Tax-audit trigger for Futures & Options (F&O) losses
A loss in F&O trading does not by itself force you into a tax audit.
Audit becomes compulsory only when one of the statutory thresholds below is crossed.
|
Situation |
Statutory basis |
Audit required? |
| 1. High-turnover traders – Total F&O “business turnover” (absolute sum of all profits + losses + option premiums) exceeds ₹10 crore in the year (₹1 crore if cash transactions > 5%) | Section 44AB(a) read with ICAI Guidance Note (digital transactions get the higher ₹10 crore limit) |
Yes |
| 2. Presumptive scheme exit – You had opted for presumptive taxation under Section 44AD in any of the preceding 5 years and in the current year you: – opt out of 44AD and – declare profit < 6% of turnover / report a loss and – total income exceeds the basic exemption limit (₹2.5 lakh / ₹3 lakh)
|
Section 44AB(e) & Section 44AD |
Yes |
| 3. All other F&O traders – Turnover ≤ ₹10 crore (fully digital) and you have never used 44AD earlier | Sec 44AB & ICAI guidance |
No |
Key points you must satisfy before an audit is triggered.
- Understand “turnover” – For derivatives, turnover is not the contract value. It is the absolute total of favorable & unfavorable differences plus option premiums as prescribed by ICAI.
- Digital versus cash ceiling – Because exchange trades are 100% digital, the higher ₹10 crore audit limit normally applies.
- Presumptive clause is narrow – Section 44AB(e) bites only if you earlier used 44AD and then back-track to actual books with < 6% profit or a loss. If you never chose 44AD, mere low profit or loss does not compel an audit.
- Loss carry-forward does not need an audit – When turnover is within limits and 44AD was never used, you may file ITR-3 with a Balance Sheet & P&L, claim the business loss and carry it forward for 8 years without audit.
- Books of account – Even where audit is not triggered, Section 44AA obliges you to keep basic books if turnover exceeds ₹25 lakh / income exceeds ₹2.5 lakh.
Practical examples
|
Example |
Turnover (₹) | 44AD history |
Net result |
Total income |
Audit? |
Reason |
| A. Salaried trader, turnover 8 lakh, loss 2 lakh |
8.5 L |
Never used | Loss | 7 L (salary) |
No |
Turnover < ₹10cr, no 44AD |
| B. Full-time trader, turnover 6 crore, profit 3%, opted out of 44AD this year |
6 Cr |
Used 44AD last year | Profit < 6% | 12 L |
Yes |
Sec 44AB(e) triggered |
| C. Option seller, turnover 11 crore, profit 1 crore |
11.5 Cr |
Never used | Profit 9% | 1 Cr |
Yes |
Turnover > ₹10cr |
Penalties for ignoring audit when applicable.
Failing to obtain/submit the audit report can attract a penalty of the lower of ₹1.5 lakh or 0.5% of turnover under Section 271B.
Compliance roadmap if no audit is needed.
- Prepare basic books (ledger, bank book, broker statements).
- File ITR-3 on or before the non-audit due date (31 July) and carry forward the business loss.
- Preserve trade records for six years.
Compliance roadmap if audit is needed.
- Engage a Chartered Accountant.
- Finalize books, get Form 3CB-3CD signed, and upload the report by 30 September.
- File the audited ITR-3 by 31 October.
Bottom-line:
You face a tax audit on an F&O loss only when your business turnover breaches ₹10 crore or you’re exiting the presumptive 44AD regime with profit < 6% (or a loss) and taxable income above the basic threshold. In every other loss situation, proper books + timely ITR-3 filing are enough—no audit required.
