How to calculate Turnover for Future and Option (F&O) trading

As per Section 43(5) of the Income Tax Act 1961, derivatives, futures and options trading will be treated as normal business income (not speculative transactions) though such transactions are completed without actual delivery of shares or securities or commodities etc. These are squared up by receipts/payments for the differences only. The contract notes are issued for the full value of the underlined shares or securities or commodities, etc. purchased or sold but entries in the books of account are made only for the differences. The transactions may be squared up any time on or before the striking date. In the case of Option trading, the buyer of the option pays the premium and the seller of the option received the premium amount. If an option contract is physically settled, there is no profit or loss.

In this scenario, questions arise on how to calculate turnover for the purpose of Tax audit. As you are aware a Tax audit is not mandatory if F&O turnover is less than Rs. 10.00 Crore subject to few conditions listed in 44AB of income tax act.

The turnover in the above types of transactions is to be determined as follows:

  • The total of favourable and unfavourable (Profit or Loss) differences shall be taken as turnover.
  • In the case of options trading, If an option contract is physically settled, there is no profit or loss. In such cases, the premium received on the sale of options will also be included in calculating turnover.

F&O Profits are treated as normal business income and tax is calculated as per the normal slab Rate.

F&O Loss is treated as a normal business Loss that can set off against any income other than Salary Income ie F&O loss can be set off against other business income, rental income, capital gain, income from other sources. Unadjusted loss can be Carry Forward for 8 years which can only be set off against normal business income.

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