Nowadays, when it comes to trading on the stock exchange, futures and options (F&O) take the lead as the most popular types of asset derivatives. In fact, it’s become pretty normal to engage in share trading and F&O trading.
In the past decade, Futures & Options trading in India has experienced an astounding surge, with trading volumes reaching an all-time high of over 1 billion contracts annually. This staggering growth demonstrates the immense popularity and increasing appetite for risk-taking among Indian investors in the derivatives market.
Many of my clients are ignorant of the taxability of F&O, Is tax audit compulsory for F&O loss, turnover for F&O for tax audit, can F&O loss be set off against business income, and how it will be shown in their Income tax returns? Is it mandatory to show these transactions in return? Set off and Carry forward of F&O losses, Require to maintain books of accounts? I thought it important to put it down in one place for everyone’s benefit.
When it comes to trading in Futures and Options, it is a business transaction. It’s interesting to note that for tax purposes, any gains or losses incurred fall under non-speculative business income/loss, as per the provisions of the Income Tax Act.
Surprisingly, many salaried individuals who trade in F&O might not even realize they are essentially running their own businesses!
And here’s a mind-boggling fact: According to a recent update by SEBI, a whopping 9 out of 10 F&O traders end up incurring losses. It just goes to show the challenging nature of this trading game!
Maintaining Books of Accounts
In the following cases, you have to maintain Books of Account, if you fulfill the criteria.
Are you an Individual or HUF dealing in F&O BUT not claiming PTS (Presumptive Taxation Scheme u/s Sec 44AD?
AND
Is your Taxable Income more than Rs.2,50,000?
OR
Does your Turnover exceed Rs.25,00,000/-?
Yes! Then, it is mandatory for you to maintain Books of Account, under the Income Tax Act.
| Assessee | Taxable Income | Turnover |
| Individual/HUF | >2,50,000/- | >25,00,000/- |
| Others | >1,20,000/- | >10,00,000/- |
Books of Account u/s Sec 44AD
No Requirement to maintain Books of Account, provided declared profits as per Sec 44AD(>=6% of Turnover) in case of F&O transactions.
How to Calculate F&O Turnover for income tax
Allow me to explain the method for calculating turnover specifically for (F&O) purposes: The total of positive and negative or favorable and unfavorable differences.
| Turnover | Total Turnover |
| (1,00,000) | 1,00,000 |
| +5,00,000 | 1,00,000+5,00,000=6,00,000 |
| (25,000) | 6,00,000+25,000=6.25,000 |
Turnover / Sales upto INR 2Crores, ITR applicability?
ITR-3 if opted out of PTS and regular income tax returns of business income including all other incomes applicable.
ITR-4 for PTS(Presumptive Taxation scheme) u/s 44AD for F&O transactions including all other incomes applicable.
Tax audit for F&O transactions
For the purpose of auditing the books of accounts, it is necessary for you to engage the services of a practicing Chartered Accountant (CA). The tax auditor plays a crucial role in ensuring that the books of accounts are maintained accurately.
They provide a comprehensive report, highlighting observations and including the necessary information in the tax audit report. The requirement for a tax audit is based on the turnover, sales, or gross receipts of the business or profession.
An important update regarding the tax audit limit was announced in the 2021 budget by the Finance Minister. Taxpayers who conduct 95% of their transactions in the digital mode now have a tax audit limit set at 10 crore rupees.
What is Section 44AD?
Section 44AD is the presumptive taxation scheme for businesses.
A resident individual or partnership firm can opt for the presumptive taxation scheme on business income. You can declare 6% of your total receipts as Income from the business. As F&O trading falls under the category of eligible business u/s 44AD, turnover limit is Rs. 2Crore.
Why does Section 44AD affect F&O transactions?
Let’s start by highlighting a crucial point: Futures and options (F&O) transactions are classified as business income according to the Income Tax Act. Consequently, the rules outlined in section 44AB regarding tax audits are also applicable when it comes to F&O trading
Tax Audit For F&O LOSS
SECTION 44AB
Section 44AB(a) Every person carrying on business shall get his accounts audited if the total turnover exceeds Rs. 10 crores. (in the case of F&O 95% or more are digital transactions, hence a threshold of Rs 1 crore is not applicable)
Section 44AB(e) The audit is required to be done If subsection (4) of section 44AD is applicable & taxable income exceeds the basic exemption limit
SECTION 44AD
Section 44AD(1) An assessee whose turnover is up to Rs 2 crores can opt to declare taxable income @ 6% of total turnover in the previous year
44AD(4) An assessee opted for a presumptive tax scheme under sec 44AD (1) cannot opt-out from the scheme for the subsequent five years. In case, he wants to opt-out and declares losses or income at less than the presumptive rate in the current year, the audit is required to be done under section 44AB (e) in order to set off of F&O losses and/or carry forward of F&O losses unabsorbed during the current year.
Tax Audit Requirement for F&O LOSS
The 44AD loss problem
The most common question asked is, Do I need to get a tax audit done for losses from Futures and Options? is audit applicable if a person declares losses or profit at less than the presumptive rate even if turnover is within the prescribed limit of 10 Crores? Is tax audit compulsory for F&O loss?
The answer is a BIG NO.
Tax audit is not mandatory,
- Trading turnover doesn’t exceed 10 crores.
- Trading turnover doesn’t exceed 2 crores and has opted for Presumptive Taxation Scheme u/s 44AD and declared deemed profit @6% of Turnover.
Tax audit is mandatory if,
- Tax audit u/s 44AB will be applicable if turnover exceeds 10 crores
- Opts out of presumptive taxation scheme in the current year and the net profit from such transactions is less than 6% of the turnover or has incurred F&O loss and Taxable income exceeds the minimum exemption limit.
