"Tax Audit for Salaried Individuals in F&O Trading: Understanding Compliance & Risks"

Case Study: Tax Audit Applicability for Salaried Individuals in F&O Trading

Background

Mr. Rajesh, a salaried employee earning ?12 lakh per annum, actively trades in Futures & Options (F&O). In FY 2023-24, he incurs a net loss of ?3 lakh from F&O trading. He does not maintain books of accounts and assumes that since he has a loss, he is not liable for a tax audit.

Issue Faced

Rajesh is unaware of the turnover calculation rules for F&O and mistakenly believes:

1. Tax Audit is Not Required since he incurred a loss.
2. Turnover Means Total Buy/Sell Value, leading to incorrect assessment.
3. Losses Don’t Need to be Reported since no tax is payable.
4. Presumptive Taxation Rules (Section 44AD) Don’t Apply to Him as he is salaried.

Analysis

1. Turnover Calculation for F&O Trading

For tax purposes, turnover in F&O trading is computed as the absolute sum of profits and losses:

• Profit on some trades: ?1.5 lakh
• Loss on other trades: ?4.5 lakh
• Total Turnover = ?1.5 lakh + ?4.5 lakh = ?6 lakh

2. Applicability of Tax Audit

As per Section 44AB r/w Section 44AD, the following conditions apply:

• If turnover is up to ?2 crore → Presumptive taxation (6% of turnover) is allowed.
• If declared profit is less than 6% of turnover and total taxable income exceeds ?2.5 lakh → Tax audit is mandatory.

In Rajesh’s case:

• Turnover = ?6 lakh
• Declared profit = Loss of ?3 lakh (less than 6%)
• Salary income = ?12 lakh (taxable income exceeds exemption limit)

Thus, Rajesh must get a tax audit under Section 44AB since his profit is below 6% of turnover and his total income exceeds the exemption limit.

Mistakes & Their Consequences

1. Failure to Conduct Tax Audit → May lead to penalties under Section 271B (?1.5 lakh or 0.5% of turnover).
2. Loss Cannot Be Carried Forward → Without proper reporting and audit, F&O losses cannot be set off against future gains.
3. Risk of Notice from IT Department → Mismatch of trading activity in AIS (Annual Information Statement) may trigger an inquiry.

Corrective Actions for Rajesh

• Get a tax audit done by a CA to comply with Section 44AB.
• Maintain records of trades to avoid issues in the future.
• File ITR-3 (since F&O trading is treated as a business income/loss).
• Claim loss carry forward to offset against future profits.

Conclusion

Salaried individuals engaged in F&O trading should:

• Calculate turnover correctly (sum of absolute profits & losses).
• Understand presumptive taxation rules (Section 44AD) and tax audit criteria.
• File the correct ITR form (ITR-3) and maintain proper records.

Failing to comply with tax audit requirements can lead to penalties and loss of tax benefits. Awareness and proper filing can help avoid unnecessary complications and ensure compliance with the Income Tax Act.