Turnover Computation & Tax audit applicability for F&O Transactions

Speculative Transaction

As per Section 43(5) of the Income Tax Act, 1961, any transactions relating to purchase and sale of commodity, shares and scripts settled without taking delivery (this means the purchase or sale won’t enter Demat account) will be treated as “Speculative transaction”. Thus, intra-day trading in stocks is a speculative transaction.

However, trading in derivatives and F&O transaction including commodity derivatives on a recognised stock exchange will not be considered as a speculative transaction (even though the delivery is not taken) and thus, F&O transaction is a Normal business transaction / Non-speculative transaction.

Turnover for the purpose of determining whether tax audit is applicable to F & O Trading or not is calculated a little differently. Based on the guidance note of ICAI, following items should be considered to constitute turnover:-

1) The total of positive and negative differences

2) Premium received on sale of options is also to be included in turnover

3) In respect of any reverse trades entered, the difference thereon But not the total value of contract.

Tax Audit in case of Futures and Options 

1) In the case of profit from derivative transactions, tax audit will be applicable if the turnover from such trading exceeds Rs. 1 crore.

2)If the turnover from such trading exceeds Rs. 1 crore but less than 2 crore then the audit can be avoided if we can show the profit at minimum 8% (6%, if all trades are digital).

3) Tax audit u/s 44AB r/w section 44AD will also be applicable, if the net profit from such transactions is less than 8% (6%, if all trades are digital) of the turnover from such transactions.

Further, please note that any turnover more than 2 crore then audit u/s 44AB will  be applicable irrespective of Profit and Loss

 4) If there is loss in F&O trading or the Net profit is less than 8% (6%, if all trades are digital) of the turnover or the turnover exceeds Rs. 1 crore, then provisions of Tax Audit are applicable and in order to get tax audit done, maintenance of books of account are mandatory.