Introduction

Salaried individuals who engage in stock trading or Futures & Options (F&O) transactions often have queries about income tax return filing, applicability for maintaining Books of Accounts and the applicability of tax audit on F&O transactions. This guide provides an in-depth analysis based on the latest provisions under the Income Tax Act, 1961.

Understanding Trading Transactions for Taxation

Trading in stocks or F&O can be broadly classified into two categories:

1. Speculative Business Transactions
2. Non-Speculative Transactions (F&O Trading)

1. Speculative Transactions:

As per Section 43(5) of the Income Tax Act, a speculative transaction is one where the purchase and sale of stocks or commodities are settled without actual delivery. Intraday trading in equities falls under this category. 

2. Non-Speculative Transactions (F&O Trading):

F&O trading, including commodity derivatives on recognized stock exchanges, is treated as non-speculative business income even though no physical delivery takes place.

 Applicability of Tax Audit for F&O Trading

Since F&O trading is considered business income, tax audit provisions under Section 44AB apply similarly to any other business income. Understanding the turnover limits and profit declaration rules is crucial for compliance.

When is Tax Audit Mandatory?

Tax audit under Section 44AB is applicable in the following cases:

1. Turnover up to Rs. 1 crore:
   • Tax audit is not required, regardless of profit or loss, provided Section 44AD(4) does not apply.
2. Turnover exceeding Rs. 1 crore but up to Rs. 10 crore:
   • Tax audit is not required if at least 95% of transactions are digital.
   • Tax audit is mandatory if cash transactions exceed 5% of total receipts or 5% of total payments. 

Please Note Receipts and payments are calculated separately, not cumulatively.

3. Turnover above Rs. 10 crore:
   • Tax audit is mandatory, irrespective of profit or loss.
4. Presumptive Taxation (Section 44AD) and Tax Audit:
   • If a taxpayer opts for Section 44AD, no tax audit is required for turnover up to Rs. 3 crore from Financial Year 2023-24 (Assessment Year 2024-25).
   • However, if Section 44AD(4) applies, tax audit is required if the declared profit is less than 6% (digital) or 8% (cash) of turnover, and total income exceeds the basic exemption limit.

Tax Audit for Professionals Under Section 44ADA and F&O Traders

If a taxpayer is carrying on a profession eligible for presumptive taxation under Section 44ADA and simultaneously engaged in F&O trading, the tax audit requirement is determined separately for each activity:

• For F&O trading, tax audit is applicable as per Section 44AB turnover limits discussed above.
• For professionals under Section 44ADA, tax audit is applicable if gross receipts exceed Rs. 75 lakh from Financial Year 2023-24 (Assessment Year 2024-25).
• If both activities are carried out simultaneously, each must be evaluated independently for tax audit applicability.

How to Calculate Turnover for F&O Trading?

Determining turnover for tax audit purposes is essential for accurate reporting. The method of turnover calculation varies based on the type of transaction:

1. Futures and Options (F&O) Trading: Turnover is calculated as the sum of absolute values of profits and losses from each squared-off trade during the financial year.
2. Options Trading: If an options contract is physically settled, the premium received on the sale is included in turnover computation.

Turnover Calculation as per ICAI Guidance Note: The calculation of turnover for tax audit purposes is guided by ICAI’s Guidance Note on Tax Audit. This method ensures uniformity in turnover computation and compliance with audit requirements.

Understanding the 5% Cash Transaction Clause Under Section 44AB

For businesses with turnover between Rs. 1 crore and Rs. 10 crore, tax audit is not required if cash receipts and cash payments do not exceed 5% of total transactions. This is computed separately as follows:

• Aggregate of all cash receipts, including sales, should not exceed 5% of total receipts.
• Aggregate of all cash payments, including expenses, should not exceed 5% of total payments.

If either of these conditions is violated, tax audit becomes mandatory.

