Buy-Back of Shares: The Complete Taxation and Strategic Planning Guide for Directors and Companies (FY 2024–25 & FY 2025–26)

CA Surekha S Ahuja

 The buy-back of shares has long been a preferred mechanism for Indian companies to return surplus funds to shareholders, restructure capital, and improve earnings per share (EPS). However, the Finance (No. 2) Act, 2024 fundamentally reshaped its taxation landscape — shifting the tax incidence from companies to shareholders.

Until 30 September 2024, under the company-level tax regime of Section 115QA, shareholders, including directors and promoters, enjoyed complete exemption under Section 10(34A). From 1 October 2024, however, buy-back proceeds are treated as “deemed dividends” under Section 2(22)(f) — fully taxable in shareholders’ hands at applicable slab rates, potentially as high as 51.12% (including surcharge and cess).

This change has made tax planning for buy-backs in FY 2024–25 (transition year) and FY 2025–26 onwards critical for both companies and directors.

Evolution of Law

Period	Legal Basis	Tax Incidence	Key Sections	Tax Rate	Exemption
Up to 30.09.2024	Section 115QA, Rule 40BB	Company level	115QA, 10(34A)	23.296% on “distributed income”	100% exempt for shareholders
From 01.10.2024	Section 2(22)(f)	Shareholder level	2(22)(f), 115-O omitted, 46A amended	Slab rate up to 51.12%	Exemption withdrawn

Intent of Amendment:
To restore tax parity between dividends and buy-backs, curb promoter-led arbitrage, prevent EPS manipulation, and ensure equitable treatment of minority shareholders.

Key Tax Mechanism Comparison

Particular	Pre-1 Oct 2024 (115QA)	Post-1 Oct 2024 (2(22)(f))
Taxpayer	Company	Shareholder
Tax Rate	23.296%	Up to 51.12%
Tax Base	Buy-back consideration minus issue price (Rule 40BB)	Entire buy-back consideration
Shareholder Tax	Nil (Section 10(34A))	Full deemed dividend income
Capital Gains	Not applicable	Capital loss = cost of acquisition (no indexation)
Carry-forward of Loss	N.A.	8 years (Section 74)
TDS Obligation	None	10% (resident) / DTAA (non-resident)
GAAR Risk	Moderate	High for promoter-centric schemes

Transitional Tax Planning in FY 2024–25

During FY 2024–25, transactions completed before 30 September 2024 remained under the old regime, while those executed on or after 1 October 2024 faced the new shareholder-tax regime.

Thus, FY 2024–25 became the final window for company-level buy-back tax planning.

Pre–October 2024 Strategy (Old Regime):

• Buy-back before 30.09.2024: Company pays 23.296%; shareholders receive tax-free income.

• Ideal for: Director/promoter-heavy holdings and companies with substantial reserves.

• Tactics used:

  • Preferential allotment or rights issue at higher price before buy-back of older low-cost shares.

  • Buy-back to achieve promoter consolidation or capital restructuring without personal tax impact.

Post–October 2024 Strategy (New Regime):

• Buy-back after 01.10.2024: Tax shifted to shareholders.

• Directors/promoters: Taxed at slab rates; can book capital loss equal to cost of acquisition.

• Company: No tax but must deduct TDS and comply with deemed dividend reporting.

• Revised approach:

  • Opt for capital reduction u/s 66 of Companies Act, 2013 for balanced tax outcome.

  • Explore dividend payout if shareholder tax bracket is lower.

  • Consider gifting shares to family members in lower slabs before buy-back.

Scenario-Wise Income-Tax Implications

Let’s illustrate through five representative cases relevant for professional planning:

(A) Shares Issued in FY 2015–16 at ₹10 — Bought Back in FY 2024–25 (Old Regime)

Company:
Distributed income = ₹890 (₹900 – ₹10) → taxed @ 23.296%.
Shareholder:
Exempt u/s 10(34A). No capital gain/loss.

Most tax-efficient model — company pays, shareholder receives tax-free.

