How to Calculate F&O Turnover

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  • 28 Sep 2023
How to Calculate F&O Turnover

In India, investors are captivated by the F&O market. On the expiry day of the January series, F&O turnover in the Indian markets crossed Rs 200 lakh crore. Nevertheless, new traders and investors in the derivatives market are unaware of how gains are taxed in the derivatives market. In this article, you will learn the basics of futures and options, the F&O turnover calculator, and how to calculate F&O turnover. We will also explore how F&O losses can benefit you to lower the taxes.

Let’s quickly review the basics of the futures and options here. Both Futures and options contracts are essential to know about contract-based trading. These definitions allow you to be clear about major types of trading in the stock market.

  • Futures

Futures contracts are agreements between buyers and sellers to purchase and sell a specified amount of an underlying asset. There's a specific future date for the contract. Likewise, the price at which the trade happens is predetermined.

  • Options

Options give you the right to buy or sell a certain quantity of the underlying asset on a specific date in the future. There will be a pre-set price for this deal. Remember that you can buy or sell the underlying asset, but you're not obligated to do so.

If the Options contract seems unfavorable, you can postpone the trade, sell it, or let it expire. However, if you want to buy it, the seller must sell it as per the contract. He can't deny it.

There are two types of options - Calls and Puts. Call options let you buy an asset at a pre-decided price until the contract expires. Put options let you sell an underlying asset at a predetermined price until the contract expires.

Before learning how to calculate F&O Turnover, let’s understand its meaning. Tax authorities consider trading in Futures and Options a business. The income you get from trading F&O is considered business income. As a result, you'll get taxed for derivatives gains just like for businesses. You'll need to understand how to calculate F&O Turnover to do this.

In F&O trading, turnover is the total income after profits and losses are taken into account. To calculate F&O turnover, deduct all expenses you incur in trading F&O, like broker commission, rent, bills, etc. Due to this, F&O turnover can be positive or negative depending on profit and loss.

Here's how to calculate F&O turnover:

  • Take the total positive and negative differences taken into account when calculating turnover.
  • The premium the trader gets when selling the options has to be included
  • If a trader reverses a trade, then the difference afterward will be part of their turnover

Basically, under F&O trading, the turnover of futures is the absolute profit, which is the difference between positives and negatives.

Futures turnover = absolute profit (profit and loss on all transactions throughout the year)

You can calculate the turnover of options by adding the premium from selling them to the profit.

Options Turnover = Absolute Profit + Premium from selling options.

F&O turnover is computed as follows:

  • Turnover is the total of favorable and unfavorable differences (Profit/Loss).
  • The premium received on the sale of options should also be included in turnover.
  • The difference in reverse trades entered should also be included in turnover.

Let’s understand the following example:

  • Purchased 1 lot of 500 shares of RIL Future at Rs.2,000 and sold at Rs.2,100 (Future Transaction).
  • Purchased 1 lot of TCS futures with a lot size of 700 shares at Rs. 3200/- and sold at Rs. 3,150/- (Futures Transaction)
  • Bought 500 shares of Maruti at Rs. 80 & sold at Rs. 100 (Call Option)
  • Sold 500 shares of Tata Motors at Rs 45 and later purchased at Rs. 50.

According to the above example, Turnover would be Rs. 1,70,000/, as worked out below in the table:

Script Name Transaction Type Lot size Purchase value Sale value Gains/(Loss) Turnover
RIL
Future
500
2000
2100
50,000
50,000
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

No matter what the profits or losses are, F&O turnover must be reported. There are tax benefits to F&O losses as well; Tax Audit u/s 44AB is applicable if the taxpayer reports losses or if the trading turnover exceeds Rs. 1 crore or Rs. 2 crores if the taxpayer falls under the presumptive taxation scheme. Alternatively, the taxpayer may decide not to claim and carry forward the loss, in which case a tax audit can be avoided, and the loss can be set off against future profits to reduce income tax liability.

A taxpayer who decides to proceed with a tax audit must hire a Chartered Accountant to:

  • Prepare Financial Statements (Profit and loss – balance sheet)
  • Filing of Tax Audit Report (Form 3CD)
  • Prepare and file ITR

Conclusion

F&O turnover is important for taxes because it's treated like business income. To calculate F&O turnover, you add up all the money you make and subtract the expenses related to F&O trading. Knowing how to calculate F&O turnover matters a lot because it affects your taxes. You have to report F&O turnover no matter what, but if you have losses, they can actually help lower your taxes.

If your turnover goes beyond certain limits or you report losses, you might have to go through a tax audit. If that happens, you'll need a Chartered Accountant to help you prepare financial documents tax audit reports, and file your income tax returns. To calculate the accurate tax that you owe on the transactions, you need to calculate the correct turnover. Tax penalties may be imposed if you make an error in calculating the right turnover. To navigate the complexity of trading, you can seek guidance from Kotak Securities.

Read More : Union budget 2024

FAQs On F&O Turnover

F&O transactions are reported in ITR 3 whether you are an individual, a HUF, or a company. You are allowed to list all other incomes other than those earned through F&O trades in ITR 3. The form allows you to mention your salary, income from house property, and other income sources.

The income or loss from F&O is classified as non-speculative business income under Section 43(5) of the Income Tax Act.

A futures and options turnover is the total revenue generated from trading futures and options. F&O turnover is calculated by subtracting all expenses associated with trading F&O.

10 crore is the turnover limit for option trading.

A tax audit is not mandatory if the F&O trading turnover does not exceed Rs. 1 Crore. In cases where turnover exceeds Rs. 1 crore but net profit is less than 6% of turnover, tax audit u/s 44AB applies.

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