How to Calculate F&O Turnover?

Last Updated: 8 Oct 2024

In India, the futures and options market has currently become a popular avenue for investors seeking a more significant portion of the Indian stock market. The craze of F&O in India holds a strong grip over the investors. Nevertheless, several traders and investors who are a beginner in the derivative market are primarily uninformed of the process of how it works or the concept of taxation on the gains in the derivatives market.

Calculating the F&O turnover is a must, as it helps to understand the amount of tax you owe to the government. So, in this blog, you will learn about future and option turnover calculation.

Futures And Options

Here is a quick review of the fundamentals of the options and futures. Both options and futures contracts are crucial to get a better idea about contract-based trading.

Futures

The futures contracts refer to the agreements occurring between sellers and buyers to sell and purchase a specific amount of the underlying asset. The contracts come with a specified future date. Similarly, it has a predetermined price at which the trade takes place.

Options

With options contracts, you will get the right to sell or buy a specific quantity of any underlying asset on a particular date in the future. The deal comes with a predetermined price. Note that you may sell or buy an underlying asset. However, it may not be a mandatory factor.

You may postpone your trade, leave it to expire, or even sell it. Nevertheless, the seller has to sell the trade according to the contract if you desire to buy it, and there is no room for them to go in denial.

Who Should Invest In Futures & Options?

Trading in futures and options (F&O) can yield profits, but it also involves risks, resulting in both advantages and disadvantages. Various categories of traders engage in F&O:

Hedgers

These individuals invest in a specific asset to shield themselves from the price fluctuations of that particular asset.

Speculators

Speculators focus solely on securities, leveraging price fluctuations. Their aim is to predict price movements and capitalize on them. While it is a personal choice, it’s important to note that leverage can amplify both returns and losses.

Arbitrageurs

These traders aim to profit from price differentials in various market conditions. They actively exploit any inefficiencies present in the market.

Deductions

As a trader, you have the opportunity to deduct specific expenses from your income. This implies that traders can subtract certain costs associated with their trading endeavours when determining their taxable income. Such expenses may encompass broker fees, software subscriptions, charges for your Demat account, or even rent if you maintain a designated trading area.

It’s crucial to note that the particulars of these deductions may differ depending on individual situations and tax regulations. Therefore, it is advisable to seek guidance from a tax professional or advisor for precise details. Keep in mind that although this provides a general outline, the actual future and option turnover calculation can become more intricate, particularly in the realm of taxes.

How To Calculate F&O Turnover?

Here’s a step-by-step guide on future and option turnover calculation:

• Consider the total positive and negative variances when determining turnover.
• Include the premium received by the trader when selling options.
• If a trade is reversed, account for the subsequent difference in the turnover.

In F&O trading, the turnover for futures is essentially the absolute profit, representing the disparity between positive and negative values. The formula for F&O turnover calculation is as follows:

Futures Turnover= Absolute Profit

For options turnover, factor in both the absolute profit and the premium earned from selling options. The formula for F&O turnover calculation is expressed as:

Options Turnover=Absolute Profit + Premium from Selling Options

F&O Turnover Example

The F&O turnover calculation involves the following step of how to calculate F&O turnover:

• Turnover comprises the aggregate of favourable and unfavourable differences (Profit/Loss).
• The premium received from the sale of options should be factored into the turnover.
• The differences in reverse trades entered should also contribute to the turnover.

Let’s illustrate this with the following example:

• Acquired one lot of 500 shares of RIL Future at Rs. 2,000 and sold at Rs. 2,100 (Future Transaction).
• Purchased one lot of TCS futures with a lot size of 700 shares at Rs. 3,200/- and sold at Rs. 3,150/- (Futures Transaction).
• Bought 500 shares of Maruti at Rs. 80 and sold at Rs. 100 (Call Option).
• Sold 500 shares of Tata Motors at Rs. 45 and later purchased at Rs. 50.Based on the given example, the turnover is Rs. 1,70,000, as detailed in the table below:
  

