How to calculate Turnover in case of F&O trading (Derivatives) and Intraday trading for Tax Audit?
Many people having confusion Regarding How to Report Profit or Loss arises from the Trading in shares and securities.
- Is this Income is treated as a Business and profession?
- Is this Income is treated as a Capital Gain income?
- and is Treated as Income from Any Other Sources?
Here we are giving you a detailed study on:-
- What is the meaning of the Term used in Trading like- Intraday Trading, Cash Trading, Short term, Long Term, Futures, Options Trading, F&O, Derivatives, and Commodity, etc.
- What is Income Tax Rules say about Trading in shares and securities?
- Guidance Note Of ICAI on Calculation of Trading in Share and securities.
- How to Report Loss and Gain in Income Tax Return?
- An audit is applicable or not on Trading in shares and securities?
- How to calculate Turnover in case of trading in the different segments?
First of all, you have to understand this Two-term Speculative Transaction and Non -speculative Transaction:-
Speculative Transaction (Intraday Trading or Non-delivery Based):-
As per the Income-tax Act, Speculative Transaction means a transaction in which a contract for the purchase or sales of any commodity including stocks and shares is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
In simple words, Intraday Trading or Cash trading is called a speculative Transaction in which shares are sale or purchase on the same day, and the delivery of shares is not taken.
Non-Speculative Transaction (Short Term, Long Term, F&O or Delivery Based):-
Under this type of trading, the share transaction is said to be complete only when there is the actual delivery of shares/securities upon the settlement of the transaction is done.
In simple Words, Short Term, Long Term trading in shares are Non-speculative Transactions and trading in the Future and options are also non-speculative transactions because in the Future and option trading delivery of shares is not possible it’s just a weekly or monthly contract that is expired or settled without delivery. So, these transactions are also included in the non-speculative transaction.
Now, the question that arises is that, What is the treatment of profit/loss from F&O Trading and Intraday trading in the income Tax Return?
As per the above definition, It is clear that F&O Trading is not considered as a speculative Business. therefore gain or Loss arises from such Transaction will be considered as normal business income and business loss.
In the case of Short Term or Long Term Trading, we have two options either we can treat them as Business Income or Capital gain Income (Investment Income) choice is ours or it depends on the number of transitions, frequency of transition, and the purpose of the transaction.
Note:- But F&O transaction is always considered as business Income or Loss.
Since income from derivative trading (Future and Option) is considered normal business income, therefore normal rules as applicable to tax audit as stated in section 44AB will be applicable.
Therefore, the applicability of tax audit will be as follows in case of F&O Trading:–
- As per the Income Tax Act, a tax audit will be applicable if the turnover of your business exceeds Rs. 1 crore.
- If the turnover from your business exceeds Rs. 1 crore but less than 2 crores then the audit can be avoided if we can show the profit at a minimum of 8% (6%, if all trades are digital).
- Tax audit u/s 44AB read with 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 of more than 2 crores then audit u/s 44AB will be applicable irrespective of Profit and Loss.
How to calculate Turnover in case of F&O trading and Cash trading?
The method of calculating turnover is a debatable issue and what makes it a grey area is that there is no guideline as such from the Income Tax department.
The ICAI (Institute of chartered accountants of India, the governing body for CA’s) issues the guidance note on tax audit under Section 44AB which given great help to the taxpayers for calculation of Turnover. which are as follows:-
The turnover or gross receipts in respect of transactions in shares, securities, and derivatives may be determined in the following manner.
(a) Speculative transaction (Intraday Trading or Non-Delivery Based):
the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit under section 44AB.
That is for all speculative transactions, the aggregate or absolute sum of both positive and negative differences from trades is to be considered as a turnover. for better understanding let us assume we have bought 100 shares of Tata Steel and 100 shares of SBI Bank in the morning,
- Buy TATA Steel 100 Shares @₹500 = ₹50,000/- and Buy SBI Bank 100 shares @ ₹300 = ₹30,000/-
Now, 100 shares of Tata Steel and 100 shares of SBI Bank bought in the morning, sold in the same day at
- Sell TATA Steel 100 Shares @₹550 = ₹55,000/- and Sell SBI Bank 100 shares @ ₹260 = ₹26,000/-
So, in the above example, we have incurred a profit of ₹5,000/- in TATA Steel shares and a Loss of ₹4,000/- in SBI Bank shares.
So, the aggregate of both positive and negative differences i.e ₹ 9000(5000+4000) is to be considered as the turnover of such transactions for determining the liability to audit under section 44AB.
(b) Non- Speculative transaction (Short Term, Long Term, F&O or Delivery Based Trading):
(1) Derivatives, futures, and options (Delivery not possible): Such transactions are completed without the delivery of shares or securities. These are also squared up by the payment of differences. The transactions may be squared up any time on or before the Expiry date. The buyer of the option pays the premium. The turnover in such types of transactions is to be determined as follows:
- The total of favorable and unfavorable differences shall be taken as turnover.
- Premium received on sale of options is also to be included in turnover.
- In respect of any reverse trades entered, the difference thereon should also form part of the turnover.
For the case of futures trading:- Let’s assume If you Buy 1 Lot (25 Units) of Bank Nifty Futures @ the Rate of ₹22,000/- and sell them @ ₹21,800,
So, ₹5,000/- (200*25 units) the loss on this trade is considered your turnover, and if you make Let’s assume ₹ 2000/- Profit from that type of trade i.e nifty futures then your turnover will be considered ₹2,000/ for that trade and your total turnover is 5,000+2,000=7,000/-
So, turnover calculation in case of future trading and Intraday trading are the same.
But in the case of Options Trading:- Turnover Calculation is a little different from the future trading calculation. In Option trading Premium received on sale of options is also to be included in turnover.
For Example:- In options, if you buy 1 lot (75 Unit) of Nifty 12000 calls i.e 12000CE @ ₹80 and sell @ ₹50. Firstly, the favorable difference or profit of ₹ 2,250 (30 *75) is the turnover. But premium received on sale also has to be included in turnover, which is ₹50 x 75 Unit = ₹ 3,750/-.
So, total turnover for the option trading will be ₹6,000( 2250 +3750).
(2.) Short Term or Long Term (Delivery-based transactions):– Where the transaction for the purchase or sale of any commodity including stocks and shares is delivery based whether intended or by default, the total value of the sales is to be considered as turnover.
That is for all delivery-based transactions, where you buy any share and hold it for more than 1 day and sell them, the total amount of the sales is to be considered as turnover. For example, if you bought 100 shares of Reliance Industries @ ₹500/-each and sold them at ₹800/- each, then the selling amount of Rs 80,000/- (800 x 100) is to be considered as turnover.
Note:- But one thing you should remember is that the above calculation of turnover is only for delivery trades if you are declaring your delivery-based trades as a business income. If you are declaring them as capital gains or investments, then there is no need to calculate turnover on such transactions. Also, there is no need for an audit if you have only capital gains irrespective of turnover or profitability.
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