Tax Audit in Case of Trading in Shares

Neethi V. Kannanth | Last updated: 02 September 2021

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Quick Summary

Trading shares can be a way to earn additional income, but it's important to understand the tax implications. This article explains the different types of share trading, including delivery-based, intraday, and trading in futures and options, and how turnover is calculated for each. It also clarifies when a tax audit is required under sections 44AB and 44AD of the tax laws, and when it might not be necessary, particularly for delivery-based trades declared as capital gains.

With the increase in the awareness about the Financial Market more people are drawn towards Trading as it enables people to earn additional income over the regular income and also offers faster returns. What is the tax treatment for the earnings from the Trading? Whether the earnings from trading are subject to Tax Audit? Let us know more about it through this article.

What are the Types of Trading?

Trading can be delivery based or non delivery based.

1. Delivery Based Trading

Delivery based trading is the most common form of share trading. In this type of trading the investors have to pay the full price of the stock and the stocks are deposited in their demat account. There is no predefined time limit in case of the delivery based trading for selling the stocks. Turnover in case of delivery based trading shall be the total sale value.

For Example If you bought 100 BPCL shares at Rs 400 and sold them at Rs 470, the selling value of Rs 47000 (470 x 100) can be considered as turnover.

It is important that the above calculation of turnover for delivery trades applies only when your equity-based delivery trades are announced as a business income.

2. Intraday Trading

When the shares are bought in the opening market and sold in the closing market, such trading is known as Intra Day Trading. Intraday trading shall be considered as speculative income.Aggregate or absolute sum of both positive and negative differences from trades is to be considered as a turnover. For example, if you buy 200 shares of SBI at 414 at time of opening of market and sell at 422 by day closing, you make a profit or positive difference of Rs 1600, this Rs.1600 can be considered as turnover for this trade.

3. Trading in Futures and Options

Trading in Futures and Options shall be considered as Non Speculative Income. Turnover in case of Future Trading shall be determined as follows-

The total of favourable and unfavourable differences shall be taken as turnover.
In case of any reverse trades entered, the difference thereon should also form part of the turnover.

For example, if you buy 1 lot (25 Units) of Nifty futures at 10200 and sell at 10300, And Buy 1 Another lot of Nifty future (25 Units ) at 10350 and sell at 10300 then Rs. 2500 (25 x 100) + 1250 (50 x 25) i.e. 3,750 the negative difference or loss on the trade is turnover.

Turnover in case of Option Trading shall be determined as follows-

The total of favourable and unfavourable differences shall be taken as turnover
Premium received on sale of options is also to be included in turnover
In respect of any reverse trades entered, the difference thereon should also form part of the turnover.

For example, if you buy 100 units or 4 lots of Nifty 10200 calls at Rs.50 and sell at Rs.55.The favourable difference or profit of Rs 500 (5 x 100) is the turnover. Also, the premium received on sale also has to be considered turnover, which is Rs 55 x 100 = Rs 5500. So total turnover on this option trade = 500 +5500 = Rs 6000.

When is Tax Audit Required?

Section 44AB- If a person’s total gross receipt and payment in cash does not exceed 5% of total receipt and payment then the limit of turnover for tax audit is Rs. 5 crores.

Section 44AD- If all the following conditions are satisfied then tax audit would be applicable-

turnover is less than Rs. 2 crores
the profit is less than 6% of the of the turnover and
the Income exceeds the Exemption Limit

When is a Tax Audit not required?

In case of Delivery based trading, if the assessee is declaring them as capital gains or investments, then there is no need to calculate turnover on such transactions. Also, where capital gain arises there is no need for an audit if you have only capital gains irrespective of turnover or profitability.

FAQ :

For delivery-based trading, the turnover is generally the total sale value of the shares, provided these trades are declared as business income.

Intraday trading is considered speculative income, and the turnover is the aggregate of both positive and negative differences from all trades.

For futures and options, turnover includes the total of favourable and unfavourable differences, plus any premium received on the sale of options. Reverse trades also contribute to the turnover.

A tax audit may be required if total gross receipts and payments in cash do not exceed 5% of total receipts and payments, with a turnover limit of Rs. 5 crores. It's also applicable under Section 44AD if turnover is less than Rs. 2 crores, profit is less than 6% of turnover, and income exceeds the exemption limit.

A tax audit is not required for delivery-based trading if the transactions are declared as capital gains or investments. If only capital gains arise, an audit is not needed regardless of turnover or profitability.

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