(B) ESOP Shares Issued in FY 2018–19 at ₹10 (FMV ₹200) — Bought Back in FY 2024–25

At exercise (2018–19): ₹190/share taxed as salary.
At buy-back: Company taxed @ 23.296% on ₹890; shareholder exempt.

No double taxation. Salary perquisite already taxed earlier.

(C) Rights Shares Issued in FY 2024–25 at ₹900 — Company Buys Back Old Shares (₹10 Issue Price)

Objective: Capital restructuring before the 1 Oct 2024 deadline.
Old shares bought back → company pays tax @ 23.296%.
New rights shares held → higher capital base for future sale.

Partial tax efficiency achieved when paid-up capital is high — the company absorbs the tax once, while shareholders retain new shares for future appreciation.

(D) Only Old Shares Bought Back; Rights Shares Retained for Future

Old ₹10 shares bought back → company pays tax @ 23.296%.
Rights shares (₹900) remain; if later sold below cost, capital loss allowable u/s 74.

Loss set-off opportunity emerges in later years.

(E) Shares Purchased from Another Shareholder at Same Price as Original Issue (₹10) — Buy-Back at ₹900

Example:
A director buys shares in FY 2023–24 at ₹10. Company originally issued them in FY 2015–16 at ₹10. Buy-back happens in FY 2024–25 at ₹900.

(i) Under Section 115QA (Before 1 Oct 2024)

• Company taxed on ₹890/share (₹900 – ₹10).

• Shareholder exempt under Section 10(34A).

• Buyer’s purchase price irrelevant — tax linked to original issue price.

No double taxation; ideal for restructuring before the deadline.

(ii) Under Section 2(22)(f) (From 1 Oct 2024)

• Entire ₹900 treated as deemed dividend in shareholder’s hands.

• Capital loss = ₹10 (cost of acquisition) allowed to be carried forward 8 years.

• TDS @ 10% by company.

Tax burden shifts to shareholder, but capital loss becomes compensatory.

Numerical Illustration:

A director purchased shares for ₹10 lakh.
Company buys back at ₹40 lakh.

• Taxable income (dividend): ₹40 lakh → taxed up to 51.12%.

• Capital loss: ₹10 lakh (can offset future capital gains).

• If future gain = ₹20 lakh → ₹10 lakh offset → taxable ₹10 lakh only.

Partial tax optimization possible through capital loss leverage.

Tax Planning & Compliance Framework for FY 2025–26

With the new shareholder-tax regime fully operative from FY 2025–26, companies and directors must realign their strategies.

(A) For Companies

• No buy-back tax under 115QA.

• Deduct TDS @ 10% u/s 194K or 195 (as applicable).

• Ensure Section 2(22)(f) compliance, valuation report, and justification of buy-back rationale to avoid GAAR exposure.

• Maintain transparent board minutes, shareholder approvals, and SEBI compliance (Rule 17, Buy-back Regulations).

(B) For Directors/Promoters (Shareholders)

• Tax burden rises steeply (up to 51.12%), but capital loss serves as a limited compensatory tool.

• Plan timing: If buy-back value < cost → immediate capital loss claim.

• Intra-family transfers before buy-back can help reallocate income to lower slabs.

• Maintain accurate documentation of acquisition cost and transaction trail.

• Prefer capital reduction over buy-back for cleaner tax outcomes.

(C) For ESOP Holders

• Buy-back proceeds = deemed dividend; perquisite already taxed earlier.

• Capital loss (equal to cost of acquisition) allowable u/s 74.

• Ensure employer deducts TDS correctly and reflects in Form 16 / Form 26AS.

GAAR and Judicial Backdrop

• Cognizant Technology Solutions (ITAT Chennai, 2023):
  Court-approved buy-back-cum-capital-reduction scheme held colourable; GAAR applied.
  → Reinforces need for commercial substance and proper structuring.

• CBDT Circular (2024):
  Clarifies buy-back post-1 Oct 2024 attracts TDS under Section 194K / 195.

• SEBI Regulations (2018, amended 2023):
  Prescribe limits (25% of paid-up capital + reserves), tender offer norms, and 15% reservation for small shareholders.

