What is Turnover and Why Does It Matter?
In the context of stock trading, turnover is not the total value of your trades. Instead, it's a specific calculation that helps determine if your trading activity qualifies as a business and whether you need a tax audit. Under Section 44AB of the Income
Tax Act, a tax audit by a Chartered Accountant becomes mandatory if your business turnover exceeds a certain threshold. For traders, since nearly all transactions are digital, this threshold is typically ₹10 crore. Many traders mistakenly believe that incurring a loss automatically triggers an audit, but this is a myth. The primary trigger is turnover, making its correct calculation the first and most crucial step in tax compliance.
The Method for Intraday and F&O Trading
For speculative business income, which includes equity intraday trading, and non-speculative business income from Futures and Options (F&O), the turnover calculation is the same. It is the 'absolute profit'. This means you sum up the profit from every profitable trade and the loss (as a positive number) from every losing trade. For example, if you made a profit of ₹20,000 on one trade and a loss of ₹15,000 on another, your net profit is ₹5,000, but your turnover is ₹35,000 (₹20,000 + ₹15,000). This method ensures that the total volume of your trading activity is captured, not just the net outcome. For options trading, the premium received on the sale of options is also included in the turnover calculation. Many brokers now provide a tax P&L statement that calculates this figure for you.
How Delivery-Based Trades Are Different
The rules change for delivery-based trading, where you hold shares for more than one day. If you classify these transactions as a business activity (treating your shares as stock-in-trade), then the entire sale value of the shares is considered your turnover. So, if you sell shares worth ₹5 lakh, your turnover for that transaction is ₹5 lakh, regardless of the purchase price or profit. However, most retail investors treat delivery-based trades as investments, not business. In this case, the income is classified as Capital Gains (either Short-Term or Long-Term). When reported as capital gains, the concept of turnover calculation does not apply at all. This distinction is critical and determines which ITR form to use and how the income is taxed.
The Tax Audit Trap: Presumptive Taxation
The presumptive taxation scheme under Section 44AD allows small businesses with turnover up to ₹3 crore (for digital transactions) to declare a minimum of 6% of their turnover as profit and avoid maintaining detailed account books. However, this can be a trap for traders. Income from intraday trading is considered speculative and does not qualify for Section 44AD. For F&O traders, while they can opt for it, problems arise if their actual profit is less than 6% of their turnover. If a trader opts for this scheme and declares a profit lower than the 6% presumptive rate (or declares a loss), a tax audit becomes mandatory, provided their total income exceeds the basic exemption limit. This rule catches many traders off guard, as a low-profit year can trigger a compulsory audit even with a turnover well below the ₹10 crore threshold.
When a Tax Audit Becomes Compulsory
To summarize, a tax audit under Section 44AB is mandatory for a stock trader in two main scenarios. The first is straightforward: if your trading turnover (calculated as absolute profit for intraday and F&O) exceeds ₹10 crore in a financial year. The second scenario is linked to the presumptive tax scheme as explained above. If you show profits less than 6% of your turnover (or a loss) while having opted for the presumptive scheme, you must get your accounts audited. It's important to note that if a tax audit is applicable, the due date for filing your income tax return is extended to October 31st, but the audit report itself must be filed by September 30th.
