Looking for a CA for help in derivative trading taxation

[stockmaverick]

hello,

3. undoubtedly there is a requirement to get accounts audited if 8% profit is not shown or to claim a loss in any business by virtue of section 44AD, if your current case i think u have a loss in FNO business hence it will be better to get the accounts audited and claim the loss to be carry forwarded for the coming years.

i hope i kept things simple and at par with the query.

thank you

CA. Ritesh Bafna

Thanks Ritesh, for the detailed inputs. I have contacted 3-4 CAs in Noida region and all of them have advised me to file returns using ITR-1 since my main source of income is from salary only and filing under ITR-4 requires tax auditing which is highly time consuming and expensive process, and also filing using ITR-4 would bring unwanted attention from Income Tax office.

a) Based on your response, is there any way to still file returns using ITR-1? I want to show losses from F&O trading since I want to offset against capital gains from sale of ESPP/ESOP (US company stocks) and also to carry forward.

b) Or is there a way I can file using ITR-4 and not get tax audit done?

c) Even for last financial year 2011-2012, I had filed returns using ITR-1 and shown F&O trading loss under STCG. If I decide to file ITR-4, can I still file revised returns for this last financial year and what would be last date for it?

Thanks,
Nitin

 

[Jai Mata Di]

Hi, ritesh.bafna88'
I have a simple question. If I trade with derivatives and my total business income is positive but, non taxable [under 2 Lakh, say 1.8Lakh]. Do I need to file a income tax return? As I don't have any loss and don't want to claim or setup any business loss for future, bcoz not sure about my business future.

Presently I am a salaried person. File tax return under ITR 1. I have enough money in my bank. I am planning to quit my job for next 2 year. And try to learn and trade full time. During this time if above case occurs.
I think any individual may skip income tax return completely with non taxable income. Please tell me.
It is just a 2 year risky break (I can afford that risk). I don't want to setup any business loss for future. So even if I have a loss of 3L. Do I need to file under ITR4 if don't want to setup any business loss for future?

 

[ritesh.bafna88]

But how the calculation of turnover of options is done.

Is it the total premium received on selling option of a strike of stock/index.
For example, if I sell 5 lots of NIFTY6000C @100, then my total turnover for this trade will be 5 (lots sold) * 50 (lot size) * 100 (price of the option) = 25000
and nil turnover for buy side.
Am I right in my calculation. Please confirm

And what about the options bought but not squared off and expired ITM (in the money).

Isnt the calculation of turnover for options is based on wrong assumption/calculation. On one side in futures they take loss or profit as turnover and while in options the total actual turnover.

That means deptt. wants that an option trader, to avoid audit process must earn minimum 2000 on net basis in above example. Isnt it a cruel joke.

hello,

my apologies that i didnt clear the options part of calculations.

to be very frank there are a number of speculations as to how to determine turnover of options. i have came across a number of different ways of calculating depending on what the client feels comfortable with.

i particularly am comfortable with the following way of calculation

now as per the ICAI guidance note:

1. the premium received on sale of an option is included in your turnover
hence if you sale 1lot option of X stock (1lot of 500 shares) at a premium of rs 10 than your premium received will be Rs.5000. now if the trade is fully favorable to you then the option will expire and you will gain entire 5000. hence this is your turnover. if the option is not favorable and you square of the position gaining say Rs.3000 then again the Entire Rs.5000 is your turnover but the buy premium, which you had paid, of Rs. 2000 will be accounted for as your Expense.

2. premium paid on buy a call or put is straight away an expense which is not to be included in turnover when it expires worth less. if you square off (which is ultimately selling) the position before expiry then again the sale premium is the turnover and buy premium is expense.

3. in case for the outstanding contracts on 31/03/20xx. one can totally ignore the same and take the turnover in the year of expiry.

yes i do agree that the valuation of option is very vague. there is no straight set rule to value option turnover or for the unexpired contracts.

the bitter truth is yes this what the department wants either you pay on calculations of 8% or go for audit to claim lower income.

