I have made losses of about ₹10 lakh in F&O trading in the last financial year. I heard that a tax audit is also compulsory if you report losses, is that true?
This is indeed a very common confusion that people have when they incur losses.
See income from intraday or F&O trading is classified as business income for taxation purposes. And for any business, the need for a tax audit depends on its turnover; it has nothing to do with the fact that you’re reporting profits or losses.
If a business’s turnover exceeds ₹1 crore in a financial year, it is required to undergo a tax audit. However, for businesses with less than 5% cash transactions, this threshold increases to ₹10 crore. Since F&O trading primarily involves digital transactions, the applicable turnover limit for a tax audit is ₹10 crore.
Turnover calculation
You can know your trading turnover from the tax P&L report provided by your broker.
For F&O and intraday trading, turnover is calculated by taking the sum of absolute profits and losses from all trades. This means that you add the value of all profits and losses without taking the -ve sign into consideration.
Let’s take a simple example. You made three trades, had profit in the first two and a loss in the third. The turnover calculation is as follows.
Once, you know your trading turnover, you can easily determine your tax audit applicability as well. Even if you have losses of ₹10L but the turnover is below ₹10Cr, you don’t need a tax audit.
But remember, you need to file your ITR before the due date (31st July) to be able to carry forward your losses.
If you miss the due date for filing the ITR and have losses that you need to carry forward, you can opt for a voluntary tax audit. For those undergoing a tax audit, the due date to file the ITR becomes 31st October and hence, you’ll be able to report and carry forward the losses.
However, the rules are a bit different if you have opted for the presumptive taxation scheme. Here’s a detailed read on tax audits for intraday and F&O traders that covers it all.
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No. Audit requirement is decided only based on turnover. You can still carry forward losses without audit too.
I am telling this from my personal experience. For last two years, my CA kept telling me that i need to go for audit to carry forward losses. So i went for audit. But this year i did self research to figure out that audit isn’t really needed to carry forward losses. Audit is only based on turnover criteria which is explained in @Surbhi_Pal’s reply above in detail. Hence, this year I submitted my ITR3 without audit before 31st July, and it got processed too, and losses are carry forwarded too as I can see in ITR-processed intimation.