Even if you’ve had a year of losses in Futures & Options (F&O) trading, you’re not necessarily off the hook with the tax department. The key to F&O tax compliance isn’t your profit or loss, but your turnover.
Thank you for reading this post, don't forget to subscribe!Under Section 44AB of the Income Tax Act, F&O trading is considered a business, not a capital asset. This means F&O traders are subject to a mandatory tax audit if their turnover crosses certain limits.
Here’s why even losses can trigger a big penalty:
- Turnover is the Key: The law doesn’t care if you made a profit or a loss. If your total turnover—the sum of all your positive and negative trading differences—exceeds ₹10 crore, a tax audit is mandatory. For example, a ₹5 lakh profit and a ₹5 lakh loss result in a net profit of zero, but your turnover is ₹10 lakh.
- The Penalty: If you fail to get a mandatory tax audit done by the deadline, you could face a penalty of up to ₹1.5 lakh or 0.5% of your turnover, whichever is lower.
- Don’t Assume: Many retail traders mistakenly believe that losses mean no tax liability or compliance. This is a costly misconception. The penalty is for non-compliance with the audit requirement, not for failing to pay tax on a profit.
The takeaway? Don’t wait for a notice. Calculate your turnover correctly using the ICAI method, and if it crosses the ₹10 crore threshold, ensure you get a tax audit done on time. It’s the only way to protect yourself from a substantial penalty.