Please Note: the above are my views of calculating the turnover based on number of practical situation and limitations to clear set of Rules. the same may be contradictory to others opinions. please use with discretion.

Regards.
CA. Ritesh Bafna

 

[ritesh.bafna88]

Thanks Ritesh, for the detailed inputs. I have contacted 3-4 CAs in Noida region and all of them have advised me to file returns using ITR-1 since my main source of income is from salary only and filing under ITR-4 requires tax auditing which is highly time consuming and expensive process, and also filing using ITR-4 would bring unwanted attention from Income Tax office.

a) Based on your response, is there any way to still file returns using ITR-1? I want to show losses from F&O trading since I want to offset against capital gains from sale of ESPP/ESOP (US company stocks) and also to carry forward.

b) Or is there a way I can file using ITR-4 and not get tax audit done?

c) Even for last financial year 2011-2012, I had filed returns using ITR-1 and shown F&O trading loss under STCG. If I decide to file ITR-4, can I still file revised returns for this last financial year and what would be last date for it?

Thanks,
Nitin

hello,

i respect the advice of other CAs but sir did anyone of them told you any section under income tax act where the return is to be chosen based on main source of income and not to keep other sources in mind while deciding. no sir there is no such thing.

a. there is no such way. in fact let me put it in this way. you must have already given to your broker details of your PAN. hence the entire broker account is already know to IT department and they can also view your trading records as they desire. considering that you just fie ITR 1 then they will know that you didnt disclose FNO trading which in itself is an offense then how come in this situation you r not under attention of IT department.

filing an itr 4 and coming under IT department scrutiny list as be a possibility but will be the right approach and avoid many hassles that can arise by just filing ITR 1.

by the way does, any CA assures you that after filling ITR 1-showing only salary income as it is your main source of income, under any event of scrutiny you will not be help accountable for not showing FNO business??

if you want to show losses than the only way to claim them is to first get the accounts audit apart from which the claim will be bogus and high chances of scrutiny can arise.

b. unless you want to show 8% FNO net profit there is no other way.

c. showing trading loss as STCL is clearly giving a false statement. i would not advice you to do so. this can lead to a lot of trouble if an scrutiny comes from the department. the revised return for f.y. 2011-2012 was possible only till 31/03/2013. now you are too late. hopefully you will be lucky enough to get away with this but i advice not to repeat.

regards
CA. Ritesh Bafna

please note: there are a lot of ways of doing things that are not as per book but ultimately that wont buy you peace of mind.

 

[J_D]

Hi Ritesh,

A Novice Question..

If a person has only incurred loss in F&O Trading in a financial year and has no other income (or less than the 200000 limit) and does not intend to claim the loss in the following years,

in view of this section 44AD is it mandatory to go for audit and file returns
even if the turnover is less than the prescribed 1 crore limit.


At a later date , if there is positive income from such trading activities, if he files the return and pays taxes, will it be ok? what is your advise.



JD

 

[emil16]

Hi Ritesh,

If I show a F&O profit of 8% this year can I exclude myself from Tax Audit inspite of Business losses files during previous few years? (or) After offsetting those losses I still have to show 8% to avoid the Tax audit?

Thanks in Advance

 

[stockmaverick]

hello,

i respect the advice of other CAs but sir did anyone of them told you any section under income tax act where the return is to be chosen based on main source of income and not to keep other sources in mind while deciding. no sir there is no such thing.

a. there is no such way. in fact let me put it in this way. you must have already given to your broker details of your PAN. hence the entire broker account is already know to IT department and they can also view your trading records as they desire. considering that you just fie ITR 1 then they will know that you didnt disclose FNO trading which in itself is an offense then how come in this situation you r not under attention of IT department.