Policy & Economic Rationale Behind the Shift

1. Tax Equity: Align buy-backs with dividend taxation.

2. Revenue Protection: Eliminate promoter-led tax arbitrage.

3. Market Stability: Prevent EPS manipulation through repeated buy-backs.

4. Fairness: Avoid minority shareholders indirectly bearing company-level buy-back tax.

5. Transparency: Encourage declared dividend routes over disguised capital returns.

Strategic Takeaways for FY 2025–26 Onwards

Strategy	Benefit	Risk/Compliance Focus
Capital Reduction (Sec. 66)	Returns capital with balanced tax incidence	Procedural complexity
Gifting shares before buy-back	Family-level tax optimization	Document gift deeds, avoid circular transfers
Synchronize buy-back losses with other capital gains	Tax-efficient offset	Timing and reporting precision
Avoid preferential + buy-back combos	GAAR exposure	Maintain genuine commercial purpose
Maintain valuation & rationale reports	Defence under scrutiny	Board & shareholder resolutions critical

Conclusion

The abolition of Section 115QA marks a decisive shift in India’s tax policy — from corporate to shareholder accountability.
While the old regime allowed tax-free exits for directors and promoters, the new regime demands careful, forward-looking planning.

Companies with high paid-up capital may still achieve partial tax efficiency through capital reduction or rights-cum-buy-back structures, but only with sound commercial logic and transparent documentation.

For shareholders — especially directors and promoters — the focus must now move from zero-tax extraction to structured tax optimization: leveraging capital losses, intra-family transfers, and timing of transactions to sustain overall tax efficiency within the ambit of law.

FEMA Compliance for Temporary Import of Diamonds for Certification Services by Indian Company

An Indian company engaged in diamond certification or grading for a U.S. client performs a service that qualifies as an “export of services” under the Foreign Exchange Management Act, 1999 (FEMA).

In this structure, diamonds are temporarily imported from abroad for laboratory certification and re-exported to the same owner after the service.
Ownership remains with the foreign client — the transactional essence lies in the certification service, not in the diamonds themselves.

This model involves a three-dimensional compliance interface:

1. FEMA – for foreign exchange realization,

2. Customs/FTP – for physical import and re-export, and

3. GST – for classification as export of services.

Legal Framework

Framework	Governing Provisions	Compliance Focus
FEMA	Sections 5, 7 & 8 of FEMA, 1999; Export of Goods & Services Regulations, 2015; Master Direction on Import of Goods & Services	Forex realization, GR waiver, AD Bank routing
Customs / FTP	Sections 74 & 143, Customs Act, 1962; FTP Para 4.75; Notification No. 40/2015-Cus. & 45/2017-Cus.; Circular No. 30/2009-Cus.	Duty-free import & re-export within 3 months
GST	Sections 2(6), 13(3)(a), and 16 of the IGST Act, 2017	Export of service — zero-rated under LUT/Bond

FEMA Compliance Essentials

(A) Nature of Transaction – Current Account

Temporary import for certification does not involve transfer of ownership or creation of capital liability.
It is a current account transaction under Section 5, requiring no prior RBI approval.
However, all forex transactions must be routed through an Authorized Dealer (AD) Bank.

(B) Export of Services and Realization

• Certification fees are to be realized in convertible foreign exchange within nine months.

• Receipts should be supported by BRC/FIRC.

• No separate Export Declaration Form (EDF) is required for services; AD bank reporting suffices.

(C) GR Waiver for Re-Export of Diamonds

Since the re-export involves no sale, there are no proceeds to declare.
Hence, a GR waiver must be obtained from the AD bank for the physical re-export component.

Documents for GR Waiver:

• Import Bill of Entry

• Re-export Shipping Bill

• Certification service contract and invoice

• Proof of identity linkage between import and re-export

• Declaration of non-transfer of ownership

The AD bank may approve directly or refer to RBI, depending on limits.

Customs and FTP Compliance

A. Eligibility

Only authorized laboratories (as notified under FTP Para 4.75) may import diamonds for grading/certification.
Examples include GIA India, Indian Diamond Institute (Surat), and IIDGR (De Beers).

