Maximizing Tax Savings In Capital Markets, Futures, And Options: Turnover Calculation, Section 44AD, And Illustrative Examples

Investing in capital markets, futures, and options can lead to significant profits, but it can also result in substantial tax liabilities. Understanding the tax implications, turnover calculation, and utilizing provisions like Section 44AD of the Income Tax Act can help investors optimize their tax savings. This blog post will discuss tax-saving strategies for capital gains in capital markets, futures, and options while focusing on turnover calculation and the applicability of Section 44AD, with illustrative examples.

1.Turnover Calculation in Futures and Options

Turnover calculation in futures and options is essential for determining tax liabilities and applicability of tax audit provisions. The turnover for futures and options trading is calculated as follows:

• For Futures: The absolute value of the settlement profits or losses at the end of each contract.
• For Options: The premium received from selling options and the absolute value of the settlement profits or losses at the end of each contract.

These values should be aggregated to determine the total turnover from futures and options trading.

Example: Let’s consider a trader who executed the following transactions in the financial year:

• Bought 1 futures contract of XYZ Ltd. and made a profit of INR 10,000
• Sold 1 options contract of ABC Ltd. and received a premium of INR 5,000, and made a loss of INR 2,000 at the end of the contract

In this case, the total turnover would be calculated as follows:

Turnover from Futures = Absolute Profit from XYZ Ltd. = INR 10,000 Turnover from Options = Premium Received + Absolute Loss from ABC Ltd. = INR 5,000 + INR 2,000 = INR 7,000

Total Turnover = INR 10,000 + INR 7,000 = INR 17,000

2. Section 44AD: Presumptive Taxation Scheme

Section 44AD of the Income Tax Act allows eligible businesses to declare their income on a presumptive basis, significantly simplifying tax compliance and reducing tax liabilities. This provision is applicable to businesses with a turnover of less than INR 2 crores. In the case of futures and options trading, if the total turnover is below the threshold and the taxpayer is eligible, they can declare 6% of the turnover as their income and pay tax on it.

Example: Considering the same trader from the previous example with a total turnover of INR 17,000:

If eligible for Section 44AD, the trader can declare 6% of INR 17,000 (i.e., INR 1,020) as their income and pay tax on this amount instead of their actual profits.

Conclusion

Understanding turnover calculation and leveraging provisions like Section 44AD of the Income Tax Act can help investors save taxes on their capital gains from capital markets, futures, and options. It is advisable to consult a tax professional to better understand these provisions and make the most of the available tax-saving strategies.