Guide to Understanding F&O Turnover
In the last few years, there has been a considerable surge in futures and options (F&O) investors in India. Like any investment, taxation is a vital aspect of F&O, and any income or loss from F&O is classified as non-speculative business income. You must understand the concept and Turnover calculation methodology of F&O turnover for tax calculation.
What is F&O turnover?
Simply put, F&O turnover is the total revenue generated from trading in F&O, considering all the profits and losses. To get an accurate estimate of F&O turnover, you need to deduct each expense incurred during trading from the income generated. These expenses include the broker’s commission, rent, bills, etc. As F&O income falls under the business income category, you must use ITR 3 to report profit or loss.
How to calculate F&O turnover?
As per the Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961,
Derivatives, futures, and options transactions are completed without the delivery of shares or securities. These are also squared up by the payment of differences. The contract notes are issued for the full value of the asset purchased or sold but entries in the books of account are made only for the differences. The transactions may be squared up at any time on or before the striking date. The buyer of the option pays the premia. The turnover in such types of transactions is to be determined as follows:
(i) The total of favorable and unfavorable differences shall be taken as turnover. (ii) Premium received on sale of options is also to be included in turnover. (iii) In respect of any reverse trades entered, the difference thereon, should also form part of the turnover.
Also as clarified by ICAI for Options premium received on sale is to be included if it has not been included for determining net profit for the transaction.
Source: Guidance Note by Tax Audit
F&O Turnover = Σ {Absolute (Sell Amt - Buy Value)}
There are two methods in which Turnover can be calculated and both of them can be considered for Tax filing as there is no clear guidelines on which method to opt for during Tax Filing.
Let us understand with an example.
Source: ClearTax
Trade-wise turnover
This turnover is calculated by adding all absolute profit and loss of all trade done in a financial year (see table).In Kotak Securities, the premium is already accounted for while calculating the P&L so it’s not required to account premium separately.
| Symbol | Qty | Buying rate | Selling rate | Buy Amt. | Sell Amt. | P/L | Turnover |
|---|---|---|---|---|---|---|---|
FUTIDXNIFTY 27APR2023 | 10 | 100 | 200 | 1000 | 2000 | 1000 | 1000 |
FUTIDXNIFTY 27APR2023 | 10 | 300 | 200 | 3000 | 2000 | -1000 | 1000 |
FUTCOMGOLDPETAL 30JUN2021 | 5 | 100 | 50 | 500 | 250 | -250 | 250 |
FUTCOMGOLDPETAL 30JUN2021 | 5 | 200 | 100 | 1000 | 500 | -500 | 500 |
TOTAL | 2750 |
Scrip-wise turnover
It is calculated by collating all trades of a particular contract in a financial year basis total profit or loss on the average buy or sell value (see table).
| Symbol | Qty | Buying rate | Selling rate | Buy Amt. | Sell Amt. | P/L | Turnover |
|---|---|---|---|---|---|---|---|
FUTIDXNIFTY 27APR 2023 | 20 | 200 | 200 | 4000 | 4000 | 0 | 0 |
FUTCOMGOLDPETAL 30JUN2021 | 10 | 150 | 75 | 1500 | 750 | -750 | 750 |
TOTAL | 750 |
It is crucial for you to accurately calculate F&O turnover to compute taxes and mention the same while filing your ITR returns.. Seek professional help if required.
We at Kotak Securities provide trade-wise turnover in all P&L-related statements (Realized Gain & Loss and Tax P&L) as it is the most conservative method. The trade-wise F&O P&L is attached in a separate sheet with the Tax P&L Excel, and you can reconcile using the same. For tax P&L, click here.
Source: ClearTax
Tax audit applicability of F&O traders
This is another essential lookout. Tax audit is applicable based on your F&O turnover (see table).
| Turnover | Tax audit applicability |
|---|---|
Up to ₹2 crores | Audit is necessary if: Profit or loss is less than 6% of your total turnover Your total income exceeds the basic exemption limit You have opted out of the presumptive taxation scheme in any of the immediate 5 previous years The audit is not applicable if you have a profit equal to or greater than 6% of the turnover. |
Between ₹2 crores and ₹10 crores | Audit is not required if your trading turnover falls within this range and you have carried the majority of transactions (more than 95%) digitally, regardless of profit or loss. |
More than ₹10 crores | Tax audit is applicable regardless of profit or loss. |
Summing it up
Source: ClearTax
Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.
FAQs
What is turnover in F&O trading?
Turnover refers to the total income from F&O trading, including profits and losses. Σ {Absolute (Sell Amt - Buy Value)}
Is F&O business income?
Yes, income generated from F&O is considered non-speculative business income.
Can I carry forward F&O losses?
Yes, you can carry forward F&O losses and offset them against your income in the following 8 years.