Examples for Clarity

Example 1: Turnover Calculation for F&O Trading

• A trader has the following transactions:
  • Profit from Trade 1: Rs. 1,50,000
  • Loss from Trade 2: Rs. 75,000
  • Profit from Trade 3: Rs. 50,000
  • Loss from Trade 4: Rs. 1,25,000
  • Total absolute turnover = 1,50,000 + 75,000 + 50,000 + 1,25,000 = Rs. 4,00,000
• Since turnover is below Rs. 1 crore, no tax audit is required unless Section 44AD(4) applies. 

When is Books of Accounts Mandatory to maintain?

The Income Tax Act has specified the books of accounts that are required to be maintained for the purpose of Income Tax. These have been prescribed under section 44AA and Rule 6F.

In case business/profession is being carried out by the individual or HUF the limits are increased as under: 

a. For Income – Limit is Rs. 2,50,000

b. For Turnover/Gross Receipt – Limit is Rs. 25,00,000

Tax Benefits on Losses in F&O Transactions

Losses incurred in Futures & Options (F&O) transactions can be set off against rental or interest income. Any unadjusted losses can be carried forward for up to eight years and offset against future business profits, including profits from F&O transactions.

Is Declaring F&O Loss in the Income Tax Return is Mandatory

Many taxpayers, particularly salaried individuals engaged in F&O trading, often fail to report these transactions in their income tax returns. This omission may occur due to ignorance, but it is crucial to note that reporting all sources of income is a legal requirement.

Brokers are mandated to report all security transaction details to the Income Tax Department by filing a Statement of Financial Transactions (SFT) annually. Non-disclosure of F&O transactions can attract scrutiny from the department, resulting in notices for non-compliance and potential penalties for failure to maintain books of accounts and non-filing of the required tax audit report along with the income tax return.

Notice Under Section 139(9) of the Income Tax Act (Defective Return)

Failure to furnish a Balance Sheet and Profit & Loss Account when required can lead to receiving a notice under Section 139(9) from the Centralized Processing Centre (CPC) of the Income Tax Department. The notice typically states:

“The assessee has claimed loss under the head ‘Profits and Gains of Business or Profession’; however, a Balance Sheet and Profit & Loss Account must be provided. If the assessee falls under Section 44AD/44AE/44ADA, the books of account must be audited if the income offered is below the prescribed limits as per the provisions of the Income Tax Act.”

While an audit is not mandatory if the turnover is below INR 1 crore, the income tax return must be duly filed with a complete Balance Sheet and Profit & Loss Account under Section 139 of the Income Tax Act.

Table in Glance:

Scenarios	Opted for 44AD	Declaring Profit	Remarks
1	Yes (Turnover is less than Rs. 2Cr.)	According to 44AD	Neither require to maintain books of accounts nor audit.
2	Yes (Turnover is less than Rs. 2Cr.)	Less than 8% or 6% as the case may be or declaring loss.	Require to maintain books of accounts and audit.
3	No (Turnover is less than limit given u/s 44AB)	Profit or loss whatever is the case.	No audit, maintain books of accounts if limit of 44AA is crossed.
4	No (Turnover is more than limit given u/s 44AB)	Profit or loss whatever is the case.	Audit and maintaining books of accounts is mandatory.

Note: In all the cases of loss audit is not mandatory. It depends case to case. But in general practice and to deal with future litigation this practice followed.

For the latest update on F&O Turnover definition read DEFINITION IN TURNOVER WITH DIFFERENT LAWS – Consult CA Online

Disclaimer: This article is solely for educational purpose and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article.

