Audit of persons doing share trading

For Tax purpose the Income tax act distinguishes between Delivery, Intraday trading in cash segment and F&O segments.

Consequently the tax treatment for profit/loss in all three are different.

CASH DELIVERY
Delivery is deemed as investment in an asset. Therefore Capital gains rules apply.
On short term investment i.e. shares bought in cash segment and sold before completion of 1 year from date of purchasing, you have to pay 15% of profits as STCG Tax
On long term investments i.e. shares sold after 1 year of holding the long term tax applies which currently is NIL.
CASH INTRADAY
Intraday trading in Cash segment is deemed as speculation, same as lottery or betting on horse racing.
The tax rate applicable on profits from speculation income is flat 30%.
Any loss is allowed to be carry forward for 4 years, to be set off against future speculation profits.
DERIVATIVES/F&O
Dealing in FnO is treated as Business. Thus normal business taxation rules apply as they would to any other business. The rate of Tax is as per Slab applicable in the respective year. In current year, income upto 150,000 is exempt. Above it the Slab rates come into effect.
Any loss again is allowed to carry forward for 8 years and set off against other heads of income or future income.

The exempt income slab Rs. 150,000 is available to every individual. i.e. If your total income does not exceed rs. 1.5 L you are not liable to any tax, irrespective of the nature of income being Capital gain or Speculation income or Business Income. Above that the tax rates come into effect.

IMP: TAX AUDIT IS ONLY REQD FOR BUSINESS INCOME I.E FOR INCOME FROM DERIVATIVES/FUTURES AND OPTIONS. Not from Income from Capital Assets or Speculation Income. So you may have a income of Rs. 2 Crore from Delivery/Intraday but no need for Tax Audit.
Another point to note is the method by which the limit of 40 Lakh is calculated for audit purpose in case of Derivatives. As the Future lots are upwards of Rs. 2 Lakhs its quite easy to cross the 40 Lakh figure by way of turnover, which is incorrect in principle.
So the total difference between Buy and Sell price of FnO is taken to calculate the 40 Lakh limit, i.e. the profit + loss + premium on options recd + premiums paid.
It may well be that you have net loss from derivatives and still have to go for tax audit. For e.g. Profit 10 L + Loss 35 Lakh = Turnover 45 Lakh Tax Audit Reqd. Net Loss = Rs. -2500,000

The above does not seems to be entirely correct.

There are various persons who are traders in shares and hence held shares in stock in trade i. e. they are in the business of buying and selling of shares. If the volume of transactions is high or frequency between buy & sell is short then the same could be treated as business and the delivery of shares would be considered as purchase and sale and taxed as business income and not investments.

If the frequency is less then it can be treated as investements and be taxed as capital gains.

Turnover in case of share intra day trading and F & O will be considered as profit + loss for the purpose of Tax Audit.

Share intraday trading is considered as speculative business and taxed as normal rates and not 30% and loss allowed to be set off against specualtion income only and carried forward for 4 years.

ya i agree with you Mr Aditya ..

volume of transactions certainly matters. If a person trading a few transactions in a year and making out a hefty profit/loss, he'll not be liable for audit.