Tax Audits & Loss Set-Offs

In a shop, turnover is total sales. In F&O you are not selling goods, so a different method is used. The ICAI Guidance Note on Tax Audit says that for futures and options the total of favourable and unfavourable differences is taken as turnover. In plain words: for each closed trade, take the size of the profit or loss, ignore the sign, and add them all. This is why turnover is far smaller than the contract value of the lots you trade.

Illustration with four closed futures trades: profits of Rs 10,000 and Rs 6,000 and losses of Rs 4,000 and Rs 2,000. Net profit = 10,000 + 6,000 - 4,000 - 2,000 = Rs 10,000. Turnover = 10,000 + 6,000 + 4,000 + 2,000 = Rs 22,000. Tax is on the net profit; the audit limit is tested against the turnover.

For options there is an extra rule. The Guidance Note also deals with premium received on sale of options and with reverse trades, and the treatment was revised in recent years. The rule says premium on sale is to be included, but not counted twice where it is already inside the profit computation. Because the details are easy to get wrong, use the tax profit-and-loss report from your broker as a starting point, and have a CA confirm the turnover (Needs verification against the current ICAI guidance).

For a business, the tax audit rule (section 44AB of the 1961 Act, section 63 of the 2025 Act) is based on turnover. Published summaries state the limits as follows. If turnover is above Rs 10 crore, an audit is needed. If it is above Rs 1 crore but not above Rs 10 crore, an audit is needed unless both cash receipts and cash payments are 5% or less of the total. Since F&O is settled through banks, many traders meet the 5% test, so the Rs 10 crore limit applies to them. Below Rs 1 crore there is no turnover-based audit.

Two cautions. First, "no audit" does not mean "no records". You still need books of account, and you still file the return with your business income or loss. Second, there are other audit triggers, such as opting for a presumptive scheme (section 44AD) and then declaring a profit below the prescribed rate. Whether a presumptive scheme suits an F&O trader is a question for a CA.

These thresholds come from secondary tax sources for FY 2025-26 and are reported to be unchanged in the 2025 Act. Verify them on incometax.gov.in against the text of the section before relying on them (Needs verification).

For FY 2025-26 (assessment year 2026-27), secondary sources report that the tax audit report is due by 30 September 2026 and the return for audit cases by 31 October 2026. Due dates are notified each year and can be extended, so check incometax.gov.in for the current dates (Needs verification).

If an audit was needed and was not done, a penalty can apply. Under section 271B of the 1961 Act the penalty is 0.5% of turnover, up to Rs 1,50,000, and it is not automatic: reasonable cause can be a defence. For the 2025 Act, secondary sources report a flat fee of Rs 75,000 for a delay of up to one month and Rs 1,50,000 after that (Needs verification). Missing the audit does not by itself erase a carry-forward of losses, but a return filed late does, so keep both deadlines in mind.

Good books make everything easier. Keep contract notes, the broker ledger, the tax profit-and-loss report, bank statements and bills for expenses. Trade from a bank account used only for trading, so that the statements reconcile easily. Ask a CA who knows markets well before the end of the financial year, not in the last week.