I am a salaried individual and have been regularly filing income tax returns (ITR). So far, I have been using the ITR-2 form since I invest in equity and also income from other sources, mainly rental income from properties. In fiscal 2023 , I was unemployed for the first two quarters. During this period, I used to trade in derivatives (options) and day trading in equity. I ended up making net losses in both. Towards the end of the year, I got a job and stopped trading in equity and options.
Since income from derivatives is considered as business income, do I need to get my balance sheets audited by a chartered accountant and use ITR-4 form for the purpose of filing my tax returns. It may be noted here that my turnover from options was less than ₹1 crore.
Can I avoid filing tax returns using ITR-4 form and instead opt for ITR-2 form as in the past at the cost of not carrying forward my losses?
—S Srivastava
We assume that you are a resident of India under the provisions of the Income Tax Act, 1961 for the purpose of paying taxes for FY2022-23.
At the outset, categorization of income—loss from trading in options and derivatives, besides day trading—into business income, capital gains, etc., would also depend upon specific facts of the case such as intention, frequency of transactions, period of holding of the assets, treatment in books of accounts, etc. Do refer to the circulars that have been issued by the tax department in this regard .
Assuming that the income or loss is considered as profits and gains from business or profession (PGBP), as per the provisions of Section 44AB of the I-T Act, every person, carrying on business shall be required to get its accounts audited for such financial year before the specified date, only if total sales, turnover or gross receipts (as the case may be) in business exceeds ₹1 crore (it is ₹10 crore if the cash receipts do not exceed 5% of the total sale or turnover or gross receipts and the cash expenditure does not exceed 5% of the total payments).
The above requirement of tax audit shall not apply to a person if he offers a deemed profit (of 8% or 6% of turnover as the case may be) to tax, as per the provisions of section 44AD (1), subject to other specified conditions.
Please note that turnover in respect of above transactions is not defined under the Act, and the same may be determined as per the guidance note issued by Institute of Chartered Accountants of India.
It is advisable that you declare all the above transactions in your ITR form and carry out the required procedures and audits, if applicable, irrespective of whether you want to claim or carry forward the losses from these transactions or not. Accordingly, as per the tax return forms notified by the Central Board of Direct Taxes for FY2022-23, you are required to file return of income in ITR-3 (or ITR-4 in specific circumstances). You are not eligible to file return of income under ITR-2, since it is not applicable for individuals having business incomes.
Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.
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Updated: 25 Jun 2023, 09:38 PM IST