Income from stock markets is perhaps the most confusing topic concerning taxation. This is because it touches upon two different tax heads namely; Income Capital Gains (long-term or short-term) and Income from Businesses or Profession.
There are two ways income from trading is treated under the income tax act
Any business comes with a lot of obligations. Maintenance of books of accounts and getting them audited, advance tax payments and filing returns on time are but a few of them. Let us examine some relevant rules laid down by the income tax act concerning business.
Trading in F&O is slightly different to other businesses. Other businesses are pretty straightforward in arriving at their turnover and profits, however, in F&O trading turnover and profits have to be computed.
Computation of turnover for F&O trading involves aggregation and arriving at the absolute value of the following
The aggregate of the above will be the turnover from F&O trading.
Table 1
Particulars | Amount | Absolute value |
Profit on options transactions | 55000 | 55000 |
Loss on Futures Transactions | -50000 | 50000 |
Premium received on the selling of options | 25000 | 25000 |
Loss on reversal of the sold options | -10000 | 10000 |
Turnover | 140000 |
Section 44AB read along with section 44AD of the income tax act says an account need to be audited u/s 44AB under the following circumstances
The table below contains the income details of a trader. Let us understand the concept of a tax audit.
Particulars | Amount |
Income from salaries | 10,00,000 |
Rental Income | 40,000 |
Income from interest | 20,000 |
Loss on F&O business | -75,000 |
F&O turnover | 1,75,000 |
6% of F&O turnover | 10,500 |
F&O loss to be carried forward | -15,000 |
The trader declares an F&O trading loss of Rs.15,000 and wantsto file his return without a tax audit report. However, in this case, he will not be able to as the conditions mentioned in Section 44AB is not met. His actual net profit (in this case loss) of Rs.15,000 is less than Rs.10,500 which is 6% of the F&O turnover and due to his salary and other income his threshold level of taxation is more than Rs.2,50,000.He will have to get his accounts audited under section 44AB. The only alternative is he has to pay tax on Rs.10,500 and file the return without a tax audit report.
Taking the same example if the trader has no other income apart from F&O business, the question of tax audit nor tax.
Profit from F&O trading is treated as business income or business loss.
No. Income from F&O trading is not speculative. It is Normal business income.
Yes. A tax audit is necessary if the turnover from F&O trading is more than Rs.5 crore.
Yes. Tax audit is necessary in case of any loss in F&O trading when there are incomes from other heads like Salary, rentals, Interest and they are above the minimum criteria of income not subject to tax.
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