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Income Tax filing & audit in case of trading in shares & F&O

Increasing awareness about financial markets attracts more people to trading as it allows people to earn more than regular income and also get faster returns. What is the tax treatment on income earned from trading? Is business income subject to a tax audit? Let us know more about it through this article.

What are the types of trading?

Trading can be delivery based or non-delivery based.

1. Delivery based business

Delivery based trading is the most common type of stock trading. In this type of trading, investors have to pay the full value of the stock and the stock is credited to their Demat account. There is no pre-determined time limit in case of delivery based trading to sell the stock. In the case of delivery based trading, the turnover will be the total sale price.

For example, if you bought 100 BPCL shares for Rs. 400 and sold them for Rs.470, the selling value of Rs 47000 (470 x 100) can be considered as turnover.

It is important that the above calculation of turnover for delivery transactions applies only when your equity-based delivery transactions are declared as business income.

 2. Intraday trading

When shares are bought in the opening market and sold in the closing market, such trading is called intraday trading. Intraday trading will be considered as speculative income. The combined or absolute sum of both positive and negative differences in trade is considered a turnover. For example, if you buy 200 shares of SBI at 414 at the opening of the market and close the day and sell at 422, you get a profit of Rs 1600 or a positive difference, which can be considered as a turnover of Rs 1600.

3. Trading in futures and options

Trading in futures and options will be considered non-speculative income. In the case of futures trading, the turnover will be fixed as follows-

·        favourable and unfavourable differences will be taken as the total turnover.

·        If the reverse enters any reverse transaction, the difference should also become part of the turnover.

For example, if you bought 1 lot (25 units) of Nifty futures at 10200 and sold it at 10300, and bought another lot (25 units) of Nifty futures at 10350 and sold it at 10300, then Rs. 2500 (25 x 100) + 1250 (50 x 25) i.e. 3,750 negative difference or loss on trade turnover.

In the case of options trading, the turnover will be as follows-

·        favourable and unfavourable differences will be taken as the total turnover

·        The premium earned on the sale of options will also be included in the turnover

·        In the case of any reverse transaction entered, the difference should also become part of the turnover.

For example, if you buy 100 units or 4 lots Nifty 10200 calls for Rs 50 and sell for Rs 55, there is a favourable difference or profit (5 x 100) turnover of Rs 500. Also, the turnover of the premium received on sale has to be taken into consideration, which is Rs. 55 x 100 = Rs. 5500. So the total turnover of this option = 500 +5500 = 6000 rupees.

When is a tax audit required?

Section 44AB- If the total receipt and a cash payment of a person do not exceed 5% of the total receipt and payment, the turnover limit for a tax audit is Rs. 5 crores.

Section 44AD- Tax audit will be applicable if all the following conditions are met-

·        Turnover Is less than Rs.  2 crores

·        Profit is less than 6% of turnover and

·        The income exceeds the exemption limit

When is a tax audit not necessary?

In the case of delivery based trading, there is no need to calculate turnover on such transactions if the assessee declares them as capital gains or investments. Also, there is no need for audit where capital gains occur if you have only capital gains regardless of turnover or profit.

So, it's always advisable to check your turnover before income tax file

The author is Santosh Patil & he is CEO & Director @ Alliance Tax Experts.

Alliance Tax Experts is a one-stop solution for all your Financial Needs. We are the leading Income Tax, GST & Company registration services provider in Mumbai, Navi Mumbai & all over Maharashtra, India.

We provide consultancy start from Company Registrations, Income Tax Filing, Accounting, GST Filing, Income Tax Audit, GST Audit services. We offer comprehensive compliances services for proprietors, partnerships, Private limited companies, limited liability partnerships, OPC private limited Companies, Trust and Individuals.

For any query you may reach us on santoshpatil@alltaxfin.com or call on 9769201316

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