Form 15CB – Applicability, Documents Required & Non-Compliance

Particular	Details	Relevant Section/Rule
Applicability
Remitter	Resident making payment to a non-resident	Sec. 195
Taxability	Remittance chargeable to tax under the Income-tax Act	Sec. 5, Sec. 9, Sec. 195
TDS Requirement	Tax deductible at appropriate rate	Sec. 195, Sec. 90(2)
Rule 37BB Exemptions	Not required for 33 specified transactions	Rule 37BB(3)
Filing of Form 15CA	Part C to be filed if tax deductible and supported by Form 15CB	Rule 37BB(2)
Documents Required
Invoice/Agreement	To identify nature and amount of remittance	Sec. 195
TRC (Tax Residency Certificate)	Claim DTAA benefit	Sec. 90(4), Rule 21AB
PAN of Remitter	Mandatory for remitter identification	Sec. 139A
Beneficiary & Bank Details	Required to link parties and trace remittance	Rule 37BB(2)
Form 10F & No PE Declaration	Proof of tax residency and no fixed base in India	Sec. 90(5), Rule 21AB(1)
Bank Advice/Remittance Proof	Supporting documentation for correctness	Rule 37BB
TDS Working/CA Computation	For CA to certify correct rate of deduction	Sec. 195(6), Form 15CB
Consequences of Non-Compliance
Not obtaining Form 15CB	Bank may deny remittance; violation of tax/FEMA obligations	Sec. 195 r/w Rule 37BB
Incorrect Certification	CA liable for ₹10,000 penalty per incorrect report	Sec. 271J
Non-deduction of TDS	Interest @1%/1.5% per month, disallowance of expense, penalties	Sec. 201(1A), Sec. 40(a)(i)
Non-filing of 15CA/15CB	Penalty ranging from ₹10,000 to ₹1,00,000	Sec. 271H

Statutory Sources:

• Income-tax Act, 1961

• CBDT Notification No. 93/2015

• Rule 37BB – Income-tax Rules, 1962

📘 What is a Gilt Fund?

A Gilt Fund is a type of debt mutual fund that primarily invests in government securities (G-secs). These are bonds issued by the central and/or state governments to borrow money. As such, gilt funds carry zero credit risk, since they are backed by sovereign guarantee, but they are sensitive to interest rate movements.

Key Features of Gilt Funds:

Feature	Description
Underlying Securities	Government bonds (short to long-term maturity)
Risk Level	Low credit risk, but high interest rate risk
Return Expectation	Moderate returns, typically 5–7% p.a. over medium to long term
Investment Horizon	Ideal for 3–5 years or more
Liquidity	High, as most gilt funds are open-ended
Regulation	Regulated by SEBI

🔹 What is a Gilt Fund Account?

A Gilt Fund Account is a folio or investment account through which an investor can:

• Invest in one or more gilt funds

• Monitor NAV, holdings, and returns

• Redeem or switch between debt schemes

It may be referred to as a Mutual Fund Account with exposure specifically to Gilt Funds. Some platforms also offer direct gilt investments via RBI Retail Direct Gilt Account, allowing investors to buy G-Secs directly from RBI.

RBI Retail Direct’:

As part of continuing efforts to increase retail participation in government securities, ‘the RBI Retail Direct’ facility was announced in the Statement of Developmental and Regulatory Policies dated February 05, 2021 for improving ease of access by retail investors through online access to the government securities market – both primary and secondary – along with the facility to open their gilt securities account (‘Retail Direct’) with the RBI.

In pursuance of this announcement, the ‘RBI Retail Direct’ scheme, which is a one-stop solution to facilitate investment in Government Securities by individual investors is being issued today. The highlights of the ‘RBI Retail Direct’ scheme are:

i. Retail investors (individuals) will have the facility to open and maintain the ‘Retail Direct Gilt Account’ (RDG Account) with RBI.

ii. RDG Account can be opened through an ‘Online portal’ provided for the purpose of the scheme.

iii. The ‘Online portal’ will also give the registered users the following facilities:

1. Access to primary issuance of Government securities
2. Access to NDS-OM.

🔄 Gilt Funds vs Share Market – A Comparison

Particulars	Gilt Funds	Share Market (Equity Investment)
Nature of Investment	Government bonds (debt instruments)	Equity shares of listed companies
Risk Level	Low credit risk, high interest rate risk	High market, business & volatility risk
Returns	Moderate & stable (linked to interest rates)	Potentially high but volatile
Ideal for	Conservative or debt-oriented investors	Growth-seeking and risk-tolerant investors
Investment Horizon	Medium to long-term	Long-term (ideally >5 years)
Volatility	Low to moderate	High
Regulation	SEBI, RBI	SEBI, Stock Exchanges
Liquidity	High in open-ended funds	High for listed shares
Taxation (LTCG >2Y)	12.5% with indexation (for funds held >2 years)	12.5% LTCG on gains > ₹1.25 lakh

📈 Who Should Invest in Gilt Funds?

