July 29, 2013

Article on how Section 44AD can affect a trader – Authored by Nithin Kamath on Hindu Business Line

Some of you who trade in the markets would have probably received notices for defective returns from the Income Tax department for the assessment year 2012-13.

One possible reason could be that you did not take note of the the amendment to section 44AD which deals with computing profits and gains from a business on a presumptive basis.

Previously, only construction business was covered under section 44AD. But from AY 2011-12, all businesses including the business of trading in the markets was brought under its purview. What this section says is that if your turnover is less than Rs 1 crore and if your profit is less than 8 per cent, then you will have to get your books audited by a chartered accountant. Turnover in this context would means settlement turnover and not contract turnover.

1. kerala says:

🙂

2. RainMaker says:

“Turnover in this context would means settlement turnover and not contract turnover”.

What is the difference can you please explain.

Suppose when nifty trading at say 6000, I buy 1000 Nifty option @ 100 and sell @ 110 for a gain of Rs. 10/-

What will be my turnover

110*1000 = 110,000 (sell)
or 210,000 total

or it will be (assuming nifty spot was trading at the same level for buy / sell)
6000*1000 = 60,00,000 (sell)
or 120,00,000 total

• Nithin Kamath says:

RainMaker Jul 31 2013, 1:04 pm
reposted it did not read the multiplication sign it beteen
What will be my turnover
100×1000 = 100,000 (buy); 110×1000 = 110,000 (sell); or 210,000 total
or it will be (assuming nifty spot was trading at the same level for buy / sell) 6000×1000 = 60,00,000 (buy); 6000×1000 = 60,00,000 (sell); or 120,00,000 total
[ Click to thank ]

• Nithin Kamath says:

Rainmaker,

Turnover the way it is calculated is usually contentious as there is no rule given by the IT department for stock market business. What we follow and which is widely followed is the settlement turnover.

The calculation the way you have mentioned is not correct. Basically whatever is the net profit or loss on a particular contract are totally summed up. So if you have trade July 6000 calls and made net profit of 10000 and trade Aug 6000 calls and made a net loss of 20000, your turnover is 30000.

If you look at the P&L statement, you will see a total payable and total receivable, you sum both of this you get the turnover.

Do read this blog where we have detailed discussion, ” Taxation Simplified”

Turnover is important to know if your books need to be audited or not, so it is always better because there is no rule for calculating turnover that if you are someone trading on f&o, have your books audited by CA in any case.

Cheers,

3. Sarvottam says:

Dear Sir,

First of all, I thank you for your great service. First, as an excellent broker and secondly for this informative blog. My query is as follows:

My F&O turnover is less than 1 crore when I calculate as per your definition using Zerodha Backoffice P&L Report. and my profit is more than 8%. So, as I understand that I need not get my account audited and due date for tax-filing for me would be 31st July 2013 (now 5th August after extension). But may I still choose to get my account audited and in that case, will due date for me would be 30th September?
Since I am trading F&O, am I liable to maintain accounts as per section 44AA?

Thanks!

• Nithin Kamath says:

Sarvottam,

It is highly advisable to have your books audited by a CA, since there is perfect definition for turnover by CBDT. So yes you can get your account audited and the last date would be 30th September.

Yes you should maintain accounts.

4. RainMaker says:

Thanks for responding gone thru the given link, please tell me if my following understanding is correct:

Nifty Future Aug series I buy one lot every day and sell (square off) one lot same day and repeat the same for the next 25 trading days and at the end of month make no profit / loss in Aug series, net receivable / payable is zero Is my turnover Zero

Each contract series will be treated separtely.

• Nithin Kamath says:

Yes,

This is what we are following to calculate turnover and since there is no exact definition for turnover by CBDT, it still makes sense to get your books audited by a CA if you are trading f&o.

Cheers,

• RainMaker says:

Thanks,

It turns my understanding regarding turnover upside down.

Now take this situation

I take Aug series and make number of trades and the net profit is say a bit less than 1 crore at the close of series. My Turnover also happens to be bit less than 1 crore, right. Now my turnover is less than I crore and I show a presumptive profit of 8% and pay tax on 8 lakhs which will come to approx 2.4 lakhs plus surcharge instead of 30 lakh plus surchage . above all I don’t need to maintain books will it be acceptable ? PC must have started scratching his head by now.

