income tax
Futures and Options (F&O) are among the most prevalent asset derivatives traded on stock exchanges. The income or loss generated from F&O transactions is classified as Business Income or Loss for tax purposes, thus invoking the standard provisions set out in the Income Tax Act. The relevant rules concerning tax audits under Section 44AB also apply to F&O trading.
Every individual or entity engaged in business must have their accounts audited if their total turnover exceeds Rs. 10 crores. In the case of F&O trading, where 95% or more of the transactions are digital, the threshold of Rs. 1 crore does not apply.
An audit is mandated if the provisions of Subsection (4) of Section 44AD are applicable and the taxable income exceeds the basic exemption limit.
A taxpayer whose turnover does not exceed Rs. 2 crores may opt to declare taxable income at 6% of the total turnover from the previous year.
If a taxpayer chooses a presumptive tax scheme under Section 44AD(1), they are committed to this scheme for the subsequent five years. Should they wish to opt out and report losses or income below the presumptive rate in the current year, an audit must be conducted under Section 44AB(e).
A frequently asked question pertains to whether an audit is necessary when a taxpayer declares losses or income below the presumptive rate, even if their turnover remains within the prescribed limits of Rs. 1 crore or Rs. 10 crores. The answer is: No.
Prior to 2016, taxpayers were required to maintain books and undergo audits if they reported income below the presumptive rate or declared losses. However, the Finance Act of 2016 amended this clause. Now, audits are mandated only if a taxpayer has declared income at the presumptive rate in any of the previous five years but subsequently declares losses or income below the presumptive rate in the current year, given that their total income exceeds the basic exemption limit.
An audit is necessary in the following situations:
Businesses with a turnover exceeding Rs. 10 crores, provided that cash receipts and payments do not exceed 5% of total receipts and payments.
Individuals engaged in business who have opted for presumptive taxation (at rates of 8% or 6%) in any of the past five years but choose not to do so in the current year.
Taxpayers should exercise caution and refrain from selecting “Yes” under the Audit Information heading—“Are you liable to get audited under Section 44AB?” Doing so may result in a validation error during the return submission process.
In summary, a taxpayer who incurs losses from F&O in the assessment year (AY) 2021-22 and has not opted for a presumptive taxation scheme in any of the last five years is not required to undergo a tax audit under Section 44AB. Care should be taken to avoid indicating liability for an audit under this section to prevent submission errors.