What are Derivatives?
A derivative means an instrument whose value is derived based on the underlying asset. It has no value of its own. Derivatives of stocks and indices can be traded on Indian stock exchanges. Common derivatives include futures contracts, forwards, options, and swaps.
Tax Treatment of Derivatives:
Derivatives can be taxed under the head Income from Business & Profession or Income from other sources depending on the fact whether the assessee is a trader or an investor.
How to Determine Turnover of Derivatives?
Mr. Ram has entered into the following transactions during the FY. 2020-21 on BSE and summary of transactions are as under:
| Script | No. of shares | Purchase value | Sale vale | Purchase turnover | Sales Turnover | Profit/Loss |
| HDFC CALL Option 220 Call | 30,000 | 1,400 | 1,600 | 4,20,00,000 | 4,80,00,000 | 60,00,000 |
| Nift 50 Future | 750 | 54,500 | 55,200 | 4,08,75,000 | 4,14,00,000 | 5,25,000 |
| Nifty 50 Future | 750 | 54,500 | 54,200 | 4,08,75,000 | 4,06,50,000 | -2,25,000 |
Calculation of Turnover and profit in accordance with Income Tax provisions read with ICAI guidance note:
| Particulars | Turnover | Profit |
| HDFC CALL Option 220 Call | 60,00,000 | 60,00,000 |
| Nift 50 Future | 5,25,000 | 5,25,000 |
| Nifty 50 Future | 2,25,000 | -2,25,000 |
| Total | 67,50,000 | 63,00,000 |
Audit Applicability:
Income from derivatives is subject to tax audit only if turnover is more than Rs 1 crore. Alternatively, one may opt to be governed on a presumptive basis. If the turnover from derivative transactions is less than Rs 2 crore. In such a case, income is taxed at a flat rate of 6% of turnover (or 8% of turnover if an electronic clearing system is not used), and there is no requirement for audit. Since turnover in the case of Ram is below the prescribed threshold, there is no requirement for a tax audit.
Written by: CA Keshav Agarwal
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