• Investors looking for safety of capital with moderate returns
• Suitable during falling interest rate cycles (bond prices rise)
• Ideal for diversification in low-risk portfolios

⚠️ Risks to Consider

• Interest Rate Risk: As rates rise, bond prices fall, affecting NAV.
• No Credit Risk, but duration risk is higher in long-term gilt funds.
• Not ideal for short-term parking due to volatility from rate changes.

📑 Source References:

1. SEBI – Mutual Funds Regulations: https://www.sebi.gov.in

2. RBI Retail Direct Scheme: https://rbiretaildirect.org.in

3. AMFI – Gilt Fund Details: https://www.amfiindia.com/investor-corner/knowledge-center/types-of-mutual-funds

Disclaimer: This article is solely for educational purpose and cannot be construed as legal and professional opinion. It is based on the interpretation of the author and are not binding on any tax authority. Author is not responsible for any loss occurred to any person acting or refraining from acting as a result of any material in this article.

Form 10-IEA is required to fill by individuals or HUFs those want to continue with the old tax regime in the present financial year ie FY 2023-24. The Budget 2023 proposes that from FY 2023-24, the new tax regime will be considered the default tax regime. By filling Form 10-IEA, taxpayers can choose the old tax regime. They must file the form on or before the due date prescribed for filing an income tax return. Let’s start with the detailed analysis of Form 10-IEA and go through its important aspects.

What is Form 10-IEA

In FY 2022-23 the old tax regime was announced as the default tax regime. Those taxpayers willing to choose the New tax regime must have to file Form 10-IE electronically. But in FY 2023-24 the new tax regime was announced as the default tax regime. And now those taxpayers willing to choose the New tax regime must have to file Form 10-IEA electronically and this action make Form 10-IE which was earlier employed to opt for the new tax regime has now been discontinued

Purpose of Filing Form 10-IEA

let’s understand the purpose of Form 10IEA.

• Individuals and HUF’s having income from profession/business must file Form 10-IEA by adhering to the prescribed deadline under Section 139(1). Please note this revised procedure streamlines the process, enabling individuals without business or professional income to directly specify their preference while filing a tax return by selecting the preferred option.
• The corresponding choice determines the rules and regulations that would be applicable to the assessee.
• Filling Form 10-IEA requires individuals to provide all the necessary information like PAN number, assessment year, name, and current status. These details can be used to accurately categorise and identify taxpayer information.

How to File Form 10-IEA

Follow these steps for filing Form 10-IEA online:

Step 1: Login on the e-filing portal 

Step 2: On the dashboard, click ‘e-File’ > ‘Income tax forms’ > ‘File Income Tax Forms’

Step 3: Scroll down to select Form 10-IEA. Alternatively, enter Form 10-IEA in the search box. Click on ‘File now’ button to proceed.

Step 4: Select the Assessment Year for which you are filing the return. For eg: If you are filing taxes for the income earned in FY 2023-24, then select AY 2024-25. 

Step 5: After checking the documents required for filing the form click on ‘Let’s Get Started’.

Step 6: Select “Yes” if you have Income under the head “Profits and gains from business or profession” during the assessment year. Select the due date applicable for filing of return of income and click on continue.

Note: Use “help document” by clicking on help document hyperlink for the help for selecting the applicable due date.

Step 7: Click ‘Yes’ to confirm the selection of the regime.

