How do we determine the turnover to check the applicability of tax audit?

A tax audit is required in 2 conditions, so when trading the markets if 

  1. Turnover is more than 1 crore
  2. Section 44AD says that, if your turnover is less than 1 crore and profit less than 8% of your turnover, you need to get a tax audit done. 

Especially with all the notices that traders have been receiving, it is best that every active trader has his books audited. 

To determine the turnover(there are many ways, but this is something I suggest): 

  • Equity delivery, everytime you buy the value of stocks gets debited from your ledger, and when you sell it gets credited, all value of sales together form the turnover. So assuming you bought stock for 1lk and sold for 1.5lk, your turnover is Rs 1.5lks.  

When filing for returns, you can either show your investments and trading separately, or if you are a very active trader you need to show investment and trading as a combined business. If you are showing investments separately, all equity delivery trades (long term capital gain and short term capital gain) will come under the capital gain head, and the turnover doesn't really matter for your equity delivery trades. Turnover for equity delivery comes into play, if you are showing your investments and trading as a combined business. 

  • Equity Intraday, At the end of the day whatever profit or loss you made during the day is either added or debited from your ledger. You can use the sum of all such profits and losses to consider for your turnover. So if one day Rs 5000 as profit and other day Rs 3000 loss, the turnover is Rs 8000. 
  • Futures, In case of futures margin is blocked in your ledger and daily MTM is either added or deducted. So typically it becomes very tough to calculate turnover, a method that most traders use is to use net settlement profits or losses for every individual contract. So if Nifty Jan futures net profit is 1lk, Nifty Feb future net loss is 2lks, your turnover now is Rs 3lks. 
  • Short options, Short options similar to futures has margin blocked, and hence the same above methodology could be used. 
  • Long/Buy options, Everytime you buy options, the money is debited and when you sell,money is credited. Sum of all such buy & sell values adds up to the turnover. 

Since there is no clear guidelines on this, every person uses a methodology to calculate turnover that best suit his needs, just make sure you are consistent to whatever the way you calculate turnover. Note that turnover is used to determine only if you need an audit or not, and it doesn't in any way affect how much taxes you have to pay. 

Do consult a CA before taking any decision, you can also read this for more. 

4 Likes

great helped a lot

Thanks for your answer. The Z-connect link you referenced however says that the turnover should only be calculated on the sell side of the transaction (delivery based), but the answer above says it’s for both buy and sell. Thanks again.

Thank ya girl for spotting it… :slight_smile: … made the change… Yes in case of delivery, only the sale is considered for turnover. It is very similar to say I am running a grocery store, my turnover is the products I sell from my store… :slight_smile:

hi all
the above mention information were very helpful. if any workout of excel sheet is there can any one may send me through mail. or let me know where i can download the excel format…
my mail id is [email protected]