In the context of income tax compliance in India, a tax audit is a significant requirement mandated under Section 44AB of the Income-tax Act, 1961. It requires certain taxpayers to get their accounts audited by a chartered accountant, especially when their turnover or gross receipts cross specified thresholds. For traders involved in the derivatives market, particularly in futures and options (F&O), calculating turnover becomes a critical element for determining whether a tax audit is applicable. However, the Income-tax Act itself does not provide any specific method for computing turnover in F&O transactions. Instead, this responsibility has been guided by the recommendations and interpretations provided by the Institute of Chartered Accountants of India (ICAI) through its Guidance Note on Tax Audit.
Understanding the Nature of Derivative Transactions
Derivatives are financial contracts whose value is derived from the price of an underlying asset such as stocks, commodities, indices, or currencies. The most common types of derivative instruments in the Indian market include futures and options. These instruments allow traders to speculate on the movement of asset prices or hedge against potential price fluctuations. Unlike regular equity trading, where shares are bought and sold for delivery, derivative trading is largely cash-settled and conducted through exchanges in a standardized format. This makes the treatment of these transactions for tax and audit purposes different from regular trading. Specifically, the turnover from derivative transactions must be calculated based on the contractual profit or loss and not based on the actual buy and sell value of the contract.
Earlier Guidance on Turnover in Derivatives
The earlier guidance available in Para 5.14(b) of the 2022 edition of the Guidance Note on Tax Audit under Section 44AB explained how turnover should be computed for derivative transactions. It provided the following key principles. First, the total of favorable and unfavorable differences from derivative trades should be considered as turnover. This means both profits and losses from each transaction should be aggregated without netting them off. Second, any premium received on the sale of options is also to be included in turnover. However, if this premium has already been accounted for while calculating profit or loss from the transaction, it should not be added again to avoid duplication. Third, in the case of reverse trades, which essentially means squaring off a trade by taking an opposite position, the difference should also be included in the turnover calculation. However, this guidance was insufficient for complex scenarios such as open positions at the end of the financial year or delivery-based settlements in derivatives. As such, it raised many questions and left professionals and taxpayers without clear direction on how to handle such situations.
Challenges With the 2022 Guidance
The 2022 guidance, while useful in simple F&O scenarios, fell short of addressing real-world complexities faced by traders. For example, it did not clarify how to compute turnover when a trader had open positions at the end of the financial year. Open positions refer to contracts that are not squared off and continue into the next financial year. Should the turnover be recognized in the year the position was opened or in the year it is closed? This ambiguity led to inconsistent practices across taxpayers. Similarly, the guidance did not address how to treat delivery-based settlements in derivative contracts. Delivery-based settlement refers to a situation where,, instead of cash-settling the contract, the actual underlying asset is delivered or received. This raised further complications, especially concerning how the transaction should be recorded in the books of the buyer and seller. The lack of clarity also extended to the treatment of premium amounts in such settlements and the inclusion of sale value in the turnover where the underlying asset was held as stock-in-trade.
Revised Guidance in Para 5.10(b) of the 2023 Note
In response to the shortcomings of the earlier guidance, the revised Para 5.10(b) of the 2023 edition of the Guidance Note on Tax Audit under Section 44AB provided more clarity and comprehensive direction. This updated guidance outlined the correct methodology for determining turnover or gross receipts from transactions in derivatives, futures, and options. It reaffirmed that in the case of squared-off transactions, the total of favorable and unfavorable differences must be considered as turnover. This implies that irrespective of whether the transaction resulted in profit or loss, both figures should be included in the turnover calculation without offsetting each other. The premium received on the sale of options remains includible in turnover, but again, only if it has not already been taken into account in the calculation of profit or loss for the transaction. For reverse trades, the difference between the purchase and sale price should be included in turnover. The 2023 guidance then went further to address the previous uncertainties. In the case of open positions at year-end, it clarified that the turnover from such positions should be recognized in the financial year in which the transaction is squared off or settled. This aligns the recognition of turnover with the realization of gain or loss. For delivery-based settlements in derivatives, it specified that the turnover should be computed as the difference between the trade price and the settlement price. Furthermore, where the underlying asset is held as stock-in-trade, the entire sale value of the delivered asset in the hands of the transferor should be considered as business turnover.
