Most of Salaried Employees are involved in derivative trading (trading in future and options or F&O on stocks, currencies, and commodities) But due to little knowledge about how these trades are taxed, those who have losses from futures & options skip reporting it in their income tax return, which is not right. If you are an F&O trader and struggling to understand how to tackle your taxes, read the complete treatment of F&O and equity trading in income tax as given below.(For FY 2017-18 and AY 2018-19)
You need to understand complete procedure step by step, hence you need to read this article till end. Following are the points helpful in understanding the tax treatment of F&O & speculations:-
- Section 43(5) has explained a speculative transaction as “a transaction -in which a contract for the purchase or sale 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. But as per Provisio to section 43(5) “TRADING IN DERIVATIVES NOT TO BE SPECULATIVE TRANSACTIONS [Section 43(5)Proviso]”
- F&O trading is reported as business for the purpose of income tax. As per provisio to section 43(5) It is Non-speculative Business.
- Intra-day trading in equity is also considered as business but as per section 43(5) of income tax act, it is considered as Speculative Business, which is reported separately and not to be clubbed with non-speculative business.
- Any investment for which intention is not trading, book gain due to difference in prices at different times but intention is to keep invested for long term or to earn dividend may be kept outside and it may not be considered as business. Income from sale of such investment is taxed under the head ‘Capital Gain”
- You have to prepare separate detail of Profit and gain for your Speculative as well as non-speculative business. Loss of speculative business cannot be adjusted from profit of non-speculative business but loss of non-speculative business can be set off from profit of speculative business. Loss not set off can be carried forward for 8 years for non-speculative business but for 4 years in case of speculative business.
- So till now, it is clear that F&O trading is Non-speculative business and Intra day equity is Speculative business. The single most important reason to file with F&O trading is to be able to benefit from losses you have incurred. If your business resulted in a loss, don’t worry, report it in your tax return. It can be adjusted from income from remaining heads such as rental income or interest income (cannot be adjusted from salary income). Any unadjusted loss can be carried forward for eight years. However in future they can only be adjusted from non-speculative income. F&O trading loss is considered a non-speculative loss. Intra-day stock trading is considered as a speculative loss. And it can only be adjusted against speculative income. Unadjusted speculative losses can be carried forward to four years.
- To report your income under speculative as well as non speculative business there are two options, you have to choose one method after understanding conditions of each:-
(A) Calculate your profit/loss as per normal provisions of income tax and comply 44AA regarding maintenance of books of accounts and 44AB regarding audit if applicable (detail of 44AA and 44AB given below) and not to choose for 44AD.
(B) Choose 44AD if conditions of 44AD can be complied and pay tax on presumptive basis.
Now you are required to determine applicability of three sections of income tax act i.e. 44AA, 44AB and 44AD.
Are your required to maintain books of accounts (section 44AA)
In case you are running a business in the capacity of an individual or a HUF, the requirement to maintain accounting records would arise if your
- income exceeds Rs 2.5 lakhs or
- gross receipts exceeds Rs 25 lakhs
- in any of the 3 preceding years or in the first year in case of a new business.
These limits are the enhanced limits w.e.f 1 April 2017. Earlier, the limit was Rs 1.2 lakhs for income and Rs. 10 Lakhs for gross receipts. However, these limits of Rs 1.2 lakhs and Rs 10 lakhs still hold good for taxpayers carrying on business other than individuals or HUF.
Being an Individual, your book keeping will be simpler, keeping your trading statements, expense receipts and bank account statements etc shall mostly suffice. From these your profit and loss account and balance sheet is prepared.
If you are not covered in above limit then you are not required to maintain books of accounts as per section 44AA. Further if you comply with conditions of 44AD and opting for 44AD then you are not required to maintain books of accounts even if you exceeded above limit of 44AA.
Are your required to get your accounts audited (section 44AB):
A Tax Audit is an audit, made compulsory by the Income Tax Act, if the annual gross turnover/receipts of the assessee exceed the specified limit. Tax audit is conducted in Sec 44AB of the Income Tax Act by a Chartered Accountant. Simply Tax Audit means, an audit of matters related to tax. Limit specified for tax audit for FY 2017-18 is:-
- Gross receipts exceeds Rs 50 lakhs for professsinals (like CA, doctors etc.)
- Gross turnover exceeds Rs 100 lakhs for business (share or F&O trading or other business etc.)
