Calculate Turnover for Tax Audit u/s 44AB in Case of OPTIONS!!

From time to time ICAI has issued the updated version of Guidance Note on Tax Audit u/s 44AB (eight edition) after incorporating the changes/ amendments in provisions relating to tax audit and reporting requirements for the relevant assessment year, for information and support of the Members.

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 favourable and unfavourable 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 favourable and unfavourable 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 favourable and unfavourable differences.

Practical Example to understand the change in the calculation of turnover

Mr. Suresh did the following option trading transactions

  • Bought 1 lot of call option 500 shares of EFG for Rs. 80 & sold at Rs. 100 (Call Option) and
  • Bought 1 lot of put Option, lot size 500 share of KLM 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 NameTransaction TypeLot SizePurchase ValueSales Value (Premium received on Sale)Gain / (Loss)Turnover as per GN 2022Turnover as per GN 2014
(1)(2)(3)(4)(5)(6)(7) =(5)-(4)(8) = (5)+(6)
EFGCall Option50040,00050,00010,00010,000(Note-1)60,000(Note-2)
KLMPut Option5002500022,500(2,500)Loss2,50025,000
XYZCall Option (Not squared off)500–30,000–30,000(Note-3)30,000
Total42,5001,15,000

As we can see 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.}

Let us see the various categories of taxpayers below:

Category of personThreshold
Business
Carrying on business (not opting for presumptive taxation scheme*)Total sales, turnover or gross receipts exceed Rs.1 crore in the FY
If cash transactions are up to 5% of total gross receipts and payments, the threshold limit of turnover for tax audit is increased to Rs.10 crores (w.e.f. FY 2020-21)
Carrying on business eligible for presumptive taxation under Section 44AE, 44BB or 44BBBClaims profits or gains lower than the prescribed limit under presumptive taxation scheme
Carrying on business eligible for presumptive taxation under Section 44AD Declares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit.
Carrying on the business and is not eligible to claim presumptive taxation under Section 44AD due to opting out for presumptive taxation in any one financial year of the lock-in period i.e. 5 consecutive years from when the presumptive tax scheme was optedIf income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for
Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44ADIf income exceeds the maximum amount not chargeable to tax in the subsequent 5 consecutive tax years from the financial year when the presumptive taxation was not opted for
Carrying on business which is declaring profits as per presumptive taxation scheme under Section 44ADIf the total sales, turnover or gross receipts does not exceed Rs 2 crore in the financial year, then tax audit will not apply to such businesses.
Profession
Carrying on profession Total gross receipts exceed Rs 50 lakh in the FY 
Carrying on the profession eligible for presumptive taxation under Section 44ADA1. Claims profits or gains lower than the prescribed limit under the presumptive taxation scheme 
2. Income exceeds the maximum amount not chargeable to income tax
Business loss
In case of loss from carrying on of business and not opting for presumptive taxation schemeTotal sales, turnover or gross receipts exceed Rs 1 crore
If taxpayer’s total income exceeds basic threshold limit but he has incurred a loss from carrying on a business (not opting for presumptive taxation scheme)In case of loss from business when sales, turnover or gross receipts exceed 1 crore, the taxpayer is subject to tax audit under 44AB
Carrying on business (opting presumptive taxation scheme under section 44AD) and having a business loss but with income below basic threshold limitTax audit not applicable
Carrying on business (presumptive taxation scheme under section 44AD applicable) and having a business loss but with income exceeding basic threshold limitDeclares taxable income below the limits prescribed under the presumptive tax scheme and has income exceeding the basic threshold limit

These high-value cash transactions may result in income tax notices.

These high-value cash transactions may result in income tax notices.

Notice Regarding Cash Transactions: If you are a citizen, you should be aware of the following information. A single blunder can result in a notice from the tax division. In actuality, the government keeps track of all your financial transactions. If you perform more cash exchanges than the cutoff, you may receive a notice from the Internal Revenue Service.

In reality, the IRS must provide information to banks, mutual funds, businesses, and property owners if someone is involved in large-scale money transactions. If you do more money transactions than automated in this situation, you are making a mistake. Tell us about any cash transactions that may result in an Income Tax Department notice.

Purchasing a home

If you trade property worth 30 lakhs or more in cash, the Income Tax Department will be informed. In this case, the Income Tax Department has the right to question you about it. You can also get some information about where your money comes from.

 

Credit Card Bill Payment

You may encounter issues if you also deposit the Mastercard bill in real money. If you deposit more than Rs 1 lakh in cash in one go with your Visa bill, the Income Tax Department has the right to question you. If you pay a Visa bill for more than Rs 10 lakh in cash in a fiscal year, you must also provide the source of the money.

income tax
Investing in stocks and mutual funds

If you put money into the financial exchange or perform a lot of money exchanges in mutual funds, debentures, and securities, be cautious. If you invest more than Rs 10 lakh in these in a calendar year, the Income Tax Department will send you a notice.

 

Understanding the Section 54 capital gains tax exemption

In a money market account, make a cash deposit.

If you deposit more than Rs 10 lakh in fixed deposits in a year, the Income Tax Department may be able to learn more about your source of funds. You carefully deposit funds in an FD so that the personal expense division has a record of your transactions and you don’t have to deal with any issues.

Avoid putting cash in your bank account.

You might be addressed if you deposit Rs 10 lakh or more in cash in a year in fixed deposits. Aside from that, if you save a sum of 10 lakh or more in cash in any bank or cooperative bank in a year, you would fall under the Income Tax Department’s radar. In this case, deposit any amount online so that the division is aware of your transaction.

Understanding the Section 54 capital gains tax exemption

Understanding the Section 54 capital gains tax exemption

A capital gain is a profit gained from the sale of a home that is taxed. The house can be characterised as a short-term or long-term capital asset depending on the holding period.

If the property is held for 24 months or more, it is subject to a 20% tax rate, as well as any applicable surcharges and cess. If kept for a short period of time, such as less than 24 months, the profits are taxed at slab rates.

Let’s imagine a person needed to relocate for a variety of reasons, so he sold his previous home. He plans to buy another house with the funds from the sale.

The seller’s goal in this situation was not to make money from the sale of the old house, but to find another acceptable home. It would be a burden for the seller if he was required to pay income tax on capital gains deriving from the sale of the old residence in this scenario.

A seller can claim a tax exemption on the capital gain arising from the transfer of a residential home property under Section 54 of the Income Tax Act. Individuals and Hindu Undivided Families are the only ones eligible for this benefit (HUFs).

In addition, the transferred asset must be a long-term capital asset that has been held for at least 24 months. The taxpayer should have bought the second house within India either one year before or two years after selling the first.

Construction expenses incurred within three years of the sale of the first house would qualify if the assessee is building a residence.

GST: Interest on non-filing of GSTR-8 by pre-approved e-commerce operators is waived by the govt.

The amount of capital gain on the sale of a residential property or the amount spent in the purchase or building of a new residential property will determine the amount of Section 54 exemption. Any residual funds are subject to taxation.

Only one residential house property purchased or completed in India is eligible for the deduction. If more than one house is purchased or built, only one house will be eligible for the exemption under section 54. A house purchased outside of India is not eligible for an exemption.

The rollover of capital gains resulting on the transfer of a residential house into another residential dwelling is eligible for the section 54 exemption. However, constraints have been put in place to prevent exploitation of this benefit and to ensure that it is only available to long-term buyers.

If a taxpayer purchases or develops a home and claims an exemption under section 54, the benefit provided under section 54 will be revoked if the new home is transferred within three years of its acquisition or completion of construction.