Taxable Turnover - FNO

Dear Sir,

I am trading in option (delivery position ) mainly square off intraday & next day. but i am confusion regarding turnover for tax audit purpose. I have the following questions please help me out.

  1. I think tax audit limit turnover is 1 crore - but how to calculate this - when i generate tax p&l from zerodha it shows 1.75 crore taxable turn over - is it correct ? But for FNO turn over should be the difference between the position say it is the sum up of profit & loss. But i think they calculated on total sell premium .

  2. If i declare the income under 44AD which ITR form is applicable? and B/S, P&L required.

  3. For trading in Market profit is uncertain - in that case we need to pay the Advance tax? My some of profit is receive in last qtr only

  4. If declared income under 44 AD is it required to pay advance tax ?

regards,

Raghu

@Quicko Can you, please.

@Ravi_Shetty

  1. Turnover for tax audit purpose is calculated as follows:
    a. In the case of Futures: It is Absolute Profits (the sum of positive and negative difference)
    b. In the case of Options: It is Absolute Profits + Premium on Sale of Options

  2. If you declare your income u/s 44AD then no need to prepare P&L and Balance Sheet. However, you can only opt for presumptive scheme u/s 44AD if your total turnover is less than Rs. 2 Cr. and your profits are more than 6%.

  3. Liability to pay the Advance tax arises when your total income is more than Rs. 2,50,000 and your tax payable is more than Rs. 10,000. You can make payment of Advance Tax till 31/03/2020.

  4. Yes, you need to pay advance tax even if you opt for presumptive taxation scheme u/s 44AD. However, you only need to pay it once in a whole year i.e, the 4th installment due on 15th March if each financial year.

For any such queries, feel free to conatct us.

Quicko, I beg to differ regarding the definition of turnover . You are considering turnover as–
" In the case of Options: It is Absolute Profits + Premium on Sale of Options '
but as per Institute guidelines no where " plus" has been mentioned. I am reproducing below the definition of turnover as per ICAI guidelines —
**"**The turnover in such types of transactions is to be determined as follows:

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

(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. "
In my opinion ,Premium received on sale of options is to be considered as Turnover when the option is not squared off, obviously the whole premium received is profit and that is also Turnover. When the option squared off it should comes under point no one, which itself includes the diff. of Sale minus purchase.
If we consider 2nd point as plus with first point to define turnover then we should also include third point . In my view Point 1/2/3 defines turnover under three different circumstances . More over if we consider Point 1+ point 2 as definition of turnover for option then it has no parity with the definition of turnover of Future (The total of favourable and unfavourable differences only). It is just my personal view, long debate is going on for several years , it is just my view , hope u wont mind.

1 Like

@sjmrng, So you point is

the above point no (ii) is only applicable when we don’t sq-off short option position.

MAYBE here I posting snap of ICAI 2013 Edition book.
:slight_smile:

The calculation of trading turnover is a debatable issue since many years. As per our interpretation, turnover as per ICAI guidelines mentions in point (ii) that Premium should also be included in turnover. It must be added to the Absolute profit as per point (i). Thus, Turnover is Absolute Profit + Premium on Sale of Options. This is the most conservative method to determine trading turnover. You may opt for a different method to calculate turnover provided you can explain it the income tax officer. Further, please note that calculation of turnover is only to determine the applicability of tax audit as per the Income Tax Act. It does not have any effect on your tax liability. For any further queries, write to us on [email protected]

Quicko I beg to differ with your following statement . According to you ,
(1)
"turnover as per ICAI guidelines mentions in point (ii) that Premium should also be included in turnover. It must be added to the Absolute profit as per point (i). Thus, Turnover is Absolute Profit + Premium on Sale of Options. This is the most conservative method to determine trading turnover"

No where Institute has stated point no 1 and 2 will be added together to determine the Turnover, IF we take sales premium along with favorable and Unfavorable differences , we are actually taking sales side Twice, Moreover according to ZEORODHA’S conservative approach ( which is also not established as correct method to determine turnover) we , the client of ZERODHA , may face problem because if we follow your method then many traders will come under TAX AUDIT on the other hand if we take point 1 (where buy and sell both took place ) and point 2( only for option sold but not covered) to determine the turnover then many traders will not fall under the requirement of Tax audit . But If Income tax officer calls for Brokers record to verify the turnover then obviously a difference will arise and will go against us because** turnover as per Zerodha 's Turnover statement ** will be much more for their conservative approach , the approach which is also doubtful.

(2) I also beg to differ with your 2nd point –

" Further, please note that calculation of turnover is only to determine the applicability of tax audit as per the Income Tax Act. It does not have any effect on your tax liability "

In my opinion, Profit depends on turnover @ 6% which obviously increase or decrease according to the definition of TURNOVER and TAX depends on Profit, if Profit Increases because of Conservative approach of turnover, Tax will also increase. Moreover If tax audit is applicable for any body but he fails to do so will face a good amount of penalty. It may happen that if any body follows conservative approach of ZERODHA , TAX AUDIT is applicable for him however if he follows other method (same as future trading ) then he may remain far away from the requirement of TAX AUDIT . Moreover Brokers record matters lot , it is not just to determine whether Tax audit is applicable or Not , it is a third party confirmation on which Income tax will rely, so Brokers statement should reflect the actual fact , not just because it is conservative approach.
I have just placed my view , hope you wont mind. Just request that Zerodha should once again go through the provision to determine turnover. Their Turnover statement is very vital because that we have to place before Incometax Officer to convince them.

Please note there is a difference in the way turnover is calculated by Income Tax vs SEBI turnover