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Futures and options are essentially financial tools that traders use to speculate the price movements of share prices and various other assets. These assets can include shares, foreign exchange and commodities.
Calculating turnover in futures and options trading is vital for individual traders and financial institutions to evaluate their trading activity, monitor risk exposure, and comply with regulatory requirements.
How is futures and options turnover calculation done?
Before delving into turnover calculations, let us briefly define futures and options:
Futures contracts are regulated agreements(take place in the market) to buy or sell an underlying asset at a specified price on the expiry of the future date.
They provide participants with the obligation to fulfil the contract, whether it results in a profit or a loss.
Let us explore 2 major types of options contracts and their features:
A call option grants the buyer the privilege without any compulsion to buy the underlying asset at the strike price on the expiry date.
They grant the buyer the privilege to sell the underlying asset at the strike price on expiry. The holder has no compulsion to fulfil the contract. Put options are often used for risk management, portfolio protection, or a way to speculate on declining asset prices.
What is futures and options turnover?
Tax authorities classify futures and options (F&O) trading as a business activity, which means that any income generated from F&O transactions is business income. Consequently, any gains or profits made in the derivatives market are subject to business taxation regulations. F&O turnover encompasses the overall income derived from trading activities, taking into account profits and losses.
How to calculate F&O turnover?
In F&O trading, the turnover calculation of options and futures is based on the absolute profit. It accounts for positive and negative differences arising from several transactions over a year.
To calculate futures turnover, you can use the simple formula:
Futures turnover = absolute profit
The formula for options turnover calculation is as follows:
Options turnover = absolute profit + premium received from selling options
These considerations and formulas are essential for accurately assessing and reporting your F&O turnover for tax purposes.
Example of F&O turnover calculation
Let us understand the F&O calculation by looking at the following example, wherein a person made the following transactions:
|Size of the lot
|Value of sales
For A Ltd and B Ltd where the transaction is done in futures, the turnover is in absolute terms. It is the absolute profit. Whereas, for C Ltd and D Ltd, the transaction is done in options and the turnover is calculated by adding the sales value and the absolute gain/loss.
Now you can compute the total expenses to arrive at the final sales value. These expenses include electricity, internet and wifi charges, commissions paid to brokers, rent payments, etc. Let us assume the total expenses incurred is Rs. 7440, so the annual turnover from F&O would be Rs.20000.
Futures and options taxation
- Trading turnover below Rs 2 Cr
A tax audit is required if F&O gains/losses are less than 6% of trading turnover and not under the presumptive taxation scheme, with total income exceeding the exemption limit.
- Trading turnover is in-between Rs 2 Cr and Rs 10 Cr
A tax audit is not needed if over 95% of transactions are digital, regardless of profit or loss.
- Trading turnover over INR 10 Cr
A tax audit is mandatory.
Now, what happens when there’s a net loss from F&O trading? F&O trading losses are considered non-speculative business losses. These losses can be adjusted against income from other businesses (excluding speculative income), rental income, or income from other
sources. Unaccounted business losses can be carried ahead for eight years. These losses can be set off with business income.
In conclusion, if you are involved in F&O trading, it is essential to adhere to these F&O tax calculations to ensure compliance with the law.
With the rise in the number of people who hold demat accounts, trading in futures and options has become rampant. Due to this, there is tighter regulation around F & O trading.
Futures and Options turnover below ₹2 crores are not subject to tax audits. Anything above ₹2 crores will be subject to audits, provided they meet other requirements regarding profit percentage, form of transactions, etc.
F&O turnover returns can be filed under ITR 3. Form 3 for ITR deals with profits or losses from business income.
F&O trading is a hedging and speculating tool for traders in the stock market. While the purpose of it is to mitigate risks, options and futures involve complex strategies. Learning and applying them accurately might lead to profits. Else, losses are equally probable.
F&O is taxable under Income Tax’s non-speculative business income. The turnover is liable for tax under regular income tax rates.
Losses under F&O transactions are not taxable. However, reporting them while filing tax returns can help in off-setting them against tax on gains.