Illustration of Turnover Computation
To understand the practical application of the guidance, consider an example where a trader, Mr A, entered into various derivative transactions during the financial year 2022-23. Some of these transactions were squared off, while others were open as of 31st March 2023. One transaction involved the sale of a call option, which was later exercised, resulting in a delivery-based settlement. Another involved a put option that expired without being exercised. Based on the revised 2023 guidance, Mr A’s turnover was computed by aggregating the profit or loss from squared-off futures and options, considering the premium received only where not already accounted for, and excluding open positions to be accounted in the next financial year. For delivery-based settlements, the difference between the trade and settlement prices was included as turnover. In cases where the underlying asset was delivered, and it was held as stock-in-trade, the entire sale value was added to business turnover. After adjusting for all relevant transactions, Mr A’s total turnover was computed to be Rs. 92,800 for the financial year. This computation followed the principles laid down in Para 5.10(b) and provided a consistent and defensible method for determining whether Mr A was liable for tax audit.
Clarification on Scope of Guidance
It is crucial to note that the revised 2023 guidance specifically states that these rules for computing turnover are only for tax audit applicability under Section 44AB. This means the methodology is not intended for use in other areas of taxation or financial reporting unless explicitly required. The turnover calculated under this guidance is used exclusively to determine whether the prescribed threshold limits for tax audit have been breached. It is not meant for computing income or for applying presumptive taxation schemes. This restriction helps ensure that the application of the turnover rules remains consistent and does not conflict with other interpretations of income or business activity under the Income-tax Act.
Applicability of Tax Audit for Salaried Individuals Trading in F&O
One of the most common questions is whether a salaried individual who also trades in futures and options is required to get their accounts audited. The answer lies in the classification of F&O trading under the Income-tax Act. All gains or losses arising from derivative transactions are treated as business income under the head ‘Profits and Gains from Business or Profession.’ These transactions are considered non-speculative even if no physical delivery takes place. Therefore, once a salaried individual enters into F&O trading, they are considered to be carrying on a business activity. The applicability of tax audit in such a case is based on the turnover from F&O trading. If the turnover exceeds Rs. 1 crore during the financial year, then a tax audit is generally required. However, a higher threshold of Rs. 10 crores is applicable if certain conditions are met. Specifically, if cash receipts and payments during the year do not exceed 5 percent of total receipts and payments, respectively, the enhanced threshold limit of Rs. 10 crores becomes applicable. In practical terms, this means that if more than 95 percent of transactions are conducted through banking channels or digital modes, the higher threshold applies.
Case Study to Determine Audit Applicability
Let us consider the example of Mr A, a salaried individual who incurred a loss of Rs. 55 lakhs from F&O trading in the financial year. He entered into five derivative transactions during the year with a cumulative buy value of Rs. 7.25 crores and a cumulative sell value of Rs. 4.70 crores. The total of favorable and unfavorable differences from these transactions added up to Rs. 2.75 crores. This amount, Rs. 2.75 crores, is treated as turnover for tax audit purposes, irrespective of the fact that Mr A incurred an overall loss. Based on this turnover, we examine whether a tax audit is necessary. The turnover is less than Rs. 10 crores, and since all F&O trading is conducted through digital means on stock exchanges, there are no cash transactions involved. This satisfies the condition that at least 95 percent of transactions are non-cash. Therefore, even though Mr A’s turnover exceeds Rs. 1 crore, he is not required to get his accounts audited, as the enhanced limit of Rs. 10 crores applies.