This is because of the language of Section 44AD:
(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).
(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.
Under the new clause, the audit is required only if a taxpayer has declared income at a presumptive rate in any of the previous five years but wants to declare losses or income at less than the presumptive rate in the current year, to either claim a set off of such losses against other incomes or carry forward of unabsorbed losses from F&O to future years, and his taxable income in the current year exceeds the basic exemption limit not chargeable to tax, then tax audit is compulsory.
F&O Loss Carry Forward
Since profit from Futures and Options (F&O) trading is regarded as regular business income, it will be subject to the normal tax rate applicable to the taxpayer and is considered to be non speculative business loss.
On the other hand, losses incurred can be set off against income within the same category, excluding speculative business income and income from other sources except for salary Income.
Any unadjusted F&O Business losses can also be carried forward as ‘Loss from Business & Profession’ for up to eight assessment years, allowing for adjustment against future profits and gains from business and profession.
Tax Audit for F&O Illustration:
Mr. Reddy started trading in F&O for the first time during PY 2021-22. He OPTED for presumptive taxation scheme and declare income @ 6% of the turnover. In FY 2022-23, his income from salary is Rs 6 Lakhs, turnover from F&O is 10 lakhs & losses from F&O are Rs 2 Lakhs.
If he wishes to set off & carry forward F&O losses, he is required to get a tax Audit in FY 2022-23. Further, he will be ineligible for the presumptive taxation scheme for the next 5 years i.e. up to 2027-28.
But If, In the above example, Mr. Reddy started trading in F&O for the first time in PY 2022-23 and has not opted for PTS in any of the last 5 years, the tax audit is not required to be done.
Tax Audit for F&O Applicability
| Turnover | Profit | Total Income | Presumptive opted in earlier years | Tax Audit |
| >10 crores | <6% | >2.5Lacs | Yes | Applicable |
| >10 crores | >=6% | <2.5Lacs | No | Applicable |
| <10Crores | <6% | >2.5Lacs | Yes | Applicable |
| <10Crores | >=6% | <2.5Lacs | No | Not Applicable |
Tax audit charges for F&O trading
Minimum Audit fees would be RS.25,000 and ITR would be either ITR-3 or 4 depending on Presumptive or regular business income along with all other incomes. ITR fees would be Rs.5,500.
Income Tax on F&O Trading in India
Slab Rates if F&O Traders opt for New Tax Regime
| Taxable Income (INR) | Slab Rate |
| Up to 2,50,000 | NIL |
| 2,50,001 to 5,00,000 | 5% |
| 5,00,001 to 7,50,000 | 10% |
| 7,50,001 to 10,00,000 | 15% |
| 10,00,001 to 12,50,000 | 20% |
| 12,50,001 to 15,00,000 | 25% |
| More than 15,00,000 | 30% |
Can F&O loss be set off against business income
F&O gains (or losses) are business income Income from trading in derivatives is treated as business income by the tax authorities. Even if the investor is a salaried taxpayer, a partner in a company or a pensioner, the gains (or losses) from futures and options will be treated as business income.
CONCLUSION:
We can draw the conclusion that individuals who have experienced losses in Futures and Options (F&O) trading during the assessment year 2023-24 and have not chosen the presumptive taxation scheme in any of the preceding five years are not obligated to undergo a Tax Audit as per section 44AB for AY 2023-24.
When you’re filing your tax returns and need assistance in your Futures and Options (F&O) transactions and determining whether a Tax audit is applicable in your case, feel free to contact me! Happy to help.
FAQ’s
Is tax audit applicable for F&O?
Tax Audit is not mandatory if Trading turnover doesn’t exceed 10 crores Or Trading turnover doesn’t exceed 2 crores and has opted for Presumptive Taxation Scheme u/s 44AD and declared deemed profit @6% of Turnover.
Tax audit is mandatory if, Tax audit u/s 44AB will be applicable if turnover exceeds 10 crores or Opts out of presumptive taxation scheme in the current year and the net profit from such transactions is less than 6% of the turnover or has incurred F&O loss and Taxable income exceeds the minimum exemption limit.
Is tax audit applicable in case of F&O loss?
The answer is a BIG NO, if you have not opted for a presumptive taxation scheme in any of 5 previous years u/s 44AD and have not opted out in the current year for claiming set off of F&O loss or for carrying forward to future years for set off against incomes except Salary Income.
What is tax audit for F&O trading?
Tax Audit in case of Income from trading in F&O.
Since the Income from F&O Trading is considered as a normal business income, normal provisions of the Income Tax Act will apply in this case. The trader would be required to prepare normal books of accounts under Section 44A of the Income Tax Act.
How do I avoid tax audits for F&O loss?
You can avoid Tax Audit for F&O Loss, provided it is your first year of F&O loss or you have been into F&O trading in past years but have never opted for presumptive taxation in any of the 5 preceding FY’s.
How do you calculate F&O turnover for tax audit?
Positive and negative turnover when added gives total turnover, for the purpose of determining tax audit applicability.
Is it mandatory to report F&O losses in ITR?
It is mandatory to report your total income in ITR filing. Any income/loss missed to be reported may call for scrutiny from the Income Tax Department. Now with complete digitization and AIR reporting from stock exchanges to Income Tax departments, it is not advisable to leave any transaction unreported.
Also, reporting of F&O loss is beneficial in setting off against incomes except salary income and carries forward for 8 AY’s for set off.
What is tax audit not applicable?
If the total sales, turnover, or gross receipts do not exceed Rs 10 crore in the financial year, then tax audit will not apply to such businesses. If you have opted for a presumptive taxation scheme and shown income at 6% or more of turnover, then a tax audit is not applicable