Tax Audit : Important Points for Futures & Options Traders

Tax Audit at a Glance: Important Points for Futures & Options Traders

Income Tax Treatment of Futures & Options Traders

• Under the Income Tax Act, Futures & Options Traders on a recognized stock exchange is treated as a non-speculative business activity u/s 43(5). Therefore, profits are taxed as business income, and losses are treated as business losses. Tax audit applicability is determined based on F&O turnover, profit disclosed, and other prescribed conditions. And Traders may also explore the presumptive taxation scheme u/s 44AD, subject to eligibility conditions.
• Futures & options traders may be an individual trading from a personal demat/trading account; a proprietor; a partnership firm; an LLP; and a company engaged in derivative trading. In simple words, anyone earning profits or incurring losses from futures & options contracts is generally referred to as a futures & options trader.

• Understanding whether a tax audit applies to your Futures & Options Trading income is crucial for ensuring timely compliance and avoiding unnecessary tax disputes. The applicability of a tax audit depends on factors such as turnover, the proportion of digital transactions, and whether you have opted for the presumptive taxation scheme.
• Tax audit requirements for Futures & Options Traders depend on turnover, profit levels, digital transaction thresholds, and whether the presumptive taxation scheme u/s 44AD has been opted for.

Tax Audit: Important Points for Futures & Options Trader

Futures & Options Traders’ Turnover up to INR 1 Crore

• U/s 44AD, tax audit is generally not required if the prescribed presumptive income is declared.
• Under normal provisions, tax audits are ordinarily not applicable.

F&O Turnover between INR 1 Crore and INR 2 Crore

• If opting for Section 44AD, tax audit may apply where profits are declared below the prescribed rate and total income exceeds the basic exemption limit.
• Under normal provisions, tax audits are generally not required where the prescribed digital transaction conditions are satisfied.
• Turnover up to INR 2 crore u/s 44AD: If you opt for the presumptive taxation scheme u/s 44AD and declare profits at or above the prescribed rate, you can generally avoid a tax audit.

Futures & Options Traders Turnover between INR 2 Crore and INR 3 Crore

• U/s 44AD, declaring profits at 6% or more can help avoid a tax audit.
• If profits are lower than 6% or a loss is incurred, audit applicability should be examined based on the relevant provisions.
• Under normal provisions, a tax audit may not be required if the digital transaction threshold conditions are met.

F&O Turnover between INR 3 Crore and INR 10 Crore:

• Section 44AD is not available as turnover exceeds the eligible limit. Under normal provisions, a tax audit is generally not required if the enhanced digital transaction threshold conditions are satisfied.
• Turnover between INR 2 crore and INR 10 crore: A tax audit may not be required if the prescribed conditions relating to digital transactions are satisfied.

Futures & Options Traders Turnover Above INR 10 Crore:

• Tax audit becomes mandatory as the prescribed turnover threshold is exceeded. Turnover exceeding INR 10 crore: A tax audit is generally mandatory where the F&O turnover exceeds INR 10 crore.

Don’t Forget: Calculate Futures & Options Turnover Correctly

How is futures & options turnover calculated?

• Futures & Options Turnover = Absolute Profit + Absolute Loss + Option Premium Received on Sale of Options.
• Since Futures & Options turnover is computed differently from regular business turnover, correct calculation is essential before determining tax audit applicability.
• Before assessing tax audit requirements, ensure that your Futures & Options turnover has been computed accurately. Futures & options turnover is calculated differently from regular business turnover, and an incorrect calculation can lead to an incorrect conclusion regarding audit applicability.

Important Note on the 5-Year Lock-in u/s 44AD in Futures & Options

If you opt for the presumptive taxation scheme u/s 44AD:

• You are generally expected to continue under the scheme for five consecutive assessment years.
• Opting out by declaring lower profits or losses may restrict your eligibility to claim the benefits of Section 44AD for the next five assessment years.
• Depending on the facts of the case, this may also result in tax audit implications under the Income Tax Act.

• Opting out of presumptive taxation: If you declare lower profits or incur a loss after opting for Section 44AD, tax audit provisions may apply subject to the conditions prescribed under the Income Tax Act.
• Losses do not automatically trigger a tax audit: Merely reporting a trading loss does not make a tax audit compulsory. Audit applicability depends on turnover, digital transaction criteria, and other relevant provisions of the Act. The final position depends on turnover, profit declaration, presumptive taxation provisions, and digital transaction criteria. Proper turnover computation is the first step toward determining audit applicability correctly.
  • F&O Trading Reporting: New fields have been added to disclose
  • Futures & Options turnover: Income from Futures & Options trading credited to the Profit & Loss Account
• A timely assessment of your tax audit obligations can help you stay compliant, avoid penalties, and minimize future litigation. Review your turnover, profit declaration, and tax position carefully before finalizing your return.