Classification of F&O Trading as Business Activity
Futures and options trading, although conducted digitally without any physical delivery, is treated as a business activity under Indian income tax law. According to prevailing tax provisions and judicial precedents, transactions in F&O are classified under the head ‘Profits and Gains from Business or Profession.’ This classification applies uniformly, whether the taxpayer is a full-time trader or a salaried employee trading part-time. The critical implication of this classification is that F&O trading income or loss is not considered capital gain or speculative business income. Instead, it is treated as a normal business activity, which brings it within the ambit of tax audit applicability under Section 44AB of the Income-tax Act.
Role of Turnover in Determining Audit Applicability
The primary factor in determining whether a tax audit is applicable in any given financial year is the turnover or gross receipts from business activities. The threshold limits for tax audit are linked to this turnover figure. For general business activities, the limit is Rs. 1 crore. However, in cases where at least 95 percent of business transactions are digital or through banking channels, the turnover threshold is raised to Rs. 10 crores. This expanded limit is particularly relevant for F&O traders, as all their transactions occur via exchanges using digital platforms. There are no cash transactions involved in buying or selling F&O contracts. Therefore, F&O traders, including salaried individuals engaging in such trades, generally benefit from the higher Rs. 10 crore threshold for tax audit.
Practical Scenarios Where Tax Audit Becomes Mandatory
Despite the higher threshold, a tax audit may still be required in certain practical scenarios. If an individual’s turnover from F&O trading crosses Rs. 10 crores, tax audit becomes mandatory regardless of whether transactions were digital. If the individual also engages in other business activities involving cash transactions, and the aggregate percentage of cash dealings exceeds 5 percent of total receipts and payments, the higher threshold of Rs. 10 crores does not apply. In such cases, even if the F&O turnover is less than Rs. 10 crores but exceeds Rs. 1 crore, a tax audit would be applicable. Another situation where a tax audit is triggered is when the taxpayer declares income under presumptive taxation under Section 44AD in earlier years but does not continue it in the current year and reports lower profits. The law requires maintaining books of account and getting a tax audit in such cases if the turnover is above the prescribed limit.
Computation of Turnover in Expired or Exercised Options
Options contracts present additional complexity in turnover computation. When an option is sold and expires worthless, the entire premium received from the buyer becomes the profit of the seller. In such cases, the premium received is included in the turnover of the seller. Conversely, if the option is exercised and the transaction is settled through delivery, the difference between the strike price and settlement price becomes the basis for turnover computation. For the buyer of an option that expires without exercise, the premium paid is treated as a loss, and the amount is included in the turnover. For buyers and sellers alike, the turnover must be computed in line with the 2023 guidance, ensuring that duplication of premium amounts is avoided if already accounted for in profit or loss.
Handling Open Positions at Year-End
Open positions at the end of the financial year pose another challenge in determining turnover. These are trades that remain unsettled as of 31st March and are either squared off or delivered in the following financial year. The 2023 guidance note resolves the uncertainty around such positions by clarifying that turnover from open positions must be accounted for in the financial year in which the trade is finally squared off or settled. This approach aligns turnover recognition with income realization and prevents premature inclusion of unrealized gains or losses in tax computations. It also ensures consistency in financial reporting and audit applicability checks.
Turnover in Delivery-Based Derivative Settlements
Although most F&O contracts are settled in cash, some contracts allow delivery-based settlement. In such cases, the transaction does not merely result in a book entry but leads to the actual transfer of the underlying asset. When a derivative transaction results in delivery, the guidance provides two treatment paths. First, the difference between the trade price and the settlement price is included in turnover. Second, if the underlying asset is transferred and was held as stock-in-trade, then the entire sale value of the asset must be included in the turnover of the transferor. This is especially relevant for entities or individuals who engage in physical settlement of derivative contracts for hedging or arbitrage purposes. In these cases, both the financial and inventory effects must be considered.
