Including Seafarers, Section 44AD Inapplicability, Turnover Rules, and Judicial Support
Futures and Options (F&O) trading is increasingly popular among resident and non-resident individuals alike, including salaried employees, freelancers, and seafarers. Yet, tax compliance remains a grey area—particularly with regard to tax audit under Section 44AB when turnover is low, profits are marginal, or losses are incurred.
This legal framework for understanding when tax audit is required for F&O trading income, with particular attention to:
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Section-wise legal interpretation (Sections 43(5), 44AD, 44AB, 44AA)
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Turnover computation as per ICAI’s guidance
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Case law support from ITAT decisions
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NRIs and presumptive taxation eligibility
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Practical scenarios and FAQs for AY 2025–26
Part A – Legal Framework and Section-wise Interpretation
1. Nature of F&O Income – Section 43(5)
As per Explanation 2 to Section 43(5) of the Income-tax Act, 1961, transactions in F&O carried out on recognized stock exchanges are not considered speculative. Consequently, the income or loss from F&O trading is treated as non-speculative business income, taxable under the head "Profits and Gains of Business or Profession" (Section 28).
2. Applicability of Presumptive Taxation – Section 44AD
Section 44AD allows eligible assessees to declare income on a presumptive basis, relieving them from the requirement of maintaining books and audit.
Who can opt for 44AD:
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Resident individuals, HUFs, and resident firms (non-LLPs)
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Engaged in eligible business (excluding profession)
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Turnover not exceeding ₹2 crore
Not applicable to:
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Non-residents (including NRIs, seafarers working on foreign ships)
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LLPs, companies, and professionals
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Assessees engaged in agency or commission business
Under Section 44AD(1), 8% of turnover (or 6% if digital) is deemed as income. However, if an eligible assessee declares income less than this percentage and has total income exceeding the basic exemption limit, they are required to maintain books and get them audited under Section 44AB r/w 44AD(4)/(5).
CBDT Circular No. 10/2017 clarifies that Section 44AD(4)/(5) applies only to eligible assessees. Thus, ineligible taxpayers (e.g., NRIs) cannot be forced into audit merely due to low profits or losses in F&O.
3. Applicability of Tax Audit – Section 44AB
Section 44AB(a) mandates a tax audit if total turnover from business exceeds ₹1 crore. However, the threshold increases to ₹10 crore if the following conditions are satisfied (introduced via Finance Act, 2021 and applicable to AY 2025–26):
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Aggregate of cash receipts does not exceed 5% of total receipts
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Aggregate of cash payments does not exceed 5% of total payments
In F&O trading, all transactions are generally routed through digital platforms—making traders eligible for the enhanced ₹10 crore threshold.
Turnover Calculation for F&O Trading
Before determining whether the ₹1 crore or ₹10 crore audit threshold is breached, it is critical to compute turnover as per the ICAI’s Guidance Note on Tax Audit under Section 44AB (2022 Edition).
For F&O trading, turnover is calculated as follows:
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Include:
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The total of favorable and unfavorable differences (i.e., absolute values of profits and losses)
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Premium received on sale of options
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Any other incidental receipts related to the F&O business
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Exclude:
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Margin money (initial or variation)
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STT, GST, stamp duty, exchange transaction charges, or brokerage
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Illustration:
| Particulars | Amount |
|---|---|
| Profit from trade A | ₹1.5 lakh |
| Loss from trade B | ₹2.0 lakh |
| Premium received on option sale | ₹4.5 lakh |
Turnover = ₹1.5 lakh + ₹2.0 lakh + ₹4.5 lakh = ₹8.0 lakh
Note: Margins or taxes (e.g., ₹10 lakh margin deposited) are not part of turnover.
This ICAI-compliant turnover figure is critical for:
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Determining audit applicability under Section 44AB
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Assessing the requirement to maintain books under Section 44AA
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Selecting the correct ITR form (generally ITR-3 for F&O)
4. Books of Account – Section 44AA
Books of account must be maintained if:
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Turnover exceeds ₹10 lakh, or
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Income exceeds ₹2.5 lakh in any of the three preceding years
Even if audit is not applicable, F&O traders are required to maintain books under Section 44AA based on this threshold.