 Step 8: Form 10-IEA has 3 sections. Verify and Confirm each section. They are as follows:

i. Basic Information: In Basic Information section, your basic information will be pre-filled. If you are filing form for the first time then opting out option will be auto-selected and if system has valid form with opting out option, then re-entering option will be auto-selected. Click on ‘Save’ button.

ii. Additional Information: Fill the necessary details in Additional information section related to IFSC unit (if any) and click on ‘Save’.

 If you are opting out of new Tax regime this Additional Information panel will be greyed off

iii. Declaration and Verification: Verification section contains self-declaration where you will be required to check the boxes and agree to the terms and conditions. Verify whether all the details are correct and save the information. Once done, click on ‘Preview’ to review Form 10-IEA.

Step 9: After reviewing all the information, ‘Proceed’ to e-verify’. You can e-verify either through:

• Aadhaar OTP
• Digital Signature Certificate (DSC)
• Electronic Verification Code (EVC)

Step 10: After verification Click on ‘Yes’ to submit the Form.

Step 11: After successful e-Verification, a success message is displayed along with a Transaction ID and an Acknowledgement Receipt Number. Please keep a note of the Transaction ID and Acknowledgement number for future reference. You can also download the form and locate the acknowledgment number. 
To download the filed form, go to ‘e-File’ → ‘Income Tax Forms’ → ‘View Filed Forms’.

Introduction:

The new section 43B(h) will be applicable from April 1, 2024 (AY 2024-25), Section 43B(h) of the Income Tax Act introduces significant changes concerning expenses related to purchases or services from Micro and Small Enterprises. Please note this section is not applicable on Medium Enterprises.

43B(h) has been inserted as a Socio-Economic Welfare Measure to ensure timely payments to micro and small enterprises.

We all know that section Section 43B of the Act provides for certain deductions to be allowed only on Actual Payment basis.

Finance Bill 2023 has newly inserted a clause to this section which is as under:

Section 43B (h) of Income Tax Act says:

“any sum payable by the assessee to a MICRO or SMALL enterprise beyond the time limit specified in 15 of the Micro, Small and Medium Enterprises Development Act, 2006,”

The above clause indicated that, in order to be eligible to claim deduction of the sum payable to micro and small enterprises, the payment shall be actually made within the time limit specified in 15 of the MSME Act, 2006.

Section 15 of MSME Development Act, 2006 says:

“Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day*:

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall not exceed forty-five days from the day of acceptance or the day of deemed acceptance”

It is very clear that, the buyer shall make the payment to the supplier as agreed between them, however the same cannot exceed beyond 45 days from date of acceptance or the day of deemed acceptance i.e., from the day of acceptance of the goods/service.

Section 2(b) of the MSME Development Act, 2006 says:

“Appointed Day” means the day following immediately after the expiry of the period of fifteen (15) days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.

Explanation—For the purposes of this clause-

(i) “the day of acceptance” means-

(a) the day of the actual delivery of goods or the rendering of services; or

(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;

(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;

Section 16 of MSME Development Act, 2006 says:

“Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank”


Consequences upon Failure to make payment to Micro and Small Enterprises under Section 43B(h)

1. If the payment is made after 45 days or 15 days as specified – then expenses disallowed in the year and deduction will be available in the year in which the payment is made.

• If the payment is due for more than 45 days or 15 days as specified but the payment is made before the end of the Financial Year – then in such case, the deduction of the expense will be available in the same year itself.

The classification of the enterprise as Micro, Small & Medium as defined in Micro, Small and Medium Enterprises Development Act, 2006 is hereby produced for your reference:

• Micro Enterprise
• Investment less than Rs. 1 crore
• Turnover less than Rs. 5 crore

• Small Enterprise
• Investment less than Rs. 10 crore
• Turnover less than Rs. 50 crore

• Medium Enterprise
• Investment less than Rs. 20 crore
• Turnover less than Rs. 100 crore

Overview:

Section 92 of the Income Tax Act, 1961, deals with regulations of transfer pricing in India. It is a practice of determining the price of the transactions between associate enterprises and computation of Income from International transaction at Arm’s Length Price. This section has significant implications for Multi National Enterprises (MNE) operating in India and also on Specified Domestic Transaction (SDT).