Once again thanks for being considerate.

• Nithin Kamath says:

Firstly rainmaker,

Turnover has nothing to do with your profitability or taxes. Turnover is just to determine if you need an audit or not.

In your case it depends on how much profit you have made in all the trades executed in the AUG series. You need to pay taxes on the profits after reducing all the expenses.

About the presumptive profit, yes you can get away presently by showing profit of 8% of the turnover and then paying taxes on that 8%. But it is not advised, because the IT department might come back on you in retrospective.

Cheers,

5. AbsoluteBeginner says:

I have a regular full time job and the company I work for deducts TDS. I have done some trading in F&O (turnover > 1 crore) and incurred losses.
I have filed ITR2 and have declared the losses under section CFL to be offset in future years hopefully. I haven’t bothered to get the trading statements audited by a CA.
Is this wrong? Was I incorrect in assuming I have an option to use ITR2 as a salaried individual who dabbles in F&O?

• Nithin Kamath says:

Yes, you were wrong in using ITR2 when you have traded on f&O. You should have used ITR4 or ITR4S for this and you could have added all the expenses you incurred and also net off any income other than your salary income with this loss.

• baligaa says:

Hello Zerodha,

I would still suggest that salaried individuals do not file ITR-4 and use ITR-2 instead and report F&O income under capital gains.

http://money.outlookindia.com/article.aspx?286519

The article I have quoted still maintains that no audit is required for turnover < Rs.1CR

Your thoughts? Is there a definitive mandate from IT authorities that all F&O activity has to be reported under business income or are we just speculating. Anyway most directives in India are open ended and subject to interpretation and the bureaucrats will not waste time exploiting these conditions. Time for brokerages to get together and fight for rights of the individual who is harassed by these illogical rules.

Disclaimer: I have never traded F&O segment.

P.S: I was looking at opening an account with zerodha for F&O trades. Now undecided as I never have visited a CA and never would like to in the future – Not if I can help it.

– Anand

• Nithin Kamath says:

Baligaa,

Firstly there is no doubt that f&O trading has to be shown as income from a business, read section 43(6) and it definitely can’t be shown under capital gains.

The amendment to 44AD happened from AY11-12, no one realized about the implications until recently when a lot of notices were sent out to people who had not got their books audited and turnover less than 1cr.

We as Zerodha and our CA have already sent out a petition against this very illogical clause to CBDT.

Cheers,

6. Chan says:

If my profit from F&O is more than 8% it taxed even if my income is below 2lk..? If so what is % of tax.

• Nithin Kamath says:

You don’t have to pay any taxes if your income is lesser than 2lks, but you have to file your returns saying no tax to be paid. The idea is filing your returns and this doesn’t necessarily mean paying taxes..

• Chan says:

If I show F&O profit is more than 8% CA audit is not required so only filing ITR 4 is sufficient am I right. Also from which date to what date I should be profitable ( because on 31 march am in profit but after 15 July fell in loss).

• Nithin Kamath says:

Chan, Year is considered from 1st April to 31st march, so presently you have to file returns from 1st April 2012 to 31st march 2013. The loss from 1st April this year can be showed in the next year returns.

Cheers,

7. nitish says:

Dear sir

I m currently in F&O actively. I have demat account in my personal Name. But sir now i have two friends who want(I also) to make partnership with them. But somebody told me that A Partnership Firm cannot be a member of a company (i.e. can’t held shares in the name of partnership firm).
1.There is any problem in future due to Demat A/c which is in My personal Name ?
2. Can i continue with same Demat alongwith Partnership Deed?
3. Is it neccessary to open firm & Demat A/c In the name of the Firm?
4. Please guide me What is the Tax consequences in all the above cases.

• Nithin Kamath says:

Nithish,

A partnership cannot have a demat account, but you can open a trading account in the name of the partnership.

So if it is only f&O trading, you can open a trading account in the name of partnership and you shouldn’t have any issues. You can send an email to [email protected] to get details of documents required to open trading account for partnership.

Demat account cannot be opened in the name of partnership and it can be opened in the name of any of the partners. So when you buy stocks for delivery through your partnership trading account, it will be sent to the partners demat account. This doesn’t cause any tax liability as the partner is just being the custodian of the shares and once the partnership sells the shares, if there is a profit the partnership has tax liability.

