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Computation of Turnover & Income Tax Return filling under Future & Option (F&O) Trading

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The Gains from trading in Future and Options (F&O) are not considered as Capital Gains but are considered as Business Income Introduction-
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Here, the buyer is obliged to buy the asset on the specified future date.
An options contract gives the buyer the right to buy the asset at a fixed price. However, there is no obligation on the part of the buyer to go through with the purchase. Nevertheless, should the buyer choose to buy the asset, the seller is obliged to sell it.

Computation of Turnover in case of F&O Transactions- The total of all contracts sold would not be considered as the total turnover.
  1. The total of positive and negative or favorable and unfavorable differences shall be taken as turnover.
  2. Premium received on sale of options is to be included in turnover.
  3. In respect of any reverse trades entered, the difference thereon shall also form part of the turnover. This can be understood through this example:-

Example 1
Mr. Samir enters into the following 2 transactions during the year:-
  1. Purchased 1 Lot of futures for Rs. 8,00,000 and sold for Rs. 8,40,000.
  2. Purchased 1 Lot of futures Tata Motors for Rs. 9,70,000 and sold for Rs. 9,50,000.
Answer-
  • Total turnover would be considered as Rs. 60,000 (Profit 40,000+ Loss 20,000)
  • Total Profit would be considered Rs. 20,000 (Profit 40,000-Loss 20,000)

Example 2
Mr. Shyam enters into the following 2 transactions during the year:-
  1. Shyam buys 100 units of Futures @ Rs 200 and sold for Rs 210.
  2. Also buys 200 units of options @ Rs 300 and sold for Rs 290.
Answer-
  • Total turnover would be considered as Rs. 61,000 [Profit 1,000+ Loss 2,000+Premium of option 58,000(200x290)]
  • Total Profit would be considered Rs. -1,000 (Profit 1,000-Loss 2,000)

Maintenance of Books of Accounts and Tax Audit in case of F&O Trading-

Income from F&O Trading is considered as normal business income.
  • In the normal course of business- If there is loss in F&O trading or the Net profit is less than 6% of the turnover or the turnover exceeds Rs. 1 crore, then provisions of Tax Audit under section 44AB are applicable and in order to get tax audit done, maintenance of books of account under section 44AA are mandatory.
  • In case of Presumptive Taxation Scheme- If there is a profit in F&O and the profit is 6% or more of total turnover, then only the income has to be declared as business income and accordingly ITR has to be filed. There will be no need to maintain books of accounts.

Set off & Carry forward of losses arising in F&O transactions-

As the trading of F&O are non speculative transactions, the loss arising out of these transaction can be set off as normal business against all other heads of income except “Income from Salary” in the same financial year. Or If the above loss is not set off in the same financial year from the other heads of income, it shall be carried forward to next year and set off from the income of same head only.


See the related post : How to E-file Income Tax Return

 ITR should be filled before the due date and losses must be shown in their ITR-

The loss can be carried forward when it has to be shown in income tax return or the return should be filled before the due date prescribed under section 139(1) or if it fails to do the same, the losses cannot be carried forward.

Example -
Mr. Rama has income for the financial year 2017-18,  Salary of Rs 10 lakh, Interest income is Rs. 49,000, Rental Income is 25,000 monthly. He has opened a trading account with a brokerage firm; he has also paid the following expenses for trading F&O- Enrollment charges Rs. 3,000 Brokerage charges Rs 72,000 Telephone expenses Rs 12,000 Internet bill is Rs 1,000 monthly He has incurred a loss from F&O aggregating Rs 2.8 lakhs. His total turnover being Rs. 28 lakhs (calculated on the basis of the method discussed above). Mr. Rama thinks that whether he has to show his trading activity from F&O or ignore it, since there is a loss?
Answer-
A) Income from Business & Profession (F&O) under normal course of business-
Loss from F&O = 2,80,000
Add: Expenses= 99,000 (I.e. Enrollment charges Rs. 3,000+ Brokerage charges Rs 72,000+Telephone expenses Rs 12,000+Internet expenses Rs 12,000)
Total Loss = 3,79,000
Computation of Income for the financial year 2017-18-
Particulars Amount (Rs.)
Income from Salary 10,00,000
Income from House Property (Rs. 3,00,000 less 30% Statutory Deduction) 2,10,000
Income from Business & Profession -3,79,000
Income from Other Sources 49,000
Total Taxable Income 10,00,000
Loss to be carried forward -1,20,000

Answer-
B) Income from Business & Profession (F&O) under presumptive taxation scheme-
Income from business is 6% of Rs. 28,00,000 (Turnover) comes to Rs 1,68,000
Computation of Income for the financial year 2017-18-
Particulars Amount (Rs.)
Income from Salary 10,00,000
Income from House Property (Rs. 3,00,000 less 30% Statutory Deduction) 2,10,000
Income from Business & Profession 1,68,000
Income from Other Sources 49,000
Total Taxable Income 14,27,000

Thus, Under Normal Course of business loss of Rs. -1,20,000/- to be carried forward and Taxable income is Rs. 10,00,000/-, but under presumptive taxation scheme Taxable Income is Rs. 14,27,000/-.  
See the related post : Eight ways to save Income tax



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