Tax Audit Requirement For F&O Transactions.
1. Futures and options (F&O) are the most common types of asset derivatives traded on a stock exchange. The income/loss arising from trading in F&O transactions would be treated as a Business Income / Loss for the purpose of taxation and the normal provisions of the Income Tax Act will apply in this case The rules as applicable to tax audit as stated in section 44AB will be applicable in the case of F&O trading also. 2. STATUTORY PROVISIONS: – 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 assesse 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 assesse opted for a presumptive tax scheme under sec 44AD (1) cannot opt-out from the scheme for 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 ) |
3. AUDIT REQUIREMENT A question that’s commonly asked is, 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 1 Crore or 10 Crores? The answer is a BIG NO. Up to the year 2016, there was a clause in section 44AD that required a taxpayer to maintain books and get them audited if he declares income less than the presumptive rate or declares losses. In Finance Act 2016 this clause was replaced by a new clause. 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, provided his total income in the current year exceeds the basic exemption limit. 4. Thus the audit is required to be done in the following cases: – (a) The businesses whose turnover exceeds 10 crores. (Cash receipts and payments do not exceed 5% of total receipts and payments respectively in case of such transactions, hence threshold limit of 10 crores is applicable) (b) A person engaged in business who has OPTED for presumptive taxation (8%/6%) in any of the last 5 years but does not opt for the same in the current year. 5. ILLUSTRATION: – Mr. Anupam started trading in F&O for the first time during PY 2019-20. He OPTED for presumptive taxation scheme and declare income @ 6% of the turnover. In PY 2020-21, 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 report & carry forward F&O losses, he is required to get a tax Audit in PY 2020-21. Further, he will be ineligible for the presumptive taxation scheme for the next 5 years i.e. up to 2025-26. In the above example, if Mr. Anupam started trading in F&O for the first time in PY 2020-21 and has not opted for PTS in any of the last 5 years, the tax audit is not required to be done. 6. VALIDATION ERROR IN ITR 3 Be careful and do not tick yes under the heading – Audit Information “Are you liable to get audited under section 44AB “, otherwise there will be a validation error at the time of submitting the return 7. CONCLUSION: It can be concluded that a person who incurred losses in F&O in AY 2021-22 and not opted for a presumptive taxation scheme in any of the last five previous years is not required to get Tax Audit under section 44AB. Be careful and do not tick on the TAB “Are you liable to get audited under section 44AB “. Otherwise, there will be a validation error at the time of submitting the return
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