options is been told to get his accounts audited before filing his Income Tax returns. I saw some traders are not filing the Income Tax returns in case of Losses & lose the benefits of carrying forward of Loss.
Is Tax Audit mandatory for Future and Options (Derivative) trading?
Futures and Options Trading is always treated as a business transaction and not a speculation transaction in the Income Tax act. Therefore the Profits or Losses are taxed under the head Income from Business.
Maintenance of Books of Accounts (Sec. 44AA of Income Tax Act) :
For Future and Options trading the books of accounts are to be mentioned as per clause 2 of Sec.44AA of the Income Tax Act. Click here for the full text of this section.
Definition of Turnover for Derivative Transactions :
Futures Trading:-
The absolute value of Favourable and Unfavourable Transactions (i.e. Profits + Losses) – (Ref. Note 1)
Options Trading:-
The absolute value of Favourable and Unfavourable Transactions (i.e. Profits + Losses) + Sale value of Option – ((Ref. Note 2)
Note 1 : For Buying or Selling of Future contracts, the trader never pays the full value of the contract but pays the Margin amount calculated by Exchange at a certain percentage. He maintains this margin while he is holding the position with the Mark to Market on daily basis. After the position gets squared off, the margin gets released & the difference will be Profit / Loss. Therefore the total of Profit + Loss is considered as his Turnover.
Nore 2 : Usually Options are traded for hedging. The trader pays a premium prevailing in the market. Therefore the Turnover is calculated as in 2 steps. 1st The total of Profit + Loss. In 2nd Step, Add the Premium received on sale of Option.
Maintenance of Books of Accounts, Sec. 44AA :
The statement of the Broker itself can be treated as maintenance of Books of Accounts. Therefore this condition gets satisfied.
Turnover & Tax Audit :
Consider the Turnover calculated with the above calculations for arriving at the limit of Sec.44AB of Income Tax for Tax Audit. Since all the transactions took place through Bank, the thresh hold Turnover will be Rs. 5Cr. (FY 2020-21) & 10Cr. From FY 2021-22 to get the books of accounts audited.
In case of Loss from Derivative Transaction :
The applicability of Sec.44AB is based on the Turnover specified therein. (The formula for calculating Turnover is given above).
If the Turnover is still under the limit of Sec.44AD, still you can declare the profit @ 6% of the Turnover & avoid a Tax Audit. (Compare the additional cash outflow as per your requirement to decide). Click here to read the full text on Section 44AD.
Conclusion :
Tax Audit –
Always it is not necessary to get the accounts audited under Sec. 44AB of Income Tax for Derivative Transactions (F&O Transactions) which are either in Profits or in Loss.
Carry forward of Loss –
You can also carry forward the Derivative Loss without Tax Audit.