Section 92E (Audit under Transfer Pricing):

Every person who has entered into an international transaction (IT) or specified domestic transaction (SDT) during a previous year shall obtain a report from an accountant (Chartered Accountant) and furnish such report on or before the “specified date” in the prescribed form (3CBE) duly signed and verified in the prescribed manner by such accountant and setting forth such particulars as may be prescribed.

Prescribed form for report from accountant is Form No. 3CEB. Under proviso to rule 12(2) audit report shall be furnished electronically.

“Specified date” means the date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139 for the relevant assessment year.[Section 92F(iv)] As due date for ITR in transfer pricing cases is 30th November of the relevant assessment year, specified date is 31St October. Report from accountant (CA) will have to be furnished on or before 31st October of relevant assessment year in Form 3CEB.

PENALTY ON ASSESSEE FOR FAILURE TO FURNISH REPORT UNDER SECTION 192E [SECTION 271BA]

If any person fails to furnish a report from an accountant as required by section 92E, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one hundred thousand rupees ie.Rs.1,00,000.

PENALTY ON AUDITOR FOR FURNISHING INCORRECT INFORMATION IN REPORTS OR CERTIFICATES

Section 271J of the Act provides for Penalty for furnishing incorrect information in reports or certificates. Section 271J provides that where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under the Income Tax Act, 1961, finds that an accountant has furnished incorrect information in any report or certificate furnished under any provision of Income Tax Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) [or Joint Commissioner (Appeals) may direct that such accountant (CA), shall pay, by way of penalty, a sum of Rs. 10,000 for each such report or certificate.

HOW TO FILE FORM 3CEB:

Form 3CEB can be filed online by following these easy steps

Step 1: You need to avail the services of a Chartered Accountant (CA) who will audit the business transactions. For this log in to your e-Filling portal account, navigate to the ‘My Chartered Accountants’ page and add a CA authorised by you. 

Step 2: Once you select a CA from the list, you must assign Form 3CEB to him/her. You can assign the form by selecting the CA’s name, selecting the filing type and entering the assessment year.

Step 3: Once the form has been successfully assigned, the CA can find it in his/her work list in the ‘For Your Action’ section. He/she can either accept or reject the assignment. If the assigned CA rejects it, you must reassign the form.

Step 4: If the CA accepts the task, he will fill in all the necessary details in the form after proper assessment and auditing. 

Step 5: Once done, you can find the form uploaded by the CA in the Taxpayer’s work list. You can click the ‘For Your Action’ button and find the form marked ‘Pending for Acceptance’. You can either accept or reject it after reviewing the form. Once you approve it, Form 3CEB will be filed.

Form 3CEB comprises three parts – Part A, Part B and Part C. 

Part A contains basic details that need to be filled up. 

Part B have a lot of information related to international transactions must be provided. It includes information about associate enterprises, nature and particulars of transactions.

Part C of the form is solely dedicated to specified domestic transactions. While Part B focuses on international transactions, Part C is on engagements with domestic enterprises. 

Conclusion:

As per Section 92E of the Income Tax Act, which relates to international transactions and specified domestic transactions, filing Form 3CEB is mandatory for companies who are engaged in foreign or domestic business with associated enterprises. Taxpayers must strictly follow the requirements listed in Form 3CEB; otherwise, there are penalty rules which might be enforced.

Clause 44 It was added w.e.f 20th August 2018 but Reporting under this clause was deferred till 31st March 2019 vide Circular No. 6/2018 dated 17th August 2018, So reporting in clause 44 is started from AY 2019-20.

The Objective for insertion of this Clause 44:

The main objective is to co-relate GST Data with Income Tax Data.

FAQ’s on CLAUSE 44

Q.1. Is reporting in this clause applicable only for Assessee who are GST registered?

Ans: No, Reporting is to be made by all assesses who are registered under GST or not.

Q.2. Interpretation of wordings “Breakup of total expenditure”? What expenditures are not Included?

