Future & Options (F&O) Accounting, Audit and Taxation

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December 30, 2021

Share trading and, Derivative trading (F & O trading) is normal now

Advertisement a days. You will not believe nearly 14.3 million new investors added
by the depositories in the year ended 31 march 2021. Further, we
cannot deny the role of digitalization and platforms available to invest in stock and
derivative market.

Most of people step-in into it without having knowledge about its taxability and how it
will be shown in their Income tax return?  Is it mandatory to show these transactions in
return? Require to maintain books of accounts? You will get answer of all of these
questions.

Let’s dig deep into this. Assuming you all know about the future and option. Let’s not go
into the definition part.

Trading in Future and option is a business transaction. Yes, you read it correctly.  as per
section 43(5) of the income tax act, 1961. It is non-speculative business income.  One can
also refer Guidance Note on tax audit by ICAI pg 25.

So, it is clear that Income from “Future and option trading” is a normal business income.

Salaried people who are doing F&O transaction are actually doing business unknowingly.
 Many are incurring and losses and some are in profit too.

Calculation of turnover for the Income tax purpose

Method of calculation of turnover is not provided under the income tax act, 1961. But
given in Guidance Note on tax audit by ICAI pg 25 as follows.

(i) The total of favourable and unfavourable differences (Profit/Loss) shall be taken as
turnover.

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(ii) Premium received on sale of options is also to be included in turnover.

(iii) In respect of any reverse trades entered, the difference thereon, should also form part
of the turnover.

Table 1 : Example of calculation of turnover of Futures:

Future Units Buying Rate Selling Rate Total Sell Total Buy Turnover
(C) (D)
(A) (B) (E=BxD) (F=BXC) (G)

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 Nifty 50  ₹ 16,800  ₹ 16,250  ₹  ₹   ₹ 
8,12,500 8,40,000 -27,500

Tata 425  ₹1,048  ₹ 1,290  ₹  ₹  ₹

Steel 5,48,250 4,45,400 1,02,850

Bank 50  ₹ 35,000  ₹ 35,000  ₹  ₹   ₹        –

Nifty 17,50,000 17,50,000

Total Turnover  ₹
1,30,350

Table 2 : Example of calculation of turnover of Options:

Options Units Buying Selling Difference Premium Turnover

Rate (C) Rate (D) Received

(A) (B) (E=(B-)xD) (F=DXB) (G)

Nifty  150 325 220  ₹  -15,750  ₹ 33,000  ₹ 48,750

16000CE

TataSteel 425 148 190  ₹  17,850  ₹  80,750  ₹ 

1200 PE 98,600

BankNifty 125 455 405  ₹  -6,250  ₹ 50,625  ₹ 56,875

36000 CE

Total Turnover  ₹
2,04,225

Requirement of Audit:

Let me remind you again this calculation of turnover is only to determined that what will
be the position under income tax. On the basis of turnover, we decide tax audit is required
or not.

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Section 44AB of the Income tax act,1961 provides that:

Every person carrying business shall, If his turnover is exceed one crore in any
previous year, require to get his accounts audited by an accountant.

In case cash receipts and cash payments does not exceed 5% of total payments or
receipts 1Crore will be read as 5Crore. For Financial Year 2021-22 this 5Crore limit is
further extended to 10Crore.

As F&O trading is also falls under the category of eligible business (turnover limit is Rs.
2Crore). So, income can also be shown under section 44AD of the income tax act, 1961 on
presumptive basis if assessee also is eligible assessee.

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In this case audit under section 44AB clause (e ) of the act,  will be required only if
declared profits are less than 8% or 6% ( As the case may be) of the total turnover.

Note: In all the cases of loss audit is not mandatory. But in general practice and to deal
with future litigation this practice followed.

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Maintaining Books of Accounts:

As per section 44AA(2) of the income tax act, 1961,

 Every person carrying business, require to maintain books of accounts the Income from
the business exceeds Rs. 1,20,000 or the turnover exceed Rs 10Lakh.

(Limit for Individual and HUF (Hindu Undivided Family) of Income is Rs. 2,50,000 and
for turnover is Rs25 lakhs.)

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One who declaring Income according per section 44AD of the act not require to
maintain books of accounts.

But If his income exceed the basic exemption limit not chargeable to tax i.e. Rs. 2,50,000
and profits are not declared according to the provisions of section 44AD then
require to maintain books of accounts and also get them audited U/s 44AB.

Can be conclude as

Case Opted  for  44AD Declaring profit Remark

1 Yes (Turnover is less According to 44AD Neither require to maintain

than Rs. 2Cr.) books of accounts nor audit

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 2 Yes (Turnover is less Less than 8% or 6% as Require to maintain books
than Rs. 2Cr.) the case may be or of accounts and audit.
declaring loss

3 No (Turnover is less Profit or loss whatever is No audit, maintain books of

than limit given the case accounts if limit of 44AA is
under 44AB) crossed

4 No (Turnover is more Profit or loss whatever is Audit and maintaining

than limit given U/s the case books of accounts is
44AB) mandatory

Accounting Entry for transactions:

One can do accounting on the basis of differences.  Let’s take Table 1, Nifty transaction as
an example.

Transaction incurred loss of Rs. 27500, Journal entry will be as follows:

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Future and options Profit and loss A/c        Dr. 27,500

To Stock Broker A/c  Cr. 27,500

(Being loss incurred on Nifty Future transaction)

(Being loss incurred on Nifty Future transaction)

In case profit entry will be reversed.

Or one can also keep record by maintaining inventory. Keep in mind turnover for Income
will not match with accounting turnover. Cause to calculate turnover under Income tax
absolute figures are considered.

Tax on Income, Set-off and carried forward of losses:

As it is considered as normal business income. Profit from F&O trading will be taxed at
normal tax rate applicable to assessee.

Loss can be set off from intra head income except speculative business income and inter
head income except salary income.

Loss can be carried forward as “Loss from Business & profession” for next 8 assessment
years and can be adjusted with profit and gains for business and profession.

*****

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Disclaimer: This article is solely for educational purpose and cannot be construed as
legal and professional opinion. It is based on the interpretation of the author and are not
binding on any tax authority. Author is not responsible for any loss occurred to any
person acting or refraining from acting as a result of any material in this article. You can
reach author at caharshalisalvi@gmail.com

Tags: Section 44AD, Tax Audit

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Author Bio

Name: CA.HARSHALI SALVI

Qualification: CA in Practice

Company: Salvi & Associates

Location: INDORE, Madhya Pradesh, India

Member Since: 08 Apr 2019 | Total Posts: 6

I am a practicing chartered accountant. Holding Certificate of "Course on Goods and
Service Tax" organized by ICAI. Having 3+ years post qualification experience in
Income Tax, GST and auditing. You can reach out to me at caharshalisalvi@gmail.com.
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