Dealing With Reverse Trades in Derivatives
A reverse trade involves taking an opposite position to square off an existing derivative position. For example, if a trader initially buys a futures contract, a reverse trade would involve selling the same contract. Similarly, selling an option followed by buying it back constitutes a reverse trade. The 2023 guidance clearly states that the profit or loss from such reverse trades must be included in turnover. This means the difference between the entry and exit prices of such trades forms part of the turnover figure used to assess tax audit applicability. Reverse trades are common in day trading strategies and short-term arbitrage, and the consistent treatment of such trades helps in ensuring a standardized approach across taxpayers.
Non-Speculative Nature of Derivative Transactions
A significant misconception among taxpayers is the speculative nature of derivatives. Under income tax law, speculative transactions are those that are settled otherwise than by actual delivery of goods or scrips. However, an exception is made for transactions in derivatives carried out through recognized stock exchanges. As a result, even though most F&O trades are cash-settled, they are classified as non-speculative business transactions. This classification holds even when the underlying securities are never actually delivered. The treatment ensures that income or loss from such transactions is not subjected to speculative business restrictions and can be set off or carried forward under normal business provisions.
Allowability of Business Expenses in F&O Trading
Since F&O transactions are treated as normal business income, the trader is entitled to claim expenses incurred in the course of the business. This includes brokerage charges, demat charges, exchange transaction fees, GST on transaction costs, telephone and internet bills, office rent, software subscription charges, consultancy fees, and other incidental expenses. However, expenses must be directly related to the trading activity and should be substantiated with supporting documentation. Personal expenses or those unrelated to the trading activity are not deductible. The ability to deduct business expenses is a key advantage of classifying F&O trading as a business, and it also affects the net profit figure, which is relevant for presumptive taxation or audit applicability.
Maintenance of Books of Accounts
Once F&O trading is classified as business, the taxpayer may be required to maintain proper books of account. Under Section 44AA of the Income-tax Act, individuals engaged in business and exceeding a specified income or turnover threshold must maintain books. This includes ledgers, profit and loss accounts, balance sheets, vouchers, and bills. Even though most F&O traders operate through digital platforms, they must maintain copies of contract notes, broker statements, bank statements, and expense records. These documents serve as the basis for computing turnover, calculating business income, and determining the necessity of a tax audit. If a tax audit is required, these books must be audited by a chartered accountant and a report filed electronically along with the return of income.
Use of Digital and Online Trading Platforms
F&O transactions are executed entirely through digital platforms provided by registered stock brokers. This digital nature of trading implies that there are no cash components involved in the transaction. The clearing and settlement are handled by clearing corporations, and funds and securities are transferred electronically. This makes F&O trading one of the most transparent and traceable forms of business activity. The digital nature also fulfills the condition for availing the higher tax audit threshold of Rs. 10 crores, provided the trader does not undertake any significant cash transactions outside the exchange mechanism.
Losses in F&O and Tax Treatment
Losses incurred in F&O trading are treated as normal business losses and can be set off against any other business income. If the losses cannot be fully set off in the same year, they can be carried forward for up to eight assessment years and adjusted against future business income. However, to carry forward business losses, the taxpayer must file the income tax return before the due date specified under Section 139(1). Filing the return late leads to the disallowance of carry-forward benefits. Also, losses from F&O transactions cannot be set off against salary income but can be set off against income from other businesses or capital gains. Understanding this aspect is important, particularly for salaried individuals who supplement their income through F&O trading.
Importance of Professional Guidance
The computation of turnover, determination of tax audit applicability, treatment of losses, and claim of expenses in derivative trading involve complex considerations. Inaccurate classification or misinterpretation of guidance can lead to incorrect tax positions and penalties. Therefore, it is advisable to consult a chartered accountant or a qualified tax advisor, especially for taxpayers dealing in high-volume or high-value derivative trades. Professional assistance ensures compliance with income tax provisions and minimizes the risk of audit objections or legal complications.
