It is a trend among young professionals and salaried employees to indulge in trading in the Futures and Options segment of the Indian National Stock Exchange (NSE). The trend is also driven by hard marketing by several advisory firms that provide trading calls to individuals for fixed fees.
As the leverage in this segment magnifies possible profits, several salaried employees indulge in F&O trading with an aim to earn high profits, though in reality most part time F&O traders incur losses. Why this happens is a topic for a separate discussion (Blog coming soon on mistakes investors make when trading in F&O).
Here we will examine another issue arising for F&O traders which is if a loss is incurred by them in trading, should they get a tax audit done.
Section 44AB of the Income-tax Act, 1961 contains the provisions for the tax audit of an entity. As per these provisions, tax audit shall be conducted by a Chartered Accountant who ensures that the taxpayers has maintained proper books of account and complied with the provisions of the Income-tax Act.
Tax Audit conducted by a Chartered Accountant is reported to the Income-tax department in Form no. 3CA/3CB and Form no. 3CD along with the income tax return.
Limit for tax audit
Turnover exceeding Rs. 2 crores for Financial Year: 2019-20. Turnover for F&O is calculated as:
total of gain and loss from options Add: Option premiumtotal of gains and losses from Futures (not net)
Important to note that gains/losses are to be added and not net off against each other when deciding the turnover for tax audit purposes.If you have opted for presumptive scheme of taxation and have declared a loss or have a lower profit than 6% or 8% of turnover
What happens when your turnover is below Rs. 2 crores but you have profits lower than 6% of turnoverThis is the tricky part where there is confusion whether tax audit is mandatory if a person has turnover below limit but has incurred losses.
Some tax experts believe that if a person is declaring lower profits than 8% of turnover or losses even if both losses and turnover are well below Rs. 1 crore, then tax audit will be applicable, otherwise the individual may get a notice from income tax authorities or may not be able to carryforward the loss.
However, there are also views which indicate that tax audit is applicable only if turnover exceeds Rs. 1 crores and profits are lower than 8% or losses are incurred in F&O.
Considering differing views, a person (if his trading turnover is below Rs. 1crore) should decide whether to go for tax audit or not depending on the quantum of loss he has incurred. If the loss or turnover is substantial then the person should definitely go for a tax audit as it will minimise risk of income tax notice and not hamper his ability to carry forward losses.
Those who want to be risk free and not worry about future tax notices should consider getting tax audit if they have reported loss in F&O segment.