Last updated on August 27th, 2022 at 10:52 am
How to Calculate Turnover for Tax Audit u/s 44AB in case of OPTIONS!!
ICAI has clarified the definition of turnover in the transaction of options in the latest (Eighth Edition) Guidance Note release on Tax Audit u/s 44AB of Income Tax Act 1961 on 19th August 2022. [Download the Guidance Note issued by ICAI]
How to calculate the turnover in a transaction of options?
|
As per the Seventh Edition of GN issued in 2014 |
As per the Eighth Edition of GN issued in 2022 |
| (i) The total of favorable and unfavorable differences shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover. (iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover. |
(i) The total of favorable and unfavorable differences shall be taken as turnover.
(ii) Premium received on sale of options is also to be included in turnover. However, where the premium received is included for determining net profit for transactions, the same should not be separately included. (iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover. |
Note: Earlier in the calculation of turnover, the premium received was in principal considered twice i.e both in point (i) and point (ii) above. The portion of the premium during the sale was already included in the total of favorable and unfavorable differences.
Practical Example to understand the change in the calculation of turnover
Mr. X did the following option trading transactions
- Bought 1 lot of call option 500 shares of ABC for Rs. 80 & sold at Rs. 100 (Call Option) and
- Bought 1 lot of put Option, lot size 500 share of PQR for Rs 50 and sold at Rs. 45.
- Sold 1 lot of Call option, lot size 500 shares of XYZ for Rs. 60 and contract not squared off on expiry and delivery is given.
The first two transactions are examples of squared-off transactions and the third transaction is the example of the contract not expired and settled through delivery.
|
Script Name |
Transaction Type | Lot Size | Purchase Value | Sales Value (Premium received on Sale) | Gain / (Loss) | Turnover as per GN 2022 |
Turnover as per GN 2014 |
|
(1) |
(2) | (3) | (4) | (5) | (6) | (7) =(5)-(4) |
(8) = (5)+(6) |
|
ABC |
Call Option | 500 | 40,000 | 50,000 | 10,000 | 10,000
(Note-1) |
60,000
(Note-2) |
|
PQR |
Put Option | 500 | 25000 | 22,500 | (2,500)
Loss |
2,500 |
25,000 |
| XYZ | Call Option (Not squared off) | 500 | – | 30,000 | – | 30,000
(Note-3) |
30,000 |
|
Total |
42,500 | 1,15,000 | |||||
In the above example Turnover as per New Guidance Note 2022 would be Rs. 42,500/- and as per old Guidance Note 2014 would be Rs. 1,15,000/-.
Note -1: Turnover = As premium received is included for determining profit/loss so it’s not included in turnover i.e. Absolute Profit/Loss = 10,000/-
Note -2: Turnover = Premium received on sale 50,000 + Absolute Profit/Loss Rs. 10,000 = 60,000
Note -3: Turnover = Premium received on the deemed sale of that contract on the expiry date, premium received is not included in determining profit/loss. {SEBI mandates physical settlement if a trader holds a position in any of the stock F&O contracts on the expiry date if the contract is not squared off.}
Click>> Taxability of Futures & Options. Set-off/carry forward of loss in case of F&O trader
This is much-needed clarification for the determination of correct turnover in the case of options trading. I would like to thank CA Abhas Halakhandi for the motivation and idea behind this article.
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Disclaimer: The above content is for general info purpose only and does not constitute professional advice. The author/ website will not be liable for any inaccurate / incomplete information and any reliance you place on the content is strictly at your risk.
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Actually earlier also option sale was not included.
1. All the condition were actual 3 condition which occurs in derivatives trade.
2. AND word was not there in 3 condition.
This change is explainatory in nature.
As per our understanding, Options do have favourable/Unfavourable differences as has been explained in examples. Practically and for the safer side Premium received on sale of option was being added again, for complying to Guidance Note as there was not complete clarity.
The same has now been clarified in the latest Guidance Note and that will be beneficial to all the assesses.
What about the people who have filed under 44AD taking turnover as per old method and paid taxes by 31st July 2022?
Since the Guidance note is effective for AY 2022-23 and onwards, Assessee has the option to revise its ITR with Turnover Calculated as per Clarification provided in New Guidance Note.