Implications of Misreporting Turnover in Derivatives
Accurate computation of turnover in derivative transactions is crucial for determining tax audit applicability. Misreporting or underreporting turnover can have serious implications under the Income-tax Act. If a taxpayer fails to report the correct turnover and consequently avoids a tax audit, they may face penalties for non-compliance. Section 271B of the Income-tax Act provides for a penalty of one-half percent of turnover, subject to a maximum of Rs. 1.5 lakh, for failure to get the accounts audited when required. In addition to financial penalties, misreporting may also attract scrutiny and further assessment from the income tax department. A common mistake made by many traders is to consider only the net profit or loss from derivative transactions instead of aggregating all favorable and unfavorable differences to arrive at the turnover figure. This incorrect approach can lead to misclassification and non-compliance.
Presumptive Taxation Scheme and F&O Trading
The presumptive taxation scheme under Section 44AD is available to small businesses, including individuals and partnership firms, to simplify tax compliance. It allows eligible taxpayers to declare income at a prescribed percentage of turnover and be exempt from maintaining books of account or getting a tax audit. However, the applicability of Section 44AD to F&O trading is debatable. Since F&O trading is classified as a non-speculative business, it technically falls within the scope of eligible businesses. Some professionals consider it acceptable to opt for Section 44AD for F&O trading if the turnover is within the specified threshold. Under this scheme, the trader can declare 6 percent of digital turnover as deemed income. However, there are risks involved in adopting presumptive taxation for derivative trading. The guidance note does not explicitly confirm the applicability, and different assessing officers may take different views. If the trader reports lower income than prescribed under Section 44AD and their total income exceeds the exemption limit, then books of account must be maintained, and a tax audit becomes mandatory under Section 44AB(e). Thus, while the presumptive scheme may provide simplicity, its use in the context of F&O trading should be carefully evaluated.
Turnover Threshold and Cashless Transactions
The government has introduced incentives for cashless transactions by providing higher turnover thresholds for tax audits. As per the proviso to Section 44AB, the limit of Rs. 10 crores is applicable if aggregate cash receipts and aggregate cash payments do not exceed 5 percent of total receipts and payments. In derivative trading, where all transactions are conducted online through stock exchanges and bank transfers, cash usage is virtually nonexistent. As a result, most F&O traders qualify for the higher turnover threshold. However, if the taxpayer engages in any parallel business activity that involves significant cash dealings, the cash component may exceed the prescribed 5 percent limit. In such a case, even though derivative trading is fully digital, the taxpayer may still be ineligible for the higher threshold and must comply with the Rs. 1 crore limit for tax audit. Therefore, a consolidated view of all business operations, including F&O and non-F&O activities, is essential for assessing the applicability of the enhanced limit.
Accounting Treatment of Derivative Transactions
Accurate accounting of F&O transactions is important not only for tax compliance but also for maintaining financial discipline. Most traders maintain their books on a cash basis or accrual basis,, depending on their accounting system. In the case of derivative trading, each contract note issued by the broker reflects the trade date, security name, buy or sell value, premium paid or received, and settlement value. These contract notes form the basis of journal entries in the books. When a trader buys a futures contract, an entry is made to record the derivative asset. On squaring off the position, the gain or loss is transferred to the profit and loss account. For options, the premium paid is recorded as a debit entry when buying, and the premium received is recorded as income when selling. Upon squaring off or expiry, the difference is recorded in the profit and loss account. For delivery-based settlements, entries must also reflect the movement of the underlying asset. The accounting must align with the guidance provided for turnover computation, ensuring no duplication or omission of any element.