B. Import Procedure

Step	Requirement
1	Execute General Bond / Bank Guarantee under Section 143 of the Customs Act.
2	File Bill of Entry marked “For certification only – no sale.”
3	Maintain control register (carat, clarity, cut, colour, control number).
4	Avail duty-free clearance under Notification 40/2015-Cus.
5	Ensure import and re-export through the same port.

C. Re-Export Procedure

• Timeline: within three months (extendable).

• Shipping Bill: must cross-reference original Bill of Entry.

• Declaration: same goods being re-exported post-certification.

• Default: attracts customs duty + penalty.

D. Audit and Reporting

• Quarterly reconciliation statement to Customs by 25th of next month.

• Surprise audits at least twice a year.

• Retention of records: 5 years (Bills of Entry, Shipping Bills, control registers, service contracts).

GST Treatment

Aspect	Position
Nature of Supply	Export of Service (Sec. 2(6), IGST Act)
Place of Supply	Outside India – as per Sec. 13(3)(a)
Tax Treatment	Zero-rated under Sec. 16
Export Mode	LUT/Bond without payment of IGST
Input Tax Credit (ITC)	Refundable on inputs and input services
Import IGST	Exempt under Customs Notification 40/2015-Cus.

Integrated Compliance Roadmap

Phase	Key Actions & Documents
Pre-Import	DGFT authorization → Execute General Bond → Service Agreement → Inform AD Bank → Apply for GR Waiver
Import	Bill of Entry (certification purpose) → Control Register → Duty-free clearance
During Service	Perform grading → Raise export invoice → Receive payment → Obtain BRC/FIRC
Re-Export	Shipping Bill (linking import details) → Proof of re-export identity → Customs clearance
Post-Export	File quarterly return → Reconcile import/export → Claim ITC refund → Report forex realization

Comparative Framework Summary

Parameter	FEMA	Customs / FTP	GST
Core Objective	Forex realization & service export compliance	Physical import/re-export regulation	Zero-rating of export services
Nature	Current account transaction	Temporary import under bond	Zero-rated export
Approvals	None (AD bank reporting)	Bond + authorization	LUT/Bond
Key Documents	Invoice, BRC/FIRC, GR Waiver	Bill of Entry, Shipping Bill	Export invoice, ITC refund documents
Time Limit	9 months for realization	3 months for re-export	As per GST return cycle
Major Risk	Delay in forex realization	Delay in re-export	Non-reporting of zero-rated export

Legal Interpretation Highlights

• Temporary import ≠ capital transaction: Ownership stays abroad; Section 5 applies.

• Dual-track compliance: Goods follow Customs law; services follow FEMA.

• Re-export waiver: GR waiver ensures FEMA closure of goods leg.

• Customs discipline ensures FEMA safety—non-re-export can convert the transaction into an import, breaching FEMA limits.

Conclusion

The temporary import of diamonds for certification and re-export is a legally compliant model when executed with procedural precision.

• No RBI approval needed (current account nature)

• Foreign exchange for service fees realized through AD bank within nine months

• GR waiver essential for re-export of same goods

• Customs bond, re-export, and recordkeeping mandatory

• GST zero-rating available under LUT/Bond

A transaction that seamlessly aligns Customs discipline, FEMA control, and GST efficiency not only ensures compliance but also strengthens India’s position as a trusted global hub for diamond certification.

The Essence

“Customs ensures the diamonds return, FEMA ensures the money comes in, and GST ensures the service remains tax-free — together, they create a flawless compliance diamond.”

CBDT Extends Due Dates for AY 2025–26: Relief for Taxpayers, Except Form 3CEB

 

The Central Board of Direct Taxes (CBDT) has announced an extension of key statutory filing deadlines for the Assessment Year 2025–26, offering welcome relief to taxpayers, professionals, and audit teams managing multiple compliance obligations.

As per the Press Release issued on 29th October 2025, the due dates for filing the Tax Audit Report and Return of Income have been extended, while the due date for Form 3CEB (Transfer Pricing Report) remains unchanged.

