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  • Writer's pictureGalactic Advisors

The 44AD loss problem

Do I need to get a tax audit done for losses from Futures and Options?

Unfortunately, the short answer is yes. The devil, however, is in the detail.

What is Section 44AD?

Section 44AD is the presumptive taxation scheme for businesses.

A resident individual or partnership firm can opt for the presumptive taxation scheme on business income. They can declare 6% (or 8%) of their total receipts as Income from business.

Why does Section 44AD affect F&O transactions?

First up, it's important to note that futures and options (F&O) transactions are treated as business income under the Income tax act.

Now, this is where it becomes dicey. If your actual profit is less than 6% of turnover, there's no way to show lower than 6% as profit without getting a tax audit done. This is because of the language of Section 44AD:

(4) Where an eligible assessee declares profit for any previous year in accordance with the provisions of this section and he declares profit for any of the five assessment years relevant to the previous year succeeding such previous year not in accordance with the provisions of sub-section (1), he shall not be eligible to claim the benefit of the provisions of this section for five assessment years subsequent to the assessment year relevant to the previous year in which the profit has not been declared in accordance with the provisions of sub-section (1).
(5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee to whom the provisions of sub-section (4) are applicable and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB.

We know you didn't even bother reading the above sections. Don't worry - we're here to explain.

  • If your turnover from F&O transactions is less than INR 2 crore, you are eligible to use Section 44AD (Sidenote: Turnover is calculated by adding the following:

    • The total of positive and negative or favorable and unfavorable differences

    • Premium received on sale of options

    • Reverse trade difference)

  • If your actual profit is less than 6% of turnover (or you have made a loss), you would obviously not want to show excess income in your ITR

  • If you don't show 6% of turnover as profit, you are an "eligible assessee" who has not declared profits from business in accordance with Section 44AD.

  • Considering the above, you will need to get a tax audit done.

Do I have to get a tax audit done if I made a loss from F&O?

Unfortunately, the answer is yes.

We know this seems like a double whammy - first you make a loss, add to that the compliance cost of getting a tax audit done.

However, note that you can set off your loss from F&O against any other income (other than salary). You may be able to use the F&O loss as a tax shield.

If, however you have a small amount of loss, might make sense to just show 6% of turnover and call it a day. Compliance costs might be higher than actual tax savings.

As always, we have tried to simplify things. Actual provisions are slightly more complex. Also note that the above provisions may not apply to foreign F&O transactions (before you ask, we're not even going to comment on the FEMA aspect of foreign F&O transactions in this post).

Need a tax audit for F&O transactions? Contact us! Our team will be happy to help.


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