How to Calculate Turnover for F&O Trading
The Futures and Options market in India has become one of the newest avenues for investors who have been wanting a bigger piece of the stock market pie.
The F&O frenzy in India has gripped investors strongly. However, a lot of investors and traders who are new to the derivatives market are unaware of the taxation on gains made in the derivatives market or are unsure about how the process works.
In this blog, we will understand how you can calculate your F&O turnover to be able to calculate the taxes you owe to the Government on the same.
What is F&O Turnover
Firstly, it is important to understand that trading in Futures and Options is considered as a business by the tax authorities. Consequently, the income you get from trading in F&O is considered as income from business. Thus, the gains you make in the derivatives market will be taxed just how they are taxed for a business.
However, to do this, you need to calculate your F&O turnover.
F&O turnover can be described as the total income from F&O trading, which takes into account all the profits and losses. To get an accurate estimate of the F and O turnover, all expenses incurred by you in the process of trading in F&O, like broker commission, rent, bills, etc., must be deducted from the income. As a result, the F&O turnover can be negative or positive based on the scale of profits and losses made.
Companies | Type | Bidding Dates | |
| Regular | Closes 22 Apr | ||
| Regular | Opens 23 Apr | ||
| Regular | - | ||
| Regular | - | ||
| Regular | - |
How to Calculate F&O Turnover
Here's how you can calculate F&O turnover-
- Firstly, take the total positive and negative differences into account while calculating turnover.
- Remember to include the premium the trader gets when selling the options
- Also note, if a trader tends to reverse a trade, then the difference afterwards will be part of the turnover
|
Â
|
Point to Remember - Has Anything Changed after the New Guidance Note Issued by ICAI? In a guidance note, the Institute of Chartered Accountants of India has stated that options traders do not have to include premium received on sale while calculating the turnover for taxation purposes. The conditions for Tax Audit are the same, but the calculation of turnover for Options Traders has changed. According to the 7th edition of Guidance Notes issued in 2014, the premium received on the sale of options was supposed to be included in the turnover. But further clarification was not provided. Usually, while calculating the turnover for trading in options, as per the rules, along with the absolute profit, the premium received was also added. But the 8th edition of Guidance Notes, which was issued in August 2022, has simplified the calculation of options turnover. It states that the Premium received on the sale of options was to be included in the turnover. However, if that premium has already been added while calculating the net profit, it does not have to be included separately. That means your absolute profit will be your turnover for Options. Remember to include the premium the trader receives when selling the Options. |
|
Summing up-
|
Example to Calculate Turnover for F&O Trading
Firstly, take into account all the favorable and unfavorable transactions made while trading in F and O.
For example, in a particular financial year, a person made the following transactions, based on which the turnover for the same has been calculated:
|
Name |
Type of Transaction |
Lot Size |
Value of Purchase |
Sale Value |
Gain/ (Loss) |
Turnover |
|
HDFC Bank |
Future |
400 |
5,000 |
5,100 |
40,000 |
40,000 |
|
Asian Paints |
Future |
500 |
4,000 |
3,900 |
(50,000) |
50,000 |
|
ICICI Bank |
Option |
600 |
6,000 |
6,500 |
500 |
500 |
|
HUL |
Option |
600 |
4,500 |
3,700 |
(800) |
800 |
|
 |
 |
 |
19,500 |
19,200 |
(10,300) |
91,300 |
Also Read: What is Futures and Options
Let us understand what happened here:
- The turnover of all futures transactions was calculated in absolute terms.
We multiply the purchase value by the lot size and then multiply the sales value by the lot size. The difference between this gives us the profit or loss, which is the turnover.
For 400 lots of HDFC Bank purchased at 5,000 and sold at 5,100, the profit/ (loss) of 40,000 is the turnover. Similarly, for 500 lots of Asian Paints purchased at 4,000 and sold at 3,900, the profit/ (loss) of 50,000 is the turnover.
- The turnover of all options transactions is not calculated in absolute terms. It has been calculated as:
Sale value + absolute profit/ (loss)
Thus, for 600 lots of ICICI Bank purchased at 6,000 and sold at 6,500, the profit made was 500. Adding the sales value of 6,500 to this, the turnover is 7,000.
Similarly, for 600 lots of HUL purchased at 4,500 and sold at 3,700, a loss of 800 was made. Adding 800 to the sales value of 3,700, the turnover comes out to be 4,500
Now, the final turnover on all these transactions made in a portfolio was calculated by adding all the turnovers of all transactions. Therefore, the final turnover for all the transactions will be 1,01,500.
After calculating the turnover simply based on the transactions, we now have to take into account the expenses and deduct them from the turnover.
You can add all the electricity expenses, STT, commission paid to brokers, internet and rent payments, etc. to calculate the final expenses.
Let’s assume the final expenses were pegged at 5,000.
So, the turnover will be:
1,01,500 – 5,000 = 96,500
Therefore, the final turnover of the portfolio above is 96,500.
Also Read: How to Trade in F&O
The Takeaway
It must be noted here that the turnover for futures and options is calculated differently. Calculating the correct turnover is essential to calculating the accurate tax that you owe on the transactions. Any error in calculating the right turnover can mean inaccurate tax payment, which may make you liable for a penalty.Â
Â