  Script Name	Transaction Type	Lot Size	Purchase Value	Sale Value	Gains/Loss	Turnover
  RIL	Future	500	2000	2100	50000	50000
  TCS	Future	700	3200	3150	(35,000)	35,000
  Maruti	Option	500	40000	50000	10,000	60,000
  Tata Motors	Option	500	25000	22500	(2,500)	25,000
  			70,200	77,750	22,500	1,70,000

  F&O Losses and Tax Audit

  Irrespective of whether there are profits or losses, reporting F&O turnover is mandatory. However, it’s noteworthy that F&O losses carry tax benefits. The obligation for a Tax Audit under section 44AB arises when the taxpayer reports losses in turnover when the trading turnover exceeds Rs. 1 crore or Rs. 2 crores if covered by the presumptive taxation scheme.

  Alternatively, the taxpayer can choose not to claim the loss, opting to carry it forward. By doing so, they can avoid the tax audit, and the loss can be offset against future profits since F&O losses, being non-speculative, contribute to reducing income tax liability.

  If the taxpayer opts for a tax audit, the following steps must be taken with the assistance of a Chartered Accountant:

  When Are Audits Applicable for F&O Trading?

  Audit requirements vary based on the specific scenarios outlined below:

  A tax audit becomes necessary when the taxpayer registers a profit or loss amounting to less than 6% of the trading turnover. If the turnover equals or exceeds 6%, a tax audit is not required.

  A tax audit is mandated when a taxpayer experiences a profit or loss amounting to less than 6% of the trading turnover. Conversely, a tax audit is required only if the taxpayer realizes a gain equal to or exceeding 6% of the trading turnover and has not chosen the presumptive taxation scheme under section 44AD. However, if the taxpayer has opted for presumptive taxation, a tax audit is not obligatory in the same scenario.

  A tax audit is required whenever the trading turnover surpasses the Rs 10 crore threshold, regardless of whether there is a profit or loss.

  Penalty for Avoiding Audits

  In the event that your accounts remain unaudited, the IT department has the authority to impose a penalty, which could be either Rs 1.5 lakhs or 0.5% of your turnover.

  The Takeaway

  It’s important to highlight that the computation of turnover varies for futures and options. Ensuring the accurate future and option turnover calculation is crucial for determining the precise tax liability on your transactions. Any mistake in determining the correct turnover could result in inaccurate tax payments, potentially subjecting you to penalties.

Frequently Asked Questions

Is a tax audit required for income derived from F&O business?

If the turnover does not exceed Rs 1 crore in a financial year, a tax audit is not obligatory. However, if the turnover surpasses this limit and the net profit is less than 6% of the turnover, tax audits become mandatory. Additionally, if the turnover exceeds Rs 2 crore, a tax audit is required, irrespective of whether the profit and loss fall below or exceed 6%.

Do I need to make advance tax payments on my F&O profits?

Income from trading in F&O is categorized as non-speculative business income and is subject to taxation based on the regular slab rates. If your total income across all categories exceeds Rs 10,000 in a financial year, you are required to make advance tax payments in four quarterly installments within the specified due dates.

What are the charges for F&O tax audits?

There are no standardized fees for F&O tax audits, and the charges typically vary from one Chartered Accountant to another.

Can expenses be claimed against F&O Income?

Since F&O income is treated as business income, expenses incurred to earn such income can be claimed as deductions from F&O (business) Income. These expenses may include STT, brokerage, electricity charges, internet expenses, etc. However, it is the responsibility of the assessee to demonstrate that these expenses were incurred to generate business income.

How Does Turnover Affect Taxation For F&O Trading?

Turnover in Futures and Options (F&O) trading affects taxation significantly, as it determines whether the income is classified as business income. The total turnover includes both favorable and unfavorable differences from trades, as well as premiums received from options sales. Accurate turnover calculation is essential for tax compliance and audit requirements.

Does Turnover Calculation Differ For Different Types Of Derivatives Or Markets?

The calculation of turnover does differ between types of derivatives. For futures, it is based on absolute profit, while for options, it combines profit and premiums received. Additionally, factors like open positions and delivery-based settlements can influence turnover calculations, making it crucial to understand the specific rules for each derivative type.