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Tax Audit In Case Of Futures & Options (F&O) and Share Trading

Today We will discuss very interesting topic in case of Futures & Options and share trading tax audit is applicable or not-

There are two types of share trading-

  • Delivery based
  • Non-delivery based

First of all, let us discuss Delivery based transactions-

In case of delivery-based transactions what is the Meaning of ‘turnover’- In case of delivery-based transactions when we buy any commodity including stocks & shares and hold it for more than one day and then sell them, the total value of sales is to be counted as turnover.

Let’s take an example suppose we bought 100 shares of XYZ Ltd for INR 800 shares and sold them at INR 820 so in this case turnover will be INR 820*100=INR 82000

Now the next question comes in our mind in case our turnover exceeds INR 1 cr. or INR 10 cr. then in this scenario is tax audit applicable??

In this case we need to check whether we are dealing in these transactions regular basis or casually –

In case our main income source is deal in commodities then in this case tax audit is applicable if turnover exceeds the limit of tax audit but if we are doing above stated transactions as side income which is addition to main source of income then in this scenario it will be treated as capital gain irrespective of turnover or profitability.

Non-delivery-based transactions-

Non-delivery-based transactions are two types-

1. Intra -day transactions – (Speculative Business Income)

  • The meaning of Speculative transaction is a kind of transaction in which contract for any commodity’s purchase or sale including stocks & shares is periodically or finally settled otherwise than through actual delivery or transfer of the commodity or scrip.
  • Through paying out the difference, the contract is settled otherwise and squared up which may be positive or negative.
  • Likewise in that case the difference amount is turnover.
  • In case of an assessee undertaking speculative transactions then there can be both positive & negative differences rising by settlement of several such contracts during the year. Positive difference & negative differences are not related to each other.
  • Entries in BOA are made only for the differences.
  • Similarly, the aggregate of both positive differences and negative differences is to be counted as the such transaction’s turnover for tax audit purposes under section 44AB.
  • For example- positive difference INR 400 and negative difference INR 600 so total turnover in that case will be INR 1000 i.e., aggregate of positive & negative differences.

2. Futures & Options (F & O)

  1. F & O are completed without the delivery of shares or securities too and squared up by payment of differences too.
  2. The transactions can be squared up any time on or before the date of striking.
  3. The total of favourable differences and unfavourable differences will be taken as turnover.
  4. For Example –Mr. A buys 100 units of Nifty Futures – INR 8000 per unit and sell at INR 7900 per unit Loss for 100 units = -10000 is turnover.
  • The need of calculating turnover arises only when treating trading Profit & Loss as business income-Turnover is only to determine if tax audit applicable or not.
  • Your tax liability is not effected by your turnover.