Should you opt for presumptive taxation on F&O income

To be sure, tax authorities treat earnings from F&O as business income, be it gains or losses. So under which part of the Income Tax Act should traders file this income? Many O&O traders declare O&O income under section 44AD of the presumptive taxation scheme. Income tax return (ITR) form 4, or ITR-4, is applicable in this case. However, some chartered accountants are of the view that F&O income does not fall under the scheme of presumptive taxation. Traders should file ITR-3 and pay taxes on the same as per their slab rates. ITR-3 also allows you to declare short-term and long-term capital gains from the money sector. ITR-2 is filed in case of capital gains only and no F&O income.

Presumptive taxation

The presumptive taxation scheme under sections 44AD, 44ADA and 44AE of the Income Tax Act, 1961, relieves small taxpayers from keeping books of account and from conducting audits. Section 44ADA applies to specified professions such as law, medicine and accountancy, etc. Section 44AE is for those who are in the business of transport.

Any other business with a turnover of less than ₹2 crore can avail the scheme of presumptive taxation and declare profits or losses under section 44AD. Owners can assume their business income at 8% of turnover for non-digital transactions and 6% for digital transactions.

Does F&O income qualify for section 44AD? A section of tax experts is of the opinion that it is possible to declare under this section if R&D gains are treated as business income.

Aakash Uppal, partner and head (north) – corporate tax, tax and regulatory services, BDO India, says that salaried employees cannot declare F&O transactions under section 44AD, while the self-employed can if there is a turnover their entire core business including R&D turnover does not cross ₹2 crores. “If an assessee has multiple businesses, then the turnover of those businesses will be clubbed to determine the limit for applying presumptive taxation under section 44AD of the Act,” he says.

Naveen Wadhwa, vice-president, Taxmann, however, says this is a misrepresentation. No self-employed person or salaried class should file their F&O income under section 44AD, he says. “This section was introduced for small business owners who do not have sufficient resources to maintain books and carry out audits. Calculating net profits or losses in F&O trades is quite simple. This information will be quite clear in your broker’s statement. There is no need to assume your F&O profits or losses when actual figures are readily available,” says Wadhwa.

Why are many choosing between ITR-4 and ITR-3? Read on.

Let’s take the example (see graphic) of a trader and assume that he transacts 8 times in O&C in a financial year. Think he makes a profit ₹5.6 lakh and loss thereof ₹60,000 from these transactions. Therefore, its net profit ₹His business income is 5 lakh. If he files his returns using ITR-3, he will be liable to pay tax on his business income as per his slab rate. Since he is in the 30% tax lab, his tax liability would come in at ₹1.5 lakh.

If the trader files taxes as per section 44AD (ITR-4), he can assume his profits at 6% of the total turnover (since F&O transactions are digital). The turnover in the case of an F&O transaction includes all profits and losses. Therefore, according to his transactions, his turnover will be ₹6.2 lakhs. The assumed profits for the year are the same, at 6%. ₹37,200. The tax liability on this, even in the 30% tax slab, will be direct ₹11,160. That is a huge difference from the ₹1.5 lakh he will have to pay in ITR-3. That is why section 44AD is preferred by F&O traders.

However, tax authorities can question the large difference between your tax liability and what you paid. In many cases, the tax department has already started sending notices to traders who have filed ITR-4.

“A Kanpur-based businessman approached me after the tax department sent him a notice saying there was a discrepancy in the way he had reported his F&O trading income. The Department sought actual profits on its F&O trades. The businessman then submitted the broker’s statement. The additional tax liability came in at ₹70,000 on which he also had to pay 100% penalty,” says Ankur Goyal, a chartered accountant (CA) who deals in assessment cases.

“Technically, CAs can make the point that section 44AD does not define what constitutes an eligible business, although it clearly states all exceptions. F&O is not among the exceptions. Be that as it may, the IT department will not buy this logic,” says Goyal.

Goyal referred to a case in the Supreme Court in 1985 where the apex court rejected the assessee’s appeal saying thus: “Where a clear literal interpretation of a statutory provision which the legislature could never have intended, results in a manifestly unjust result The Court could. to modify the language used by the legislature to achieve the intent of the legislature and create a reasonable interpretation.”

Goyal says, “this ruling may be applicable in cases where there is an unfair difference in the tax liability between the applicable profit to be shown under ITR-3 and the profits shown under section 44-AD. IT Department may consider it as tax evasion and may impose penalty.”.

The way out is to maintain proper books of account and file your F&O trading income in ITR-3. “The taxpayer can claim deductions against expenses such as telephone, electricity and internet bills incurred while trading in Operations and Operations,” says Vivek Jalan, partner, Tax Connect Advisory, a multi-disciplinary tax advisory firm.

Moreover, one cannot switch between ITR-4 and ITR-3 every year. There is a provision in Section 44AD that says if you switch from ITR-4 to any other ITR forms, you will not be allowed to go back to ITR-4 for the next five years. “This provision keeps a check on people who may misuse section 44AD. You cannot go with it one year to reduce your tax liability and then switch to another ITR the following year. You have to be consistent,” says Uppal of BDO India.