filing an itr 4 and coming under IT department scrutiny list as be a possibility but will be the right approach and avoid many hassles that can arise by just filing ITR 1.

by the way does, any CA assures you that after filling ITR 1-showing only salary income as it is your main source of income, under any event of scrutiny you will not be help accountable for not showing FNO business??

if you want to show losses than the only way to claim them is to first get the accounts audit apart from which the claim will be bogus and high chances of scrutiny can arise.

b. unless you want to show 8% FNO net profit there is no other way.

c. showing trading loss as STCL is clearly giving a false statement. i would not advice you to do so. this can lead to a lot of trouble if an scrutiny comes from the department. the revised return for f.y. 2011-2012 was possible only till 31/03/2013. now you are too late. hopefully you will be lucky enough to get away with this but i advice not to repeat.

regards
CA. Ritesh Bafna

please note: there are a lot of ways of doing things that are not as per book but ultimately that wont buy you peace of mind.

Thanks again. Since there are complications involved in tax audit / ITR-4 filing which I think am not ready for now and I have only booked losses through F&O trading, I am deciding to file only ITR-1 and show only salary income. I think this should be okay since I have incurred only losses in F&O trading and okay with not carrying them forward. I know this would mean loss to me in case of future income from F&O or other capital gains. Please let me know if it is acceptable in terms of IT rules to still file ITR-1 and avoid showing F&O trading losses.

Thanks,
Nitin

 

[ritesh.bafna88]

Hi, ritesh.bafna88'
I have a simple question. If I trade with derivatives and my total business income is positive but, non taxable [under 2 Lakh, say 1.8Lakh]. Do I need to file a income tax return? As I don't have any loss and don't want to claim or setup any business loss for future, bcoz not sure about my business future.

Presently I am a salaried person. File tax return under ITR 1. I have enough money in my bank. I am planning to quit my job for next 2 year. And try to learn and trade full time. During this time if above case occurs.
I think any individual may skip income tax return completely with non taxable income. Please tell me.
It is just a 2 year risky break (I can afford that risk). I don't want to setup any business loss for future. So even if I have a loss of 3L. Do I need to file under ITR4 if don't want to setup any business loss for future?

hello, yes you are right if your income is below 2 lakh then filling of income is not necessary. pls keep in mind the limit of 2 lakhs is of gross total income so if your gross comes to 280000 and you claim deduction u\s 80C and other relevent sections to the tune of Rs 100000 then your net is below taxable at Rs. 180000 but you still need to file return.

claiming loss is totally individuals decision.

regards.
CA. Ritesh Bafna

 

[ritesh.bafna88]

Hi Ritesh,

A Novice Question..

If a person has only incurred loss in F&O Trading in a financial year and has no other income (or less than the 200000 limit) and does not intend to claim the loss in the following years,

in view of this section 44AD is it mandatory to go for audit and file returns
even if the turnover is less than the prescribed 1 crore limit.


At a later date , if there is positive income from such trading activities, if he files the return and pays taxes, will it be ok? what is your advise.



JD

hello JD,

well it mostly depends on the FNO turnover if the turnover is huge say 25 to 30 lakhs than department can ask as to why no ITR is filled as the case is covered by business income. as per 44AD the business income should be more than 8% hence the income comes to 2 Lakhs to 2.4Lakhs which is above the limit specified in IT limit.

if ultimately the FNO turnover 8% profit is below taxable income then one can take a chance and not file the ITR. please note the same is not advisable. this is purely decision of the income bearing individual.

Regards,
CA. Ritesh Bafna

 

[ritesh.bafna88]

Hi Ritesh,

If I show a F&O profit of 8% this year can I exclude myself from Tax Audit inspite of Business losses files during previous few years? (or) After offsetting those losses I still have to show 8% to avoid the Tax audit?

Thanks in Advance

hello,

8% profit is to be calculated before any setoff of previous losses.

audit will depend on current income and not past income.

regards,
CA. Ritesh Bafna