Did you know that the turnover for futures and options (F&O) trading impacts how you are taxed? Understanding this concept is crucial for every trader. In this article, we will demystify F&O turnover, show you how to calculate it, explain why it's important, and provide a detailed demonstration.
Futures and Options (F&O) turnover refers to the total income from F&O trading, accounting for all profits and losses. To get an accurate estimate, you must deduct all expenses incurred in the process, such as broker commissions, rent, and bills, from the income. Consequently, F&O turnover can be either positive or negative based on the scale of profits and losses made.
Income from trading in F&O is considered as business income by tax authorities. Therefore, any gains made in the derivatives market will be taxed similarly to how they are taxed for a business.
Calculating F&O turnover is vital for several reasons:
1. Tax compliance:
Proper calculation ensures you meet the requirements set by the Income Tax Department.
2. Audit requirements:
If your turnover exceeds a certain threshold, you may need to get your accounts audited.
3. Financial analysis:
Understanding your turnover helps assess your trading performance and profitability.
Also Read: 8 Best F&O stocks for entering the Futures and Options market
Turnover for futures:
1. List all your profits and losses from futures trading.
2. Ignore whether they are gains or losses and just add them up.
Formula: Turnover=Sum of all Profits+Sum of all Losses
Example: If you made ₹2,50,000 profit, ₹7,50,000 profit, ₹1,50,000 loss, and ₹75,000 loss,
Turnover = ₹2,50,000+₹7,50,000+₹1,50,000+₹75,000 = ₹12,25,000
Turnover for options:
1. List the absolute profits or losses from options trading.
2. Add the premiums received from selling options.
Formula: Turnover=Absolute Profit or Loss+Premium on Sale
Example: If you made ₹50,000 profit and received ₹10,000 premium from selling an option.
Turnover = ₹50,000+₹10,000=₹60,000
Combined turnover:
Add the turnovers from both futures and options to get the total F&O turnover.
Formula: Total Turnover=Futures Turnover+Options Turnover
Priya is an active trader in the Indian stock market, dealing primarily in futures and options (F&O). She wants to calculate her F&O turnover for the financial year to ensure she complies with tax regulations. Here’s how she can do it:
1. List of transactions:
i. Trade 1: Profit of ₹3,00,000
ii.Trade 2: Loss of ₹1,20,000
iii.Trade 3: Profit of ₹2,50,000
iv.Trade 4: Loss of ₹80,000
2. Turnover calculation: Priya adds up all the profits and losses, ignoring whether they are gains or losses.
Turnover = ₹3,00,000+₹1,20,000+₹2,50,000+₹80,000 = ₹7,50,000
1. List of transactions:
i.Trade 1: Profit of ₹60,000
ii.Trade 2: Loss of ₹20,000
iii.Premium received from selling options: ₹40,000
2. Turnover calculation: Priya adds the absolute profit or loss and the premium received from selling options.
Turnover = (₹60,000+₹20,000)+₹40,000 = ₹1,20,000
To find her total F&O turnover, Priya combines the turnovers from futures and options.
{Total F&O turnover} = ₹7,50,000 + ₹1,20,000 = ₹8,70,000
An important fact to note is that if your turnover exceeds ₹1 crore in a financial year, you must get your accounts audited by a Chartered Accountant. This is as per Section 44AB of the Income Tax Act. Neglecting this can lead to penalties and increased scrutiny from tax authorities.
F&O traders must also pay advance tax if they don't opt for presumptive taxation under Section 44AD. Losses from F&O trading are treated as non-speculative business losses, which can be set off against other income except for salary and carried forward for 8 years.
Understanding and calculating turnover for futures and options is crucial for tax compliance and financial health. By following the above-mentioned methods, you can ensure accurate F&O tax calculation and stay on the right side of regulatory requirements. For more in-depth insights, visit the Sharekhan Knowledge Centre.
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