Sale amount no longer to be included in turnover of options trading for taxation
August 25, 2022
As per Income Tax (IT) laws, turnover for options trading is calculated by adding profit, loss and sale amount (premium received on sales) of all the trades done in a year
Options traders have a reason to rejoice from the current assessment year. In a guidance note, the Institute of Chartered Accountants of India (ICAI) has said that options traders don’t have to include premium received on sale, while calculating the turnover for taxation purposes.
As per Income Tax (IT) laws, turnover for options trading is calculated by adding profit, loss and sale amount (premium received on sales) of all the trades done in a year. This method of computation inflates turnover for options traders significantly and pushes the turnover over the ₹10 crore threshold beyond which tax audit is mandatory. With the sale amount removed from turnover calculation, total turnover for options traders will come down and save many traders from mandatory audit requirements.
However, sale amount is to be omitted only when it has been already used to calculate profit or loss. The ICAI note clarified,“Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included."
Hiren Bhandari, an Ajmer-based chartered accountant, explained, “If an option contract is physically settled, there is no profit or loss. In such cases, the premium received on sale is to be included in calculating turnover."
IT rules treat income from F&O trading as business income and mandates tax audit for turnover above ₹10 crore if at least 95% of the total payments made on trades are done through digital modes. In cases where cash receipts are over 5% of the total payments, traders have to undergo mandatory audit for turnover above ₹1 crore.
Turnover on futures contracts is calculated by adding the profit and loss (called net profit). For options, premium received on sale is also added to the net profit, which has now been removed by the ICAI.
The tax department is yet to amend the IT Act to include this condition.
“In the absence of any guidance from the IT department, everyone relies on the guidance given by ICAI for ITR filing," said Karan Batra, founder, Charteredclub.com.
For the current assessment year, since the due date of 31 July for non-audit cases has passed, taxpayers who dabble in F&O and are yet to file ITR will have to mandatorily undergo tax audit irrespective of whether they follow the new rule or the previous rule.