Broker Contract Notes and Reconciliation
Broker contract notes and ledger statements are critical documents for F&O traders. These records detail the daily transactions, mark-to-market gains or losses, margin requirements, brokerage charges, statutory levies, and net payable or receivable positions. These records must be maintained accurately and reconciled regularly with the trader’s bank account and accounting software. Any discrepancy between the broker’s records and the trader’s books can lead to errors in reporting income or turnover. Periodic reconciliation ensures that all trades are accounted for, all expenses are captured, and profits or losses are computed correctly. It also provides evidence in case of scrutiny by tax authorities. Since derivative trading involves complex calculations and frequent transactions, manual accounting may not be sufficient. Many traders use specialized accounting tools or hire professional accountants to maintain their books and compute turnover accurately.
Importance of Filing Income Tax Return on Time
Timely filing of the income tax return is mandatory for claiming benefits such as loss carry forward, avoidance of penalty, and maintaining compliance. For taxpayers engaged in derivative trading, this becomes even more critical. If there is a loss from F&O trading, it can be set off against other business income or carried forward for future years. However, this benefit is allowed only if the return is filed on or before the due date under Section 139(1). Missing the deadline results in forfeiture of the loss carry-forward benefit. Furthermore, late filing may also attract interest under Section 234A and a penalty under Section 234F. The due date for filing an income tax return for individuals not subject to audit is typically 31st July of the assessment year. For those required to get their accounts audited, the due date extends to 31st October. Taxpayers must determine their audit requirements well in advance and ensure timely compliance to avoid adverse consequences.
Adjustments for Unrealized Gains and Open Contracts
Another important consideration in turnover computation is the treatment of unrealized gains and losses on open contracts. At the end of the financial year, a trader may have derivative positions that have not yet been squared off. These open contracts may show unrealized gains or losses based on mark-to-market valuation. However, the turnover from such contracts should not be recognized in the current year. As per the 2023 guidance, the turnover from these open positions should be computed and included only in the year when the position is closed or settled. Recognizing turnover or income prematurely may lead to inflated taxable income and incorrect audit decisions. Traders must ensure that unrealized mark-to-market values are not considered in the computation of turnover or business income unless they are backed by actual settlement.
Audit Report and Form 3CA or 3CB and 3CD
When a tax audit is applicable, the taxpayer is required to furnish an audit report in the prescribed form. The auditor must report on the correctness of the books, the method of accounting, compliance with tax provisions, and a detailed breakup of expenses, income, and turnover. The report must be furnished electronically using Form 3CA or 3CB along with the statement in Form 3CD. Form 3CA is used when the taxpayer is already subject to audit under any other l a uch as the Companies Act. Form 3CB is used when the taxpayer is not subject to any other audit. Form 3CD provides extensive details including nature of business, particulars of partners or proprietors, turnover, method of accounting, details of deductions claimed, and more. The auditor must verify the correctness of turnover from F&O transactions and ensure that it aligns with the ICAI guidance. Failure to file the audit report on time may result in penalties and disallowance of certain deductions.
Use of Technology and Automation in Turnover Calculation
Given the complexity and volume of derivative transactions, many traders and professionals use automation tools for computing turnover. These tools import contract notes, extract relevant data, and compute profit or loss, including turnover based on guidance principles. They also help in generating audit-ready reports, GST reports, and profit and loss statements. Use of such tools minimizes human errors and ensures accurate computation as per regulatory guidelines. It also facilitates a quick audit by providing a structured and transparent record of all trading activities. Traders who engage in high-frequency trading or maintain large portfolios particularly benefit from automation. Even for small traders, using basic Excel-based templates can help maintain consistency in reporting.
Education and Awareness for Retail Traders
Retail participation in the derivative market has increased significantly in recent years. Many salaried individuals and small business owners have entered F&O trading without fully understanding the tax implications. A large number of retail traders are unaware of their obligations under the Income-tax Act, especially in areas such as turnover computation, tax audit applicability, reporting losses, and filing returns. This knowledge gap leads to non-compliance, inaccurate filings, and penalties. Traders need to educate themselves on the basics of tax treatment, audit requirements, and documentation. Regulatory bodies, brokerages, and chartered accountants have a role to play in spreading awareness through webinars, tutorials, and advisory sessions. An informed trader is more likely to maintain proper records, comply with tax laws, and avoid disputes with tax authorities.
