How to Calculate F&O Turnover?
There has been a surge in the number of futures & options investors within the last couple of years. This is demonstrated by the fact that the number of Demat accounts in India has jumped from 3.5 crores to 8.5 crores from April 2018 to Feb 2022.The derivatives market, specifically the F&O segment has become widely popular.
Investors/traders can satisfy their appetite for large gains from this market while investing only a small amount. However, like any other income, taxes are applicable on gains from futures and options. Investors and traders who are new to the derivatives market need to learn how to calculate F&O turnover for taxation purposes.
What Is F&O Turnover?
Future & options Turnover is nothing but the total revenue generated from trading in futures and options. Each expense incurred in the process of trading in F&O like broker’s commission, telephone bills, office rents etc., is to be subtracted from the income generated to get an accurate estimation of F&O turnover.
It is also very important to understand that income generated from futures and options trading is considered income from a business, for taxation purposes. Thus, the revenue generated will be taxed in the same manner as business income.
How to Calculate F&O Turnover?
While calculating F&O Turnover, the following are the key points to consider:
- The difference between the positives and negatives is to be considered while calculating F&O turnover.
- The difference will also form a part of the turnover, In case of reverse trade entered by the trader.
- Premiums received from selling options are not to be included in F&O turnover when calculating for taxation as per the Income Tax Act.
Let’s understand the concept of F&O turnover better with an example:
The following are the details of transactions made by Mr Anuj in a particular financial year, based on which the F&O turnover has been calculated:
|Company||Transaction Type||Lot size||Purchase Value||Sale Value||Gain/Loss||Turnover|
Note that the total expense incurred by Mr Anuj in the context of F&O was ₹8,000.
Now let us understand what happened in the above table:
Here in this table, we have derived the turnover of futures by multiplying the purchase value with the lot size. At the same time we have multiplied the sale value by the lot size and their difference is the gain or loss. Adding the profits and losses gives the turnover value.
For instance, a single lot of Eicher Motors consists of 300 shares. It was purchased at
₹200 and sold at ₹190. This resulted in a loss of ₹10/share or ₹3,000 (10 x 300) in net losses for a single lot.
Now the total turnover on all the transactions made on trading futures and options was derived by adding up all the turnovers. Therefore, the final turnover comes to ₹27,000.
After deriving the turnover, we will have to take into account all the expenses like broker’s commission, telephone bills, office rents etc. and subtract them from the total turnover.
Total expense incurred by Mr Anuj was ₹8000
Therefore, the final turnover of his portfolio will be ₹19,000 (27,000-8000).
Deductions Applicable on F&O Turnover
The expenses associated with F&O trading like broker’s commission, telephone bills, office rents, depreciation, Demat charges, and cost of subscription for software and research can be used to set off against the income. Therefore any expenses deriving out of F&O trading can be deducted from total income.
The income generated from trading futures & options is classified into two types of income speculative & non-speculative. The income generated from F&O trading is treated as non-speculative income. However, income generated from intraday trading is treated as speculative as there is no delivery of shares.
Non-speculative income can be carried forward for up to 8 years and adjusted against any non-speculative income. This includes income from house property, interest income and capital gains from various assets.
F&O Turnover Reporting for Tax Audit
Whether you have made profits or losses in futures & options trading, you must report the same. Under Section 44AB, anyone engaged in a profession like F&O trading needs to get their accounts audited if their turnover or gross receipts in the previous year exceed ₹50 lakh. The tax audit report needs to be furnished to the respective authority by the due date.
Taxpayers who have opted for the presumptive taxation scheme under Section 44AD similarly need to get audits if their income exceeds ₹2 crore in the last year. Taxpayers can report losses from their F&O trading. One can also carry forward losses if one decides not to claim presumptive taxation and avoid audits at the same time.
To perform a tax audit you can appoint a Chartered Accountant (CA), who can help you out with the following:
- Preparing financial statements which include profit & loss accounts, balance sheets and statements of cash flow
- Preparation and filing of the tax audit report (Form 3CD)
- Preparation and filing of Income Tax Returns (ITR)
When Are Audits Applicable for F&O Trading?
The following are the audit applicability in the respective scenario:
- Turnover up to ₹2 Crore
A tax audit is applicable if the taxpayer has incurred a profit or loss of less than 6% of the trading turnover. If the turnover is more than or equal to 6% of the turnover then a tax audit is not applicable.
- Turnover from ₹2 Crore to ₹10 Crore
Tax audit is applicable if a taxpayer has incurred a profit or a loss which is less than 6% of the trading turnover.
Tax audit is applicable only if a taxpayer has made a gain of more than or equal to 6% of the trading turnover and has not opted for the presumptive taxation scheme u/s 44AD. While in the same scenario, if a taxpayer has opted for presumptive taxation, a tax audit is not applicable.
- Turnover above ₹10 Crore
Whenever the trading turnover crosses the ₹10 crore mark, a tax audit is applicable irrespective of the fact whether there is a profit or loss.
Penalty for Avoiding Audits
The IT department can levy a penalty of either ₹1.5 lakhs or 0.5% of your turnover in case your accounts are not audited.
Due to a surge in the number of trading platforms, F&O trading has become widely popular among Indian traders. People often find it confusing to furnish their trading income when filing taxes. Therefore it is essential to understand how an F&O turnover is calculated for ITR and tax audits as and when applicable.
Frequently Asked Questions
Is a tax audit necessary for income from F&O business?
If one’s turnover does not exceed ₹1 crore in a financial year, a tax audit is not mandatory. If the turnover exceeds this limit and the net profit is less than 6% of the turnover, tax audits are mandatory. However, if the turnover exceeds ₹2 crore irrespective of the fact whether the profit and loss are below 6% or above.
Do I need to pay advance tax on my F&O profits?
Income generated from trading in F&O is treated as non-speculative business income and is taxable as per the normal slab rates. On the other hand, if your income under all heads exceeds ₹10,000 in a financial year, you have to pay advance taxes in four quarterly instalments within the due dates.
What are the F&O tax audit charges?
There are no such standardised fees for tax audit in F&O. It usually varies from one individual CA to another.