Thread by @manansmehta5

Here's a thread on why Section 44AD is a nightmare for F&O traders:

Do I need to get a tax audit done for losses from Futures and Options?
Unfortunately, the short answer is yes. The devil, however, is in the detail.

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What is Section 44AD?

Section 44AD is the presumptive taxation scheme for businesses.

A resident individual or partnership firm can opt for the presumptive taxation scheme on business income. They can declare 6% (or 8%) of their total receipts as Income from business.

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Why does Section 44AD affect F&O transactions?

First up, it's important to note that futures and options (F&O) transactions are treated as business income under the Income tax act.

Now, this is where it becomes dicey.

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If your actual profit is less than 6% of turnover, there's no way to show lower than 6% as profit without getting a tax audit done. This is because of the language of Section 44AD

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I know you won't bother reading the sections. So let me simplify:

1. If your turnover from F&O transactions is less than INR 2 crore, you are eligible to use Section 44AD

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(Sidenote: Turnover is calculated by adding the following:

➡️The total of positive and negative or favorable and unfavorable differences
➡️Premium received on sale of options
➡️Reverse trade difference)

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2. If your actual profit is less than 6% of turnover (or you have made a loss), you would obviously not want to show excess income in your ITR

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3. If you don't show 6% of turnover as profit, you are an "eligible assessee" who has not declared profits from business in accordance with Section 44AD.

4. Considering the above, you will need to get a tax audit done.

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Do I have to get a tax audit done if I made a loss from F&O?

Unfortunately, the answer is yes.

I know this seems like a double whammy - first you make a loss, add to that the compliance cost of getting a tax audit done.

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However, note that you can set off your loss from F&O against any other income (other than salary). You may be able to use the F&O loss as a tax shield.

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If, however you have a small amount of loss, might make sense to just show 6% of turnover and call it a day. Compliance costs might be higher than actual tax savings.

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As always, we have tried to simplify things. Actual provisions are slightly more complex.

The above provisions may not apply to foreign F&O transactions (before you ask, we're not even going to comment on the FEMA aspect of foreign F&O transactions in this post).

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