Applicability of Tax Audit in Derivative Transactions
Determining the applicability of a tax audit in the case of derivative transactions involves evaluating turnover thresholds and profit declarations. According to Section 44AB of the Income Tax Act, a tax audit becomes mandatory if:
- The turnover exceeds ₹10 crore (if cash transactions are up to 5% of total receipts and payments).
- The turnover exceeds ₹1 crore (if the 5% cash transaction condition is not met).
- The taxpayer declares profits lower than 6% (for digital transactions) or 8% (for non-digital transactions) of turnover and total income exceeds the basic exemption limit under the presumptive taxation scheme.
For derivative transactions, which are considered business income, these thresholds are equally applicable. If the net profit from derivatives is less than the presumptive rate and the total income is above the exemption limit, a tax audit becomes applicable even if turnover is below ₹1 crore.
Treatment Under Presumptive Taxation
Presumptive taxation under Section 44AD provides relief from maintaining books of account and undergoing a tax audit if certain conditions are met. However, derivative transactions are considered speculative or non-speculative business income (depending on the type), and this influences their eligibility under presumptive taxation.
Equity derivatives (Futures and Options) traded on recognized stock exchanges are considered non-speculative business income. Taxpayers engaged in such transactions can opt for presumptive taxation provided:
- Turnover is less than ₹2 crore.
- They declare income at or above the prescribed percentage (6% for digital transactions, 8% for others).
If the taxpayer opts to declare profits lower than the presumptive rate and the total income exceeds the exemption limit, a tax audit is required.
Reporting in Income Tax Return (ITR)
Derivative transactions are reported in the ITR as business income. Taxpayers must file either ITR-3 (for individuals and HUFs having income from business or profession) or ITR-4 (if opting for presumptive taxation under Section 44AD).
The reporting must include:
- Turnover calculation.
- Profit or loss from derivative transactions.
- Expenses incurred.
- Audit report, if applicable.
Failure to report derivative transactions accurately may result in scrutiny, penalties, or disallowance of losses.
Maintenance of Books of Accounts
For derivative trading considered as business income, the maintenance of books is mandatory unless exempted under Section 44AA. Traders opting for presumptive taxation and meeting all criteria are not required to maintain detailed books. However, if the taxpayer doesn’t opt for presumptive taxation or declares profits lower than the specified rate, maintaining books becomes mandatory.
Books of accounts may include:
- Trading statements from brokers.
- Bank statements.
- Expense records.
- Ledger of margin money and brokerage.
GST and Derivative Trading
Generally, GST is not applicable on the trading of derivatives as they are considered securities, and securities are excluded from the definition of goods and services under GST law. Therefore, trading in derivatives does not attract GST liability, and no GST registration is required solely for derivative trading.
However, if the person has other businesses that are liable for GST, then derivative trading turnover may be included for registration threshold calculation, although not for tax payment.
Practical Tips for Traders
To ensure compliance and proper tax planning, derivative traders should consider the following:
- Maintain proper documentation: retain all contract notes, profit and loss statements, and broker bills.
- Use specialized accounting software for tracking trades and expenses.
- Consult a tax professional before opting for or deviating from presumptive taxation.
- Review audit applicability annually, especially if turnover or income levels vary significantly.
- Consider the implications of declaring losses, especially when they need to be carried forward or set off.
Conclusion
Calculating turnover in derivative transactions is critical for assessing tax audit applicability and ensuring compliance under the Income Tax Act. Since derivatives are treated as business income, even small traders must stay aware of turnover computation norms, presumptive taxation limits, and audit thresholds. Proper reporting, documentation, and professional consultation can help avoid legal complications and optimize tax obligations.