Income earned through options is taxable under the head Profit or Gains of Business or Profession
I trade in options only and not in stocks. I do not have any other income, such as salary, business, etc, and my only source of income is income from options. Let’s assume I earn ₹10 lakh f rom options trading in a financial year. What is the tax implication on such income? As per an article I read online, income earned from derivatives is considered business income. If so, can I apply Sec 44AD in such cases? What is the threshold limit form Sec 44AD? Kindly clarify.
We understand that your only source of income is ₹10 lakh from dealing in options during the particular financial year. As per Income Tax Act,1961 (‘the Act’) , income earned through options is taxable under the head Profit or Gains of Business or Profession (PGBP). As per section 43(5) of the Act, the definition of speculation income excludes derivatives and similar instruments. Generally, income from futures and options could be regarded as a derivative instrument. Hence, the income from options could be treated like any other business income from PGBP. Therefore, the same could be declared and taxed under section 44AD of the Act.
As per the provisions of section 44AD of the Act, in the case of an eligible assessee (Resident Individual, Resident Hindu undivided family or resident partnership firm) engaged in the eligible business (turnover not exceeding ₹2 crore and not into the business of plying, hiring or leasing goods carriages), a sum equal to 8 per cent (6 per cent in respect of amount received by way of A/c payee cheque/ A/c payee Bank Draft, electronic clearing system) or a sum higher than the aforesaid sum shall be deemed to be the profit and gains of such business chargeable to tax under the head PGBP.
In the instant case, we assume that you are a resident individual, and the income earned through options is electronically, hence 6 per cent of the gross receipt or actual profit made from such business could be offered to tax in the tax return. As per the tutorials issued by the Income Tax Department, a person can declare income at the lower rate (i.e. at less than 6 per cent or 8 per cent). However, if he does so and his income exceeds the maximum amount not chargeable to tax, then he his required to maintain the books of account as per the provision of section 44AA of the Act and has to get his accounts audited as per section 44AB of the Act.
Additionally, if you opt for the presumptive taxation scheme under section 44AD of the Act, the threshold limit for turnover to be calculated in absolute terms from options should be not more than ₹2 crore and you are also required to follow such scheme for the next five years. If you opt out of the presumptive taxation scheme, the same shall not be available for you for the next five financial years following the year of opting out.
The writer is a Partner with BDO India LLP
Send your queries to firstname.lastname@example.org