- Tax audit under Section 44AB also becomes mandatory for taxpayers who is eligible for presumptive scheme of taxation u/s 44AD, but declare an income lower than the presumptive income (6%/8%) if his total income (after setting off F & O losses or other business losses if any) exceeds the maximum amount not chargeable to tax i.e. Rs 2.5 lakhs.(only for assessee whose turnover exceeds rs. 1 crore or who is covered u/s 44AD(4) i.e. adopted 44AD last year but decide not to opt 44AD this year. In other cases where turnover is less than Rs. 1 crore and assessee is not covered by 44AD(4), tax audit is not required even if profit declared in less than limit specified in 44AD.)
- Tax audit under Section 44AB also becomes mandatory for taxpayers who opt out of presumptive scheme u/s 44AD before 5 year and he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme if his total income exceeds basic exemption limit.
If you are not covered in above limit then you are not required to get books of accounts audited as per section 44AB. Further if you comply with conditions of 44AD and opting for 44AD and also not claiming income less than limit specified in 44AD(i.e. 6%/8%) then you are not required to maintain books of accounts and being audited even if your turnover exceeded limit of Rs. 100 lakhs as specified in section 44AB.
Are you eligible for Taxation of business income on presumptive basis (section 44AD):
Eligible Assessee for 44AD:-
- Resident Individual
- Resident HUF
- Resident Partnership Firm (not being LLP)
Further, the above 3 taxpayers shall not claim any deduction under section 10A/10AA/10B/10BA or under section 80HH to 80RRB in the relevant year.
Eligible Business under section 44AD:-
- Any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and
- Whose total turnover or gross receipts from all his businesses in the previous year does not exceed 2 Crore.
How Business income is calculated u/s 44AD:
Under this section, an eligible assessee engaged in eligible business with turnover less than 2 Crore can consider his taxable business income (PGBP) as –
- 6% of his digitally received turnover or gross receipt [w.e.f AY 2017-18];and
- 8% of his remaining turnover or gross receipt
Other Conditions of 44AD:-
- You are eligible for 44AD only if you are covered in definition of eligible assessee as in engaged business with turnover less than Rs. 2 Crore as described above.
- If you are eligible and decided to opt for 44AD then you are not required to maintain books of accounts as per section 44AA and also not required to get your accounts audited u/s 44AB. But if you claim income from business less than 6%/8% (as explained above) of turnover then you are required to maintain books of accounts u/s 44AA and get your accounts audited u/s 44AB if your total income exceeds the basic exemption limit.
- Expenses relating to PGBP will not be allowed. [section 30-38 of Income Tax]
- Any person opting for the presumptive taxation scheme under section 44AD is liable to pay whole amount of advance tax on or before 15thMarch of the previous year. If he fails to pay the advance tax by 15th March of previous year, he shall be liable to pay interest as per section 234C.
- Assessee under presumptive taxation can take the deduction of Chapter VI-A.
- W.e.f AY 2017-18, If you are opting for the presumptive scheme of 44AD, you must file presumptive scheme for at least 5 years in continuation, If you decide to show and file profits as per regular business (ITR-3) before the end of these 5 years, you will lose presumptive benefits and disallowed from presumptive taxation for the subsequent 5 years.
- If a person opts for presumptive taxation scheme then he is also require to follow the same scheme for next 5 years. If he failed to do so, then presumptive taxation scheme will not be available for him for next 5 years. [For example, an assessee claims to be taxed on presumptive basis under Section 44AD for AY 2017-18. For AY 2018-19 and 2019-20 and he offers income on basis of presumptive taxation scheme. However, for AY 2020-21, he did not opt for presumptive taxation Scheme. In this case, he will not be eligible to claim benefit of presumptive taxation scheme for next five AYs, i.e. from AY 2021-22 to 2025-26.] Further, he is required to keep and maintain books of account and he is also liable for tax audit as per section 44AB from the AY in which he opts out from the presumptive taxation scheme. [If his total income exceeds maximum amount not chargeable to tax]
How turnover of F&O and Speculative Transactions is calculated:
In case of F&O Trading and Intra-day equity trading being speculation, since these transactions are non-delivery based, turnover is not full value of trade but it is only the net of the sales and purchases that is to be treated as turnover. Here, it makes no difference, whether the difference is positive or negative. All the differences, whether positive or negative are aggregated and the turnover is calculated.
For computation of turnover of futures, the total of positive and negative or favourable and unfavourable differences shall be taken as turnover.
Similar will be the case pertaining to speculation income the total of positive and negative or favourable and unfavourable differences shall be taken as turnover.
For Option Contract:- Premium received on sale of Options is considered as turnover.
Which ITR form is applicable to salaried Employee doing F&O trading:
- If assessee is eligible and decide to opt for presumptive scheme u/s 44AD and not having any income under the head “Capital gain” and not having “income from more than one house property” then he may file ITR-4 otherwise ITR-3 will apply.
- But if decided not to opt for presumptive scheme u/s 44AD then you need to file ITR-3.