As an F&O trader, it is very important to understand the F&O taxation and requirements to audit. F&O transactions are generally carried out on the stock exchanges or on MCX/ NCDEX wherein the transactions take place digitally with no cash involved. Also, most of the individual future and option traders do end up in losses due to lack of proper knowledge. The question which comes to every traders while filing their ITR is whether an audit is required for carry forward of losses.

Let us try to understand the requirements of the audit and calculation of taxation for F&O traders. The requirements to audit can be understood by the below table:

Thus, the F&O traders will have to get their audit done if they declare the profit below 6% i.e. presumtive limits under Section 44AD. However, those who are in lossess will be in difficult situation as they have to declare either minimum 6% of turnover as profits or get the audit done. But as per law, such traders have to get the tax audit done from a Chartered Accountant to carry forward the losses to next year.

The most important aspect now which requires to be undersood is as to How to calculate turnover for F&O traders and Shares traders:

For delivery-based transactions: Lets understand with an example.

For instance, if you buy 100 shares of Reliance at Rs 700 and sell at Rs 720, your turnover is Rs 72,000 (Rs. 720 * 100).

For speculative transactions (intraday equity trading):

Add up the positive and negative differences from trades. For example, buying 100 shares of Reliance at Rs 700 and selling at Rs 720 gives you a turnover of Rs 2,000 [(720-700)*100]

For non-speculative transactions (futures and options):

Sum up the favourable and unfavourable differences, including premiums received on options sales. Buying 25 units of Nifty futures at Rs 7,500 and selling at Rs 7,400 results in a turnover of Rs 2,500 i.e [(7500-7400)*25].

Calculation methods: Add up absolute values of profit and loss from each trade.

Example:

• Trade 1: Bought 100 Nifty futures at Rs 7,500, sold at Rs 7,600, Profit = Rs 10,000.
• Trade 2: Bought 100 Nifty futures at Rs 7,600, sold at Rs 7,550, Loss = Rs 5,000.
• Total turnover = Rs 10,000 + Rs 5,000 = Rs 15,000.

Consequences of Not getting tax audit done?

Lower of the following:

• 0.5% of the total sales or gross receipts or turnover or
• Rs 1,50,000

Due date for tax audit

31 October of the Assessment year

Conclusion:

In summary, for Future and Options (F&O) traders, understanding tax rules and audit requirements is crucial. Whether an audit is needed depends on factors like turnover and profit margins. Traders declaring profits below certain thresholds may need audits to carry forward losses. Calculating turnover correctly is key, with different rules for different types of transactions. Not meeting audit deadlines can lead to penalties. So, it’s important for F&O traders to stay informed and compliant to avoid any issues with taxation and audits. Our expert team at P G A & Co. Chartered Accountants helps our clients to over come the problem of tax audits in case of F&O losses.