Any person having income from trading in shares and securities should report it as income from business and profession. To determine the applicability of Tax Audit as per the Income Tax Act, we should calculate Trading Turnover for such income. It is important to note that tax liability does not depend on Turnover. The trading turnover calculation should be done only when the income from shares is considered as a business income and not when it is considered as capital gain income.
The method to calculate turnover for Income Tax on trading is different for each type of trade i.e. Equity Intraday, Equity Delivery, Equity F&O, Currency Trading, Commodity Trading, etc. To understand how it is calculated, we need to understand the meaning of Absolute Profit.
Absolute Profit for Trading Turnover Calculation
Absolute Profit means the sum of positive and negative differences. It is the sum of the absolute value of profit and loss of each trade during the financial year.
For Example:
- Trade 1
- Trader buys 400 units of Scrip 1 at Rs.100 on 25/01/2020
- Trader sells 400 units of Scrip 1 at Rs.90 on 26/01/2020
- Trade 2
- Trader buys 200 units of Scrip 2 at Rs.45 on 25/01/2020
- Trader sells 200 units of Scrip 2 at Rs.50 on 26/01/2020
- Absolute Profit
- Loss from Trade 1 = (90-100) * 400 = Rs. -4,000
- Profit from Trade 2 = (50-45) * 200 = Rs. 1,000
- Absolute Profit = 4000+1000 = Rs. 5,000
Method of Trading Turnover Calculation for Tax Audit Applicability
Examples
Equity Intraday Trading
- On 25/10/2018 you buy 5 shares of Britannia at Rs. 5390 and sell them on the same day at Rs. 5350. Loss = (5350-5390)*5 = Rs. -200
- On 24/10/2018 you buy 17 shares of RBL Bank at Rs. 483 and sell them on the same day at Rs. 488. Profit = (488-483)*17 = Rs. 85
- Trading Turnover = Absolute Profit = 200+85 = Rs. 285
Equity Delivery Trading
- On 14/11/2018 you buy 2 shares of Britannia at Rs. 5855 and sell them on 26/11/2018 at Rs. 5995. Profit = (5995-5855)*2 = Rs. 280
- On 14/02/2019 you buy 9 shares of Hindustan Unilever at Rs. 1784 and sell them on 18/03/2019 at Rs. 1697. Loss = (1698-1784)*9 = Rs. -774
- Trading Turnover = Sales Value = 2(5995)+9(1697) = Rs. 27,263
Equity / Currency / Commodity Futures Trading
- On 17/01/2019 you buy 75 units of Bank Nifty Futures at Rs. 10,922.95 and sell them on 18/01/2019 at Rs. 10,893.35. Loss = (10893.35-10922.95)*75 = Rs. -2220
- On 05/04/2018 you buy 40 units of Bank Nifty Futures at Rs. 24,624 and sell them on the same day at Rs. 24851.7. Profit = (24851.7-24624)*40 = Rs. 9,108
- Trading Turnover = Absolute Profit = 2220+9108 = Rs. 11,328
Equity / Currency / Commodity Options Trading
- On 11/09/2019 you buy 80 units of Bank Nifty Options at Rs. 28.45 and sell them on the same day at Rs. 51.8. Profit = (51.8-28.45)*80 = Rs. 1,868
- On 12/09/2019 you buy 40 units of Bank Nifty Options at Rs. 134.2 and sell them on the same day at Rs. 105.25. Loss = (105.25-134.2)*40 = Rs. -1,158
- Trading Turnover = Absolute Profit + Sales
- Absolute Profit = 1868+1158 = Rs. 3,026
- Sales = 80(51.8) + 40(105.25) = 4144 + 4210 = Rs. 8,354
- Trading Turnover = Absolute Profit + Sales = 3026 + 8354 = Rs.11,380
FAQs
No. Trading Turnover is different than Contract Turnover.
Contract Turnover is the sum of the purchase value and sales value. It is not considered for income tax purpose. Trading Turnover or Business Turnover is the absolute profit i.e. sum of positive and negative differences. This turnover is considered to determine the applicability of the tax audit and the applicable ITR form.
To determine whether a tax audit is applicable or not, calculate the trading turnover. In the case of Equity Intraday Trading, Absolute Profit is Trading Turnover. Absolute Profit means the sum of positive and negative differences. Eg: Loss from Scrip 1 is Rs. -5000 and profit from Scrip 2 is Rs. 8000, absolute profit = 5000+8000 = Rs. 13,000. If the turnover exceeds Rs. 1 Cr then tax audit is applicable.
To determine whether a tax audit is applicable or not, calculate the trading turnover. If you are investing in Futures, Absolute Profit is Trading Turnover. Absolute Profit means the sum of positive and negative differences. Eg: Loss from Scrip X is Rs. -5000 and profit from Scrip Y is Rs. 8000, absolute profit = 5000+8000 = Rs. 13,000. If you are trading in Options, trading turnover = Absolute Profit + Premium on sale of options. If the total trading turnover exceeds Rs. 1 Cr, tax audit is applicable.
Hey @Divyesh_Patel,
The trading transactions are treated differently under Income Tax. The calculation of turnover from the transactions, calculation of tax amount and checking the applicability of tax audit are different for every situation.
Income Head - Options trading is considered as a business income under income tax
Tax Calculation - Tax is to be paid at slab rates as per income tax act. In your case, there is a loss of Rs.18,000 and thus you are not required to pay tax if you do not have any other income
Carry Forward Loss - You can carry forward the loss for 8 years. It means that the loss of Rs.18,000 can be set off against profit earned in future
Calculation of Turnover
There is a concept of absolute profit under income tax. It is the sum of all positive and negative differences from all trading transactions. Eg: Profit from transaction 1 is Rs.10,000 and loss from transaction 2 is Rs.15,000
Realized Profit = Rs.10,000 - Rs.15,000 = Loss of Rs.5,000
Absolute Profit = Rs.10,000 + Rs.15,000 = Rs.25,000
Turnover of options trading = Absolute Profit + Sales
Hope this helps