Q.3. Tabular format for disclosure:

Sl. No.	Total amount of Expenditure incurred during the year	Relating to Goods or services Exempt from GST	Relating to entities Falling under Composition Scheme	Relating to Other Registered Entities	Total Payment to Registered Entities	Expenditure relating to entities not registered under GST
(1)	(2)	(3)	(4)	(5)	(6)	(7)

Q.4. Colum 2 says “Total amount of Expenditure incurred during the year” so shall we report head-wise / nature wise expenditure?

Q.5. What are the Expenditure relating to other registered entities (column 5)?

Ans: The value of all inward supplies from registered dealers, other than supplies from composition dealers and exempt supply from registered dealers, are to be mentioned in this column.

Q.6.  What is the meaning of “Total payment to registered entities (column 6)”?

Ans: The language used in sub-heading of column 6 is total’ payment’ to registered entities. The word ‘payment’ should harmoniously be interpreted as ‘expenditure’ as the combined heading of columns (3), (4), (5) is ‘Expenditure in respect of entities registered under GST’. Hence, the total expenditure in respect of registered entities i.e., sum total of values reported in columns (3), (4) and (5) should be reported in Column 6.

Q.7. Checks and Control while reporting?

Foreign Currency Exposure:

The Foreign Currency Exposure is a risk associated with the businesses and investors engaged in the activities (trade and investments) of dealing in foreign currency transactions. The entities involved in the activities of transactions in different foreign currency denominations and does not take steps to protect themselves from currency fluctuations.

This exposure arises when a company or individual holds assets, liabilities, or cash flows in a foreign currency without implementing any hedging mechanisms to mitigate potential adverse currency fluctuation.

Entities needs to hedge ourselves from foreign currency exposure in the market to avoid any risk of volatility in the exchange rates and Derivative hedging is the one of the best ways to hedge.

Unhedged foreign currency exposure (UFCE):

The RBI issues guidelines for banks to manage their foreign currency exposure either fund base or non-fund base, in an attempt to reduce the risk of unhedged exposure on the banking system during extreme volatility in forex markets.

Banks would be required to assess the unhedged foreign currency exposures of all entities to whom they have an exposure in any currency.

Accordingly, the banks were given advisory through the issuance of various directions, guidelines and circulars to develop a framework for regular monitoring of entities that do not have a hedge. Henceforth, the present directions dated 11th October 2022

Applicability of the Directions:

The provision pertaining to the current directions shall apply to all commercial Banks excluding Payments Bank and Regional Rural Banks along with the Overseas Branches and Subsidiaries of Banks incorporated in India.

These Directions shall come into effect from January 1, 2023.

Computation of UFCE:

Banks shall ascertain the Foreign Currency Exposure (FCE) of all entities at least on an annual basis. Banks shall compute the FCE following the relevant accounting standard applicable for the entity. For ascertaining the Foreign Currency Exposer, the banks shall also include all the sources of an entity’s exposure, including Foreign Currency Borrowings & External Commercial Borrowings.

UFCE shall be obtained from entities on a quarterly basis based on statutory audit, internal audit or self-declaration by the concerned entity. Moreover UFCE information shall be audited and certified by the statutory auditors of the entity, at least on an annual basis.

Provisioning and Capital Requirements:

The bank is required to calculate the total potential loss to the entity from Unhedged Foreign Currency Exposure. It shall be determined by using the data published by FEDAI on the annual volatility rate in the USD-INR exchange rate for the last 10 years and multiplying it with the UFCE of an entity.

The bank is required to ascertain the susceptibility of an entity towards adverse exchange rate movements. It shall be determined by computing the ratio of potential loss to the entity from UFCE and the entity EBID (Earnings before interest and depreciation).

In case if the bank is unable to gather information on UFCE and EBID of an entity due to restrictions on disclosure of information, then, in that case, the bank can compute the susceptibility ratio by using data that is immediately preceding the last four quarters.

