This helps in strategic hedging against market volatility or taking advantage of leveraged exposures as per investors' outlooks. The article covers how these versatile financial instruments play a significant role in the financial ecosystem, benefiting consumers and investors alike.

What are Futures and Options?

Beyond daily spot settlement volatility risks bothering both producers and consumers, futures and options contracts in traded commodities and securities enable tactical hedging interests to lock in prices contractually over set tenures aligned with individual outlooks, production cycles or consumption needs. Thereby, parties mitigate uncertainties threatening viability or budgeting.

Meanwhile, speculators sensing favourable directionality leverage such instruments for potential profitability, albeit with defined downside risks given inbuilt standardisation. Thereby, these derivatives cater to both strategic and opportunistic interests collectively.

What is F&O Turnover?

Futures and Options trading income earned in a financial year is considered business income for tax filing purposes. The profit or loss amount from total F&O trades is taken as the trading income.

Direct expenses related to F&O trading, such as brokerage fees, internet expenses, computer depreciation, etc., are deducted from this total income amount. The resultant net amount left after deducting the direct trading expenses from total F&O trading income is called F&O Turnover.

This turnover amount has to be accurately computed and reported in tax returns for proper documentation and assessment of taxes on income from F&O trades. An accurate calculation also aids compliance with business income tax norms applicable to derivatives trading.

Types of Futures and Options 

Futures contracts have the same terms for both the buying and selling parties - to transact the underlying asset at a pre-decided price on a future fixed date.

However, options contracts are of two categories depending on the intended transaction:

Put Option: This gives the holder a right (without any obligation) to sell the underlying asset at a predetermined 'strike' price on or before the expiry date. Put options allow locking in an asset's selling price in future.

For example - A farmer can purchase a wheat put option to sell his harvest at Rs 2,000 per quintal in the coming months. This secures income against price declines.

Call Option: This gives the buyer a right (without any obligation again) to purchase the underlying asset at a preset strike price on or before the expiry date. Call options allow locking in an asset's purchase price in future.

For example - A jeweller can buy a gold call option to procure gold at Rs 5,000 per 10 grams after 6 months. This caps procurement costs if gold prices escalate later.

So, while futures contracts have the same clauses for both sides, options are of two types depending on the intended trade - Puts (for selling assets in future) and Calls (for purchasing assets in future) at locked-in prices.

How to calculate F&O Turnover?

Calculating F&O turnover involves 3 key points:

• The total of all positive and negative profit/loss differences from various F&O trades executed during the entire year has to be taken.
• Any premium amount received on writing/selling options contracts also needs to be included.
• If reverse F&O trades are done, covering earlier buy/sell positions, the net profit/loss amounts from these have to be considered as well.

In simple terms -

For Futures trading turnover:

Futures Turnover = Total absolute net profit amount from all futures trades in the year

For Options trading turnover:

Options Turnover = Total absolute net profit from options trades Total premium earned on writing/selling options contracts

So, the turnover calculation methodology differs slightly for futures and options trading but includes all applicable income components from the respective derivative trades. Accurate computation is necessary for proper documentation and tax assessment on F&O incomes.

F&O Turnover Example

Example 1:

Futures Trading

• Total profit from futures trades in year = Rs 1,50,000
• Total loss from futures trades in year = Rs 50,000

Futures Turnover = Total Absolute Profit

= Profit Loss

= 1,50,000 50,000 = Rs 2,00,000

Example 2:

Options Trading

• Total profit from options trades = Rs 80,000
• Total loss from options trades = Rs 20,000
• The total premium received on writing options = Rs 30,000

Options Turnover = Total Absolute Profit Premium Earned

= (Profit Loss) Premium

= (80,000 20,000) 30,000

= Rs 1,30,000

So, in the first example, the total net profit and loss amounts are added to calculate futures turnover.

In the second example, options turnover also includes any income from premiums earned on writing options over and above the total profit/loss amounts.

Conclusion

Futures and options play a crucial role in modern markets by facilitating efficient trading between spot and derivatives markets. Customised contracts offer the flexibility to capitalise on market volatility or secure budgets despite uncertainty, promoting integrity and sustainability in society. By unlocking the full potential of futures and options, new investment opportunities can be discovered.