5. ITR Filing, Return Due Dates, and Loss Carry Forward
For AY 2025–26, the extended due dates notified by CBDT are as follows:
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Non-audit cases: 15 September 2025
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Audit cases: 31 October 2025
Losses under the head "business income" (including F&O losses) can be carried forward only if the return is filed within the due date u/s 139(1).
The applicable ITR form is ITR-3, even if there is no other business income.
Part B – Practical Case Matrix: Residents vs NRIs
| Case | Resident Status | Turnover | Result | Profit % | 44AD Applicable | Audit Required | Reason |
|---|---|---|---|---|---|---|---|
| 1 | NRI Seafarer | ₹60 lakh | Loss ₹6 lakh | NA | No | No | 44AD not applicable; turnover < ₹10 Cr |
| 2 | Resident | ₹80 lakh | Profit ₹4 lakh | 5% | Yes | Yes | Profit <6%; 44AD not opted |
| 3 | Resident | ₹90 lakh | Profit ₹10 lakh | 11% | Yes | No | Profit >6%; audit not required |
| 4 | NRI | ₹1.2 crore | Profit ₹12 lakh | 10% | No | Yes | Turnover > ₹1 crore; 44AD not applicable |
| 5 | Resident | ₹60 lakh | Profit ₹6 lakh | 10% | Yes | No | Profit >6%; audit not required |
| 6 | Resident | ₹75 lakh | Loss ₹5 lakh | NA | Yes | Yes | Loss declared; 44AD not opted |
| 7 | NRI | ₹95 lakh | Profit ₹2 lakh | ~2% | No | No | 44AD not applicable; turnover < ₹10 Cr |
Part C – Key Judicial Precedents
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PCIT v. Mukesh Ratilal Maru (ITAT Mumbai, ITA No. 4810/Mum/2019)
Held that where the assessee is not eligible for 44AD, audit under 44AB is not mandatory even if profits are below 6%. -
Ajay Traders v. ITO (ITAT Indore, ITA No. 182/Ind/2019)
Held that F&O losses do not automatically trigger audit unless 44AD is opted and its conditions are violated. -
Saraswati Trading Co. v. ITO (ITAT Delhi, ITA No. 1801/Del/2018)
Confirmed that profit below presumptive threshold does not trigger audit when 44AD is inapplicable.
Part D – Frequently Asked Questions (FAQs)
Q1. I’m an NRI seafarer with ₹60 lakh turnover and ₹6 lakh F&O loss. Do I need audit?
No. You are not eligible for 44AD, and your turnover is below ₹10 crore. Audit is not required.
Q2. I’m a resident with ₹80 lakh turnover and ₹3 lakh profit (3.75%). I didn’t opt for 44AD. Do I need audit?
Yes. As you are eligible for 44AD but chose not to use it and declared profit <6%, audit is mandatory.
Q3. If I opt for 44AD but report profit <6%, is audit needed?
If total income exceeds ₹2.5 lakh, then yes. If total income is below ₹2.5 lakh, no audit is needed under 44AD(5).
Q4. I have ₹1.1 crore turnover from F&O and 100% digital receipts. Profit is 10%. Do I need audit?
No. If 95% or more of receipts/payments are digital and turnover is <₹10 crore, audit is not required.
Q5. Does salary income affect audit requirement?
No. Audit depends solely on business turnover and 44AD conditions. Salary income does not trigger audit.
Q6. What are the consequences of not getting an audit done when required?
Penalty under Section 271B may be levied: 0.5% of turnover (maximum ₹1.5 lakh).
Conclusion
F&O trading is classified as non-speculative business income and carries significant compliance obligations. Whether a trader is required to get audited under Section 44AB depends on:
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Accurate turnover calculation as per ICAI guidance
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Applicability and usage of presumptive scheme (Section 44AD)
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Residential status and digital receipt thresholds
NRIs, including seafarers, are not eligible for presumptive taxation under Section 44AD. Therefore, the fact that profit is below 6% or a loss is incurred does not by itself mandate audit—unless turnover exceeds ₹1 crore (or ₹10 crore if 95%+ transactions are digital).
Traders must maintain books of account if turnover exceeds ₹10 lakh or income exceeds ₹2.5 lakh, and timely file ITR-3 to preserve carry-forward rights for losses.