In case of Unlisted Company if the information on EBID and UFCE is not available due to the non-availability of the last audited results of the last quarter, then, in that case, the bank shall undertake the latest quarterly and annual result. However, the EBID figure shall be for the last financial year.

The direction has determined the figure for computing the incremental provisioning and capital requirements which are as follows:

Potential Loss or EBID ( in Percentage)	Incremental provisioning Requirements	Incremental Capital Requirements
Up to 15 %	0	0
15% to 30%	20 BPS	0
30% to 50%	40 BPS	0
50% to 75%	60 BPS	0
More than 75%	80 BPS	Risk weight + 25%

Further, the bank is required to calculate the incremental requirements on quarterly basis. 

For projects under implementation and the new entities, banks shall calculate the incremental provisioning and capital requirements based on projected average annual EBID for the three years from the date of commencement of commercial operations.

In the case of consortium arrangements, the consortium leader / bank having the largest exposure shall have the lead role in monitoring the unhedged foreign exchange exposure of entities.

Exemption / Relaxation (a) Banks shall have the option to exclude the following exposures from the calculation of UFCE:

(i) Exposures to entities classified as sovereign, banks and individuals.

(ii) Exposures classified as Non-Performing Assets.

(iii) Intra-group foreign currency exposures of Multinational Corporations (MNCs) incorporated outside India.

Provided that the bank is satisfied that such foreign currency exposures are appropriately hedged or managed robustly by the parent. (iv) Exposures arising from derivative transactions and / or factoring transactions with entities, provided such entities have no other exposures to banks in India.

Assessment of Unhedged Foreign Currency Exposure (UFCE):

The banks are further required to ascertain the UFCE by obtaining such information from the concerned entity on quarterly basis. Further, the information on UFCE supplied to the bank must be audited and certified by a statutory auditor of the entity.

Nostro and Vostro accounts are two types of bank accounts used in international banking transactions. These terms originate from Latin, with Nostro meaning “our” and Vostro meaning “your”. In this article, we will discuss the meaning and differences between these two types of bank accounts.

What is a Nostro account?

A Nostro account is a bank account that a bank holds in a foreign currency in another bank. These accounts are maintained by banks to facilitate their foreign currency transactions. Nostro accounts are used by banks to hold funds that belong to their customers in other countries. These accounts are denominated in the currency of the foreign country where the account is held. Banks use Nostro accounts to receive and make payments in foreign currencies.

For example, if Bank A in the United States has a customer who wants to make a payment to a supplier in Japan, Bank A would use its Nostro account in Japan to make the payment in Japanese yen. The funds would be transferred from the customer’s account in Bank A to Bank A’s Nostro account in Japan, and then Bank A would use these funds to make the payment to the supplier in Japan.

What is a Vostro account?

A Vostro account is a bank account that is held by a foreign bank in the local currency of the country where the account is held. Vostro accounts are maintained by banks to facilitate transactions with their international customers. These accounts are used by banks to hold funds that belong to their customers in the local currency of the country where the account is held. Banks use Vostro accounts to receive and make payments in local currencies.

For example, if Bank A in the United States has a customer who wants to receive a payment from a supplier in Japan, Bank A would give its Japanese partner bank permission to open a Vostro account with Bank A. The supplier in Japan would transfer the payment in Japanese yen to Bank A’s Vostro account in Japan. Bank A would then credit the payment to its customer’s account in the United States in US dollars.

Differences between Nostro and Vostro accounts

The main difference between Nostro and Vostro accounts is that Nostro accounts are held by a bank in a foreign country, denominated in the currency of the foreign country, and used to facilitate its transactions in that country. On the other hand, Vostro accounts are held by a foreign bank in the local currency of the country where the account is held, used to facilitate transactions with the bank’s international customers.

Another difference between Nostro and Vostro accounts is the ownership of the account. A Nostro account is owned by the bank that holds the account, while a Vostro account is owned by the foreign bank that opened the account.

A Nostro Account of one country can be a Vostro Account for another country, and vice versa