How to Calculate F&O Turnover

Futures and Options Turnover

The simplest definition of turnover is the total purchase and sales of a business in a particular year or time period. The turnover helps in determining the size of business operation and over a period of time, it can also serve as a benchmark to rate business against competition.

Derivatives have been very actively traded in India for over two decades. At the beginning of 2022, the Indian exchanges were able to cross ₹ 200 lakhs crores in daily turnover in derivatives. Such brisk turnovers and market activity would always warrant scrutiny and various kinds of reporting. Therefore, it is important for all market participants to understand the implications of law and rules governing the turnover calculation and tax computation.

Since 2006, the profit or losses arising out of derivatives trading have been categorized as “Income from Business activity” instead of earlier classification, which defined such gains and losses as “speculative income”

Deductions

Reporting such transactions as a part of business offers an inherent advantage; for one, the expenses arising out of such business activity can be used to offset the income. Thus, any cost associated with the business of derivative trading such as brokerage, Demat charges, cost of subscription for research and software, depreciation, connectivity charges, rent, etc., can be deducted from total income.  

This business income from derivatives trading is further classified into “speculative” and “non-speculative income”. Intra-day trading transactions are deemed to be speculative (since there is no delivery of shares) and other F&O transactions are treated as non-speculative. While the tax payable on both incomes is the same, the difference arises in terms of disclosure and in particular when any loss is incurred.

Set-off and carrying forward

Under speculative (intra-day trading) business income, losses can be adjusted only against speculative income. And can be carried forward to a maximum length of 4 years. While losses arising from non-speculative (F&O trading) business, can be used to set-off against any other income i.e. it can be adjusted against income of house property, interest income, against profits from non-speculative gains, capital gains arising from sale of property (except salary income as it is treated under Normal Business Income). The unutilized losses can be carried forward for the maximum of 8 years and can be used to set-off against any business income and save taxes.

    “With great powers, comes great responsibilities”
                                                                                                                                                - Spiderman’s Uncle Ben 

While classification of F&O trading under business helps in curtailing taxes on income. The benefit of carrying forward losses can only be availed on a set precondition of filing ITR returns on time. ITR-3 is the applicable ITR form to report income from ‘profits and gains from business or profession (PGBP)’. The tax payable on such income is at the slab rate applicable to each individual, HUF or business entity.

Audit

While self-attested ITR submission are allowed and overall tax liability is not affected by turnover, there are certain conditions that would attract audit requirement;

• When turnover crosses ₹ 5 crores transaction mark.
• Section 44AD – If the turnover is less than ₹ 2 crore and if profit less than 6% (under presumptive taxation) of turnover and total income exceeds basic exemption limit (this section applies only if person’s taxable income other than the loss from trading is more than the taxation slab). An audit is not required if turnover is less than ₹ 5 crores but your total income is within the taxable limit of ₹ 2.5 lakhs

Penalty

If accounts are not audited on time, the IT dept can levy a penalty of ₹ 1.5 lakhs or 0.5% of turnover, whichever is lower. The provision of tax audit u/s 44AB is applicable on anyone fulfilling above conditions.

How to calculate F&O turnover

Calculation of futures turnover is straightforward. The turnover is equivalent to the sum of all profit and loss made in various transactions throughout the year. 

The common definition of turnover, which is sum total of buy and sell volume is not applicable here. The Income Tax department isn’t interested in volume, it is interested in business turnover. As mentioned above, the futures turnover is the sum of all profit- and loss-making transactions. The profit and losses are converted into absolute numbers and added back to turnover.

For options, much of the calculation remains the same, with an additional step at the end. The premium received is added back to the absolute P&L number and then posted in turnover.

AUDIT FOR F&O

Trading Turnover up to ₹ 2 crore

If the taxpayer has incurred a loss or the profit is less than 6% of trading turnover and total income is more than basic exemption limit, a tax audit is applicable.

If the taxpayer has a profit of more than or equal to 6% of trading turnover, tax audit is not applicable.

Trading Turnover more than ₹2 crore and up to ₹10 crore

If the taxpayer has incurred loss or the profit is less than 6% of trading turnover, the tax audit is applicable.

If the taxpayer has a profit of more than or equal to 6% of trading turnover and has not opted for the Presumptive Taxation Scheme under Sec 44AD, tax audit is applicable.

When the taxpayer has a profit of more than or equal to 6% of trading turnover and has opted for the Presumptive Taxation Scheme under Sec 44AD, Tax Audit is not applicable.

Trading Turnover more than ₹10 crore

Tax Audit is applicable irrespective of the profit or loss.