Revised Deadlines at a Glance

Filing Type	Statutory Section	Original Due Date	Extended To
Tax Audit Report	Section 44AB	31st October 2025	10th November 2025
Return of Income	Section 139(1)	31st October 2025	10th December 2025
Form 3CEB (Transfer Pricing Report)	Section 92E	31st October 2025	No Extension

Key Highlights

• The “specified date” for furnishing the Tax Audit Report under Section 44AB has been extended by 10 days, from 31st October 2025 to 10th November 2025.

• The due date for filing the Return of Income under Section 139(1) now stands extended to 10th December 2025, allowing additional time for audit completion and reporting synchronization.

• Importantly, Form 3CEB (Transfer Pricing Report) — required under Section 92E for international or specified domestic transactions — is not covered under this extension. The deadline continues to be 31st October 2025.

A formal notification/order under the Income-tax Act, 1961 is expected shortly to give statutory effect to the above extensions.

Professional Insight

This extension is a timely relief for audit and tax professionals navigating:

• Complex Form 3CD disclosures for AY 2025–26,

• Revised reporting requirements under Clause 44, foreign remittance, and GST reconciliation,

• Overlapping year-end statutory and income-tax deadlines.

However, businesses subject to transfer pricing regulations must remain alert — since no relaxation applies to Form 3CEB, compliance teams must still ensure:

• TP documentation and benchmarking reports are finalized well before 31st October 2025, and

• Form 3CEB is electronically filed within the statutory timeline to avoid penalties under Section 271BA.

Action Points for Taxpayers and Professionals

1. Finalize Tax Audit documentation by 10th November 2025.

2. Plan ITR filings accordingly to utilize the extended time up to 10th December 2025.

3. Complete Form 3CEB filing and TP documentation before 31st October 2025 — since no extension has been notified.

4. Monitor the CBDT website for the official notification or circular formalizing these extensions.

Press Release Date: 29th October 2025
Source: [CBDT Press Release — Due Date Extension AY 2025–26

Understanding Auditor’s Opinion on Financial Statements in UDIN — A Practical Analysis for Professionals

 The feature “Auditor’s Opinion on Financial Statements” within the UDIN portal has recently gained attention among members engaged in audit and assurance functions.

While it may appear to be a simple selection, its correct usage is crucial for compliance with Standards on Auditing (SAs) and the integrity of UDIN-based authentication.

This article interprets the latest FAQs, provides practical illustrations, and clarifies how to report auditor’s opinion, KAM, EOM, and Other Matter in the UDIN portal correctly.

Applicability — Not for Every Assignment

The “Auditor’s Opinion on Financial Statements” field is mandatory only for two categories of engagements:

• (a) Statutory audits, including Tax Audits and GST Audits, and

• (b) Other Audit & Assurance functions that conclude with an opinion on the true and fair view of financial statements.

For other professional assignments—such as concurrent audit, internal audit, stock audit, revenue audit, valuation, or compilation—this field should be marked “No”, as these do not result in an audit opinion.

When “Yes” is selected, the portal prompts further disclosures such as:

• Type of audit opinion (Unmodified / Qualified / Adverse / Disclaimer)

• Presence of Key Audit Matters (KAM), Emphasis of Matter (EOM), or Other Matter

• Classification of the entity (Listed / Non-listed)

This ensures the UDIN record reflects the audit conclusion consistent with Standards on Auditing and safeguards the credibility of digital attestation.

Framework of Auditor’s Opinion under SAs

Under SA 700 (Revised), an auditor must form an opinion on whether the financial statements give a true and fair view based on sufficient appropriate audit evidence.
Where modification is necessary, SA 705 (Revised) defines the framework as follows:

Nature of Matter	Material but Not Pervasive	Material and Pervasive
Financial statements are misstated	Qualified Opinion	Adverse Opinion
Insufficient appropriate audit evidence	Qualified Opinion	Disclaimer of Opinion

This classification ensures uniform professional judgment when determining the nature and impact of misstatements.

Illustrative Scenarios for All Four Audit Opinions

The following table illustrates practical cases for each opinion type and the corresponding UDIN selection:

Type of Opinion	Illustrative Scenario	Reasoning / Basis under SAs	UDIN Selection
1. Unmodified (Clean) Opinion	ABC Pvt. Ltd.’s financial statements comply with Ind AS, and sufficient appropriate audit evidence is obtained.	Auditor concludes that the financial statements present a true and fair view as per SA 700 (Revised).	Select “Unmodified / Clean Opinion”
2. Qualified Opinion	XYZ Ltd. lost inventory records for two small warehouses due to a data crash, but the remaining 95% of inventory was verified.	The misstatement is material but not pervasive. Financial statements are fairly stated except for the specific matter.	Select “Qualified — Material but Not Pervasive”
3. Adverse Opinion	LMN Ltd. valued obsolete stock at full cost and failed to recognize deferred tax liabilities.	Misstatement is material and pervasive, distorting overall presentation of financial statements.	Select “Adverse — Material and Pervasive”
4. Disclaimer of Opinion	PQR Ltd.’s accounting records were destroyed in a server failure; no sufficient audit evidence was available for key balances.	Auditor unable to obtain evidence — misstatement could be material and pervasive.	Select “Disclaimer — Material and Pervasive”

These examples demonstrate how audit judgment under SA 705 directly translates into the correct UDIN classification.

Reporting of KAM, EOM, and Other Matter in UDIN

When selecting “Yes” for the auditor’s opinion, the UDIN portal also requires reporting on whether KAM, EOM, or Other Matter paragraphs were included in the audit report.
Here’s how to interpret and disclose them correctly:

Type	When Applicable	Example / Practical Case	UDIN Reporting Guidance
Key Audit Matters (KAM) (SA 701)	For listed entities and, optionally, for large unlisted entities where significant matters were communicated to TCWG.	Revenue recognition involving multiple performance obligations or valuation of financial instruments requiring complex estimation.	Select “Yes” if one or more KAMs were included. The KAM description is not entered — only presence is indicated.
Emphasis of Matter (EOM) (SA 706)	To draw attention to a properly disclosed matter fundamental to user understanding, without modifying the opinion.	Example: Major litigation disclosed in notes; material uncertainty on going concern disclosed by management.	Select “Yes – EOM Present” when such paragraph exists, even though opinion remains unmodified.
Other Matter (SA 706)	To refer to a matter not presented or disclosed in financial statements, but relevant to users’ understanding of the audit.	Example: Comparative figures audited by another auditor; reliance on another firm’s component audit report.	Select “Yes – Other Matter Present” when included in the report.

Key principle: Presence of KAM, EOM, or Other Matter does not by itself constitute a modified opinion. The auditor must report both — the type of opinion and the presence of such paragraphs separately in UDIN.

Decision Framework — When to Select “Yes” in UDIN

Material Uncertainty on Going Concern

Under SA 570 (Revised), if significant doubt exists about an entity’s ability to continue as a going concern, the auditor must evaluate management’s disclosure:

• If adequately disclosed → include an Emphasis of Matter (EOM), with an Unmodified Opinion.

• If not adequately disclosed → issue a Qualified or Adverse Opinion, depending on pervasiveness.

Correct reflection of this scenario in UDIN ensures audit trail transparency and protects the auditor’s professional judgment in future reviews.

Professional Implications and Best Practice

The “Auditor’s Opinion” field in UDIN is not a procedural checkbox—it’s a compliance and integrity checkpoint connecting the audit conclusion to a digitally traceable record.

Correct classification under SA 700, SA 701, SA 705, SA 706, and SA 570 helps auditors:

• Maintain consistency and credibility in digital reporting,

• Strengthen assurance quality and peer review readiness, and

• Reinforce public trust in the audit profession.

Ultimately, this feature embodies the principle that:

Every digitally authenticated audit must faithfully mirror the auditor’s professional opinion — clear, consistent, and compliant with the Standards on Auditing.

In essence:
The UDIN feature on Auditor’s Opinion on Financial Statements is not a mere declaration.
It is the bridge between audit integrity, digital accountability, and public confidence — ensuring every signature carries both professional judgment and ethical clarity.

Tax Audit for F&O, Share Trading, Mutual Funds, and AIFs – Turnover Rules, Section 44AB Threshold, and Form 3CD

F&O, Shares, Mutual Funds, and AIFs — Tax Audit, Turnover, and Reporting Guide under Section 44AB and Form 3CD

The New Investment Spectrum and Tax Audit Complexity

The tax treatment of income from securities has evolved beyond simple “capital gains vs business income.”
Today’s taxpayer may deal simultaneously in:

• Equity delivery transactions (shares held as investment or stock-in-trade),

• Intraday equity trading (speculative business),

• Futures & Options (F&O) (non-speculative business u/s 43(5)(d)),

• Mutual Funds (equity/debt),

• Alternative Investment Funds (AIF Category I, II, III),

• Portfolio Management Schemes (PMS),

• ESOP/ESPP/RSU gains, and

• Buyback, bonus, rights, OFS, and tender offers.

Each has distinct turnover logic, income head, and audit relevance under the Income-tax Act and Form 3CD.

Classification of Income — The Starting Point

Before evaluating tax audit applicability, classification of income must be determined:

Activity Type	Legal Basis	Income Head	Remarks
Delivery-based share trading (investment)	Sec. 45	Capital Gains	Short-term if held ≤12 months; Long-term otherwise
Delivery-based share trading (business)	Sec. 28	Business Income	If frequency, intent, and volume indicate trading
Intraday equity trading	Sec. 43(5)	Speculative Business	Profit/loss under PGBP; Turnover = absolute sum of profits & losses
F&O (derivatives)	Sec. 43(5)(d)	Non-speculative Business	Treated as regular business
Mutual Funds	Sec. 10(23D), 115AD	Capital Gains / Dividend	Not business unless held as stock-in-trade
AIF Category I & II	Sec. 115UB, Rule 12CB	Pass-through income	Nature retained (business/capital) at investor level
AIF Category III	Sec. 10(23FBA)/(FBB)	Taxed at Fund Level	Investor taxed on distributions
PMS Portfolios	Judicial precedent (e.g., Radials International, ITAT Delhi)	Capital Gains (generally)	Unless trading characteristics dominate
ESOP/RSU/ESPP	Sec. 17(2)(vi), 49(2AA)	Salary (on exercise) & Capital Gains (on sale)	Separate computation under both heads

Turnover Computation & Tax Audit Applicability (Section 44AB)

Delivery-Based Equity Trading

If shares are held as investment, sale is capital gain — not part of turnover.
If held as stock-in-trade, sale proceeds minus cost is business turnover.

• Turnover basis: Aggregate of sales value (not absolute profit) if frequent trading.

• Tax audit: Triggered if business turnover > ₹10 crore (if digital >95%) or ₹1 crore (if <95%).

Intraday (Speculative) Trading

Per ICAI Guidance Note (2023):

Turnover = Absolute sum of profits and losses.

• Example:
  Profit ₹3L + Loss ₹1.2L → Turnover = ₹4.2L.

• Tax audit: If turnover > threshold or profit < presumptive % (6%/8%) and opted out of 44AD.

F&O Transactions

• Defined as non-speculative business u/s 43(5)(d).

• Turnover basis (ICAI GN Para 5.10(b)):

  • Absolute profit/loss of each contract,

  • Plus premium on sale of options,

  • Plus any differences on open position settlement.

• No 6% or 8% presumptive condition where digital transactions >95%.

• Tax audit exempt if turnover ≤ ₹10 crore and digital payments exceed 95%.

Clause-wise:

Clause	Particular	Implication
8A	Nature of business	“Derivative trading (non-speculative)”
40	Turnover disclosure	Computed per ICAI GN
44	Mode of transactions	Verify >95% digital for exemption
32(a)/(b)	Loss carry-forward	Non-speculative business loss up to 8 years

Mutual Fund Investments

• Treated as capital asset; not included in turnover.

• Taxed as capital gains u/s 45 read with 111A/112A.

• Audit: Not applicable since not “business activity.”

Disclosures in Form 3CD:

Clause	Disclosure
14	Investments in MF
18	Income not chargeable under business head
32(b)	Carry forward of capital losses (if any)

AIFs (Alternative Investment Funds)

Category I & II (Pass-through)

• Income taxed in hands of investor, nature retained.

• If AIF income = business, include in turnover.

• If AIF income = capital gains, no turnover impact.

Category III (Taxed at fund level)

• No pass-through; investor taxed on distribution only.

Reporting:

Entity	Applicability	Reference
AIF (as Trust)	44AB if total receipts > ₹10 Cr	Section 115UB(4)
Investor	Only disclose share under Clause 14/18	Form 64C/64D

PMS & Advisory Portfolios

• Gains from PMS-managed equity are generally capital in nature unless systematic churning is proven.

• Hence not part of turnover.

• Tax audit not applicable unless taxpayer has other business income.

ESOP / RSU / Buyback / Rights

Event	Tax Head	Basis	Audit Impact
ESOP exercise	Salary (u/s 17(2)(vi))	FMV – exercise price	P&L impact (not business)
Sale of ESOP shares	Capital Gains	Sale – FMV at exercise	Disclosed in CG Schedule
Buyback (Sec 115QA)	Capital Gains (exempt for shareholder)	Company pays 20% tax	Not turnover
Bonus / Rights issue	Not taxable at allotment	CG on sale	Not turnover

Clause 44 and Related Audit Disclosures

Clause	Relevance	F&O / Share Trader	MF / AIF / PMS Investor
Clause 8A	Nature of business	Trading / Derivatives	Investment
Clause 13(e)	Stock valuation method	Mark-to-market (F&O)	NA
Clause 14	Investments	Yes	Yes
Clause 18	Other incomes	Dividend, AIF share	Yes
Clause 32(a)/(b)	Losses carried forward	Business & CG separately	Yes
Clause 40	Turnover and ratios	Applicable	NA
Clause 42	TDS compliance (194Q/194H/194J)	Brokerage, exchange fees	NA
Clause 44	Digital payment ratio	Must show >95% digital for exemption	NA

Loss Set-off and Carry-forward Mechanics

Income Type	Section	Set-off in Same Year	Carry-forward Period
F&O loss (non-speculative)	72	Any business income	8 years
Speculative (intraday) loss	73(1)	Only speculative income	4 years
Short-term capital loss	70(2)	Any capital gain	8 years
Long-term capital loss	74(1)(b)	Only LTCG	8 years
AIF business loss (Cat I/II)	115UB(3)	Pass-through to investor	8 years
PMS or MF capital loss	70/74	Capital gains only	8 years

Practical Decision Matrix — Section 44AB Tax Audit

Case	Turnover Basis	Digital %	Audit Required?
F&O trader – turnover ₹8 Cr	98%	No
F&O trader – turnover ₹8 Cr	90%	Yes (cash >5%)
Intraday trader – turnover ₹2 Cr, loss	100%	Yes (opted out of 44AD)
Delivery trader (capital)	NA	NA	No
PMS / MF investor	NA	NA	No
AIF investor (Cat I/II)	NA	NA	No
AIF trust (Cat III receipts ₹15 Cr)	NA	NA	Yes

Audit Checklist for Professionals

✅ Confirm nature of income via holding pattern, frequency, and intention.
✅ Compute turnover strictly per ICAI GN.
✅ Verify digital transaction ratio (Clause 44).
✅ Separate F&O from delivery, intraday, and capital activities.
✅ Map all income heads correctly in ITR (Business, CG, Other Sources).
✅ Reconcile brokerage statements, ledger, and demat/PMS reports.
✅ Match carried-forward losses in Form 3CD with ITR schedules.
✅ Ensure AIF Form 64C/64D consistency with ITR.

Final Interpretation

The audit exemption threshold of ₹10 crore is purely turnover-based, not profit-percentage dependent, provided digital transactions exceed 95%.
Thus, F&O, intraday, and delivery-based business traders must compute turnover as per ICAI norms; capital investors in shares, MF, PMS, or AIFs remain outside tax audit unless they engage in active business trading.