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Tax Audit of Trading Income

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Sakshi Shah

Budget 2020
F&O Trading
Intraday
Section 44AB
Section 44AD
Tax Audit
Trading Income
Trading Turnover

Stock Traders trade in shares, securities, commodities, and currency through online trading platforms. Income from trading in Equity Intraday, Equity F&O, Commodity Trading, and Currency Trading is considered as a Business Income. Thus, it is important to determine if the Tax Audit as per the provisions of the Income Tax Act is applicable to Trading Income.

Tax audit limit has been increased from INR 5 Cr to 10 Cr for taxpayers who carry out 95% of their transactions in the digital mode as announced in the budget 2021 by the FM. This limit was initially increased from INR 1 Cr to INR 5 Cr in Budget 2020
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Tax audit limit has been increased from INR 5 Cr to 10 Cr for taxpayers who carry out 95% of their transactions in the digital mode as announced in the budget 2021 by the FM. This limit was initially increased from INR 1 Cr to INR 5 Cr in Budget 2020

Under Budget 2020, the limit for turnover as per Section 44AB is increased from INR 1 Cr to INR 5 Cr if at least 95% of the total payments and at least 95% of the total receipts are digital in nature.

In the case of Traders, the limit for Tax Audit applicability u/s 44AB would be INR 5 Cr since all transactions are digital. For the taxpayers who do not satisfy the above conditions, the limit under Sec 44AB of INR 1 Cr remains unchanged.

Let us understand the conditions for Tax Audit in the case of Stock Traders who have all their trading transactions online. The presumptive rate is 6% since the transactions are digital. The increased limit of INR 5 Cr is applicable FY 2019-20 onwards. If the tax audit is applicable the trader should appoint a CA to prepare and file a tax audit report.

In the case of Income Tax on Trading, since all these trading transactions are digital, the prescribed rate under Sec 44AD would be 6% instead of 8% in normal cases.

Import Your Trades
File ITR Online

India’s fastest growing Tax Filing Platform

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Import Your Trades

File ITR Online

India’s fastest growing Tax Filing Platform

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Tax Audit of Trading Income – Upto AY 2019-20

Trading Turnover up to Rs. 1 Cr

Trading Turnover more than Rs. 1 Cr and up to Rs. 2 Cr

Trading Turnover more than Rs. 2 Cr

Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
Explore
Check Tax Audit Applicability u/s 44AB
Check Income Tax Audit applicability u/s 44AB to file Tax Audit Report Form 3CB - 3CD with your Income Tax Return.
Explore

Tax Audit of Trading Income – AY 2020-21 Onwards

Trading Turnover up to Rs. 2 Cr

Trading Turnover more than Rs. 2 Cr and up to Rs. 5 Cr

Under Budget 2020, the turnover limit under Sec 44AB has been increased from Rs. 1 Cr to Rs. 5 Cr. However, the turnover limit under Sec 44AD has not been changed. When the Trading Turnover is between Rs. 2 Cr and Rs. 5 Cr, neither Sec 44AB is applicable nor Sec 44AD. Thus, Tax Audit is not applicable irrespective of profit or loss. The Income Tax Department is expected to make an amendment in the turnover limit of Sec 44AD to resolve this loophole.

Trading Turnover more than Rs. 5 Cr

ITR for Intraday Traders
CA Assisted Income Tax Return filing for Individuals and HUFs having income form Intraday Trading.
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ITR for Intraday Traders
CA Assisted Income Tax Return filing for Individuals and HUFs having income form Intraday Trading.
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FAQs

Is the Tax Audit limit of Rs. 5 Cr increased for MSME only?

After the Budget 2020 speech, there was a confusion regarding the tax audit limit. Whether the limit of Rs. 5 Cr was increased for MSME only?
No. The limit of Rs. 5 Cr is not restricted to MSME only. As per the Finance Bill, the increased limit in Sec 44AB is applicable to any person who earns Business Income.

I have a loss from Intraday / F&O Trading. Is Tax Audit applicable?

Tax Audit applicability as per Income Tax Act is:

1. If the Trading Turnover in a financial year is up to INR 2 Crore and net profit is less than 6% of the trading turnover
2. If the Trading Turnover exceeds INR 2 Crore irrespective of profit or loss
The limit of turnover to determine tax audit has been increased to Rs. 5 Cr under Budget 2020. The new limit is applicable to AY 2020-21. Therefore in the case of loss from Intraday Trading, Tax Audit is applicable.

How do I calculate Trading Turnover for Intraday Trading and F&O Trading?

Trading Turnover should be calculated to determine the Tax Audit applicability as per the Income Tax Act. Absolute Turnover is the sum of the absolute value of profit and loss of each trade during the financial year.
1. Trading Turnover for Intraday Trading = Absolute Turnover
2. Trading Turnover for F&O Trading
Futures = Absolute Turnover
Options = Absolute Turnover + Premium on Sale of Options

Got Questions? Ask Away!

  1. Hi @saik,

    Tax audit is applicable when your turnover is above the threshold or you have losses and your total income is above the basic exemption limit.
    If your total income is below the basic exemption limit of INR 2.5 lakh and your turnover is below the threshold - Tax audit is not applicable. You can carry forward the losses by reporting them when filing your ITR.

    You can use this tool to determine if tax audit is applicable to you.

    Learn more about tax audit

    Hope this helps :slight_smile:

  2. Hey @saik

    1. You can carry forward the losses by filing ITR within due date without going through tax audit when your total income from all sources is below 2.5 lakhs and total turnover from trading activities does not cross the threshold limit of 5 crore.

    2. No other way except filing ITR. If you do not want to carry forward the losses while filing ITR, you can make the losses to be carried forward as 0 in “Schedule CFL”, but there is no way to report losses to ITD except filing ITR.

    Hope this helps!

  3. Hi @saik,

    In case of Income Tax on Trading, since all the trading transactions are digital, the prescribed rate under Sec 44AD would be 6% of the turnover to determine the applicability of tax audit.
    And,

    You can use this tool to determine if tax audit is applicable to you or not :slight_smile:

Continue the conversation on TaxQ&A

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