Presumptive taxation

Normally, a business must keep detailed books. Once turnover crosses a threshold, those books must be audited too. Presumptive taxation offers a shortcut.

Instead of working out actual profit from full accounts, a taxpayer can just declare profit at a prescribed rate of turnover. Tax is paid on that declared figure. This skips the usual bookkeeping and audit burden.

For a PMS client trading futures and options, F&O income counts as business income. It is taxed under "Profits and Gains from Business or Profession". That is exactly the kind of income the presumptive scheme applies to. And it is exactly where opting in or out of the scheme changes whether a tax audit becomes compulsory.

Chapter 11 sets out the audit consequence in three turnover bands for F&O trading, tied directly to the presumptive scheme.

Turnover up to Rs 2 crore. If profit is below 6% of turnover, and the taxpayer has opted out of the presumptive taxation scheme in the past five years, a tax audit becomes mandatory under Section 44AB(e), provided total income exceeds the basic exemption limit. If profit is 6% or higher, no audit is required.

Turnover between Rs 2 crore and Rs 10 crore. No audit is required, irrespective of profit or loss, if more than 95% of transactions are digital.

Turnover above Rs 10 crore. A tax audit is mandatory under Section 44AB(a), regardless of profit or loss.

The 6% line only bites for a taxpayer who has stepped out of the presumptive scheme in the preceding five years — a trader who has never opted in or out is judged on the other two bands directly.

Anil Bhatt trades F&O through a PMS mandate. His F&O turnover for the year is Rs 1.6 crore, and his net profit from those trades is Rs 7,20,000 — a profit-to-turnover ratio of:

Rs 7,20,000 ÷ Rs 1,60,00,000 = 4.5%

That is below the 6% line. If Anil had opted out of the presumptive taxation scheme at any point in the previous five years, and his total income exceeds the basic exemption limit, a tax audit under Section 44AB(e) becomes mandatory for this year — even though his turnover of Rs 1.6 crore is well inside the Rs 2 crore band that would otherwise avoid an audit.

Compare his colleague Meera Rao, with the same Rs 1.6 crore turnover but a profit of Rs 10,50,000, a ratio of 6.6%. Because her profit clears the 6% line, no audit is triggered under this provision regardless of her presumptive-scheme history. The 6% figure, not the turnover figure, is what decides the outcome inside the Rs 2 crore band.

Chapter 11, section 11.2.3 (Taxation on Derivatives), covers this while explaining F&O tax treatment for PMS clients. The workbook's own three-tier audit table — the 6% profit line under Rs 2 crore turnover, the 95% digital-transaction test between Rs 2 crore and Rs 10 crore, and the mandatory audit above Rs 10 crore — is the examinable content, with presumptive taxation as the trigger condition for the first tier.

• The 6% profit test only matters if the taxpayer opted out of the presumptive scheme in the past five years. A taxpayer who never used the scheme is not automatically caught by this specific clause.
• 6% or higher profit avoids the audit; below 6% with a presumptive-scheme opt-out triggers it under Section 44AB(e). Do not reverse the direction.
• The 95% digital-transaction test applies only in the Rs 2 crore–Rs 10 crore band, and removes the audit requirement regardless of profit or loss in that band — a different mechanism from the 6% test.
• Above Rs 10 crore turnover, an audit is mandatory no matter what — profit level and digital-transaction share stop mattering entirely.
• F&O losses can be carried forward for up to 8 assessment years and set off only against business income, never against salary — a related but separate rule in the same section, easily confused with the audit trigger.