• nitish says:

Dear Sir

Sir If i Open Demat & Trading A/c in Any of the Partners Name, then can i claim expenses such as:-
-Telephone & Internet exps
– Partners Salary
– Electricity expenses etc.
You are requested to guide me about all above things in Detail.

• Nithin Kamath says:

If you are trading in the name of partnership, the partnership can claim all the expenses and not you as an individual. Read this blog for more.

8. Deepkum says:

If I have short term capital loss from previous years that I have been carrying forward so far, can I file Sugam (4S) ITR if I do not wish to carry those losses forward anymore ?

• Deep, ITR 4S is for presumptive income and you cannot setoff your carry forwarded losses with your presumptive income. You will have to use ITR 4 for that.

• Deepkum says:

Thanks for the quick reply, Nithin. That was exactly my Question. The loss is from few years back. Can I just ignore that loss and file ITR 4S. I know that I will not be able to utilize that loss, as I am not an investor any more.

9. I’ve been reading informative comments here. As per my understanding, to calculate turnover you need to add results of each completed transaction(round trip) within a series (or contract) regardless of sign. E.g. on day 1 you buy one lot of NIFTY April expiry futures and sell for a profit of 10,000 and next day you buy and sell NIFTY April again for a loss of 5000. your turnover would be 15,000 and not 10,000. This is because of the fact that each individual trade (buy or sell) is basically a contract to buy or sell with another counter-party. Just like if you were buying and selling physical goods each transaction has a potential for profit or loss and is independent of the last or the next transaction within the same scrip/series/contract (E.g. NIFTY April). Would be happy to discuss.

• This is a grey area, but yeah the most conservative approach of calculating turnover would be the way you have mentioned.

10. Natasha Oberoi says:

Hi

Great site and highly informative.

Also please guide if Turnover is less than 1Cr and there is Loss but the Loss is not being claimed, do we still have to AUDIT book of accounts under section 44AD.

Kindly respond.

• Natasha, as long as the your net profit is less than 8% of your turnover you will need an audit. If your turnover is very small, one of the things you can do is declare 8% of turnover as your profit (using ITR4S) and pay taxes accordingly. Might cost lesser than CA audit fees. So if your turnover is 5lks, 8% of 5lks is 40k. On 40K, if you are in 10% bracket you have to pay only 4k as taxes.

11. Aakash says:

Hi,
I appreciate the efforts taken by zerodha for the educating common retail investors regarding income tax compliance.
1. I was thinking of trading in FnO but now i have decide not to, until i have some trading capital to afford 15K-20K for a CA audit.
2. It doesn’t make any sense for a small retail investor to trade in fno or intraday trading as the our regulatatory requirements are so ridiculous and most of the our retail trader will end-up making losses.
3. I am also curious to know that are such audit requirement common throughout the world or western world ? or India is the only country to have such requirement for derivative income of small traders.
4. I would suggest zerodha to tie-up with a CA firm specializing in filing return/audit/book keeping for people who are trading in stock market(small traders/investors), taking care of their taxation needs . It would take big pain out of retail investors and also it will be a big business opportunity for zerodha.

• Aakash, Generally things are more tougher in India. Yes we are looking at a partnership with a CA firm, the only issue is that the CA institute has a limit on how many audits one CA can do in a year.

12. baljinder says:

Hi Sir,

I am trading with Zerodha along with other small business. Now My Query is that If other business turnover is 1Cr and trading turnover is 50lac, Can the section 44Ad applied? will it be applied on total turnover or separately.
For eg:
FY 2016-2017
1.5 Cr X 8% or 1cr X 10% + 50L X 8%
will the accounts need to be audited in this case.

13. Tushar says:

I have a simple query my turnover for short term delivery based trading ( 4-6 weeks ) is 3Cr. Do I need to do tax auditing or is it only for F & O .

14. Banerji says:

In calculating Turnover and Profit on Futures trade for Tax purpose, do we take Gross Turnover ( Absolute sum of Profits and Losess inclusive of brokerage, STT, GST, Stamp duty etc ) and Gross Profit ( ie Profit without deducting Brokerage, STT, Stamp duty GST etc )
OR
do we take Net figures ( ie Net of brokerage, STT, Stamp duty, GST etc ) ?

15. JAYANT says: