Tax Implication on F&O and Intraday Trading
It has been a phenomenon that most of the people in India trading in Future and option or intraday trading don’t disclose their profit or loss from trading in the Income tax return. There are three potential reasons for this.
- Most of the trader ends up making a loss, and they think it’s not needed to disclose as there is no income earned
- Those who earn small profit feels that the profit is small enough not to disclose.
- There is sheer ignorance of the fact that any loss or profit from share market trading is mandatory to show in the income tax return
However, As per income tax act, It is mandatory to disclose all source of income in the Income tax return, and as per the act, the Income also means loss.
Treatment under Income Tax Act
Future and Options Trading (F&O) Profit/loss is considered as Non-Speculative Business Income/Loss. On the Other Hand, Intraday Trading Profit/Loss is considered as Speculative Business Income/Loss.
Therefore, in both the scenario, the Profit or Loss from F&O trading or Intraday trading is considered as Business Income in the Income tax act.
Maintain Book of Accounts
If you are an individual or HUF, then It is mandatory to maintain book of account if your income exceeds Rs 2,50,000 or your trading turnover exceeds Rs. 25,00,000 in any of the 3 preceding financial years or in the current year in case of a new trader.
If you are other than Individual or HUF (Like Partnership firm, LLP, Company etc.), In that case, the limit is reduced to Rs 1,20,000 for Income and 10,00,000 for Turnover.
Failure to maintaining Book of account may lead to penalty under Income tax act.
However, since these days trader trades through online portal of a broker, all the necessary accounting record like trading ledger, Profit and loss record can download from broker portal. Do not forget to download all these records from the broker portal in case you wish to change the broker as it will be difficult to retrieve the data once you change the broker.
What is Turnover
Turnover calculation in case of F&O trading and Intraday trading is little different then the normal business. Turnover should be calculated in the below manner:
- Total of positive and negative or favourable and unfavourable differences shall be taken as turnover.
- Premium on the sale of options
- In case of a reverse trade, the difference (whether positive or negative) on the trade
The absolute total of above 3 points will be considered as Turnover for an F&O and Intraday trading.
Let us understand this with the help of an example
During a Financial Year, Ram Purchases 10 lot of SBI Future contract at Rs 10,00,00 and sell them at Rs. 20,00,000. He further bought 20 Lot of Reliance Future contract at 20,00,000 and sold them at Rs. 10,00,000. He also earns premium of Rs. 5,50,000 on sale of option.
Let us see how much turnover Ram had during the Financial Year
|Profit on Future contract of SBI||Rs. 10,00,000|
|Loss on Future Contract of Reliance||Rs. 10,00,000|
|Premium earned on option||Rs. 5,50,000|
|Total Turnover||Rs. 25,50,000|
As we can see in the above table, we need to consider the absolute of favourable and unfavourable position, and as such Ram turnover is more than Rs 25,00,000, hence he needs to maintain book of account.
Profit or loss arises from trading business will be added or reduced from your overall income and tax will be calculated on that. Please refer to my article How a Loss from Shares and Derivatives Trading can save Income Tax on Your Income. this article helps on how a loss from F&O and Intraday trading can save your overall income tax.
As explained above that F&O trading and Intraday Trading is considered as normal business as per income tax act, and as such most of the tax implications applicable to a normal business will be applicable to F&O trader and Intraday Traders. Which means that provision of Tax Audit may also applicable to a F&O and Intraday Trader. These may be little complicated to understand however I have tried my best to explain the tax implication in the below points
- If the Turnover during the year is less than 1 Crore or If the turnover during the year is less than 2 Crore for the person covered under presumptive income scheme section 44AD.If the Turnover during the year is less than 1 Crore or If the turnover during the year is less than 2 Crore for the a person covered under presumptive income scheme section 44AD.
|Profit /Loss||Is Tax Audit Applicable?|
|If the Overall Profit is more than 6% of Turnover||No|
|If the Overall Profit is less than 6% of Turnover||Yes|
|If there is Loss||Yes|
However, there is an exemption to the applicability of tax audit in case there is a loss or profit is less than 6% of turnover. If an Individual/ HUF total income from all source during the year is less than Rs. 2,50,000 then Tax Audit is not Applicable
- If the Turnover during the year is more than 2 Crore, then it is mandatory to have tax audit irrespective of Profit or loss
A Tax Audit is performed by a Practicing Chartered Accountant and tax audit need to file with Income tax department along with Income Tax Return.
Penalty for Non-Compliance with Tax Audit
A Penalty equal to lower of Rs 1.5 lakhs or 0.5% of turnover can be levied under Section 271B for not getting books audited under Section 44AB.