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Trading in futures and options has become a popular activity among traders, owing to the availability of multiple online trading platforms. Futures and options (F&O) are two types of derivatives — special contracts whose value is derived from the price of an underlying security or asset, and are available for trading in the Indian stock market. Furthermore, the F&O segment, over any other market segment, accounts for the majority of the trading across the stock exchanges in the country.
Key Takeaways
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F&O turnover is calculated by using the absolute value of profits and losses, rather than the net outcome.
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Futures turnover comprises total absolute profit and loss, whereas options turnover is the sum of absolute profit and absolute loss. Do not add the premium received, if already part of net P&L calculation.
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Accurate F&O turnover estimate is required for income tax filing and tax auditing purposes.
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Even in the case of a loss, F&O turnover must be recorded for compliance reasons.
What is F&O Turnover?
F&O turnover is the gross volume of your trading activity. It is not the contract value (which would be in crores), and it is not your Net Profit.
According to the latest ICAI Guidance Note (8th Edition), turnover for F&O is calculated as the sum of absolute differences (positive or negative) of all transactions.
Why Is It Important To Calculate F&O Turnover?
Calculating the turnover on futures and options trading is important for tax filing purposes, and F&O trading is often reported as a business while filing tax returns. But one has to first analyse the total income for the year, which can be a positive or negative value (profit or loss). Expenses directly related to F&O business are deducted from the income, such as broker’s commission, office rent, telephone and internet bills etc., along with the depreciation on assets used for the business. The amount left will be the Net Profit from F&O trading. Also, calculating turnover determines if you need a CA Audit.
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Net Profit: Income - Expenses (Brokerage, Internet, etc.). This is what you pay tax on.
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Turnover: Determines compliance requirements (Audit vs. No Audit).
How To Calculate F&O Turnover?
F&O turnover is calculated as the absolute value of the profit or loss on a trade. To calculate the futures and options turnover, one has to take care of the following:
Futures Turnover:
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Calculate the profit or loss on each futures contract.
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Sum up the absolute values of all profits and losses for the period.
Options Turnover:
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Calculate the profit or loss on each options contract.
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Sum up absolute profit and absolute loss. Do not add the premium received.
Key Points to Remember
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Absolute values are used for both futures and options turnover.
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Option premiums received are included in options turnover.
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Complex strategies and multiple legs can increase calculation complexity.
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Brokerage statements often provide turnover details.
Key Elements of F&O Turnover
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Absolute Profit and Loss: This is derived by summing up all the positive and negative differences. You treat all losses as positive numbers for the calculation.
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Premium on Sale: For Options, the premium received on the sale of an option is included only if it hasn't already been factored into the net P&L by your broker.
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Reverse Traders: Differences from any reverse trades are also included in the turnover.
Example To Calculate Turnover For F&O Trading
Assume a trader executed the following trades in a financial year:
1. Futures Turnover Calculation
Sum of Absolute Profit & Absolute Loss.
|
Trade |
Instrument |
Profit / Loss (₹) |
Turnover Calculation (Absolute Value) |
|
Trade 1 |
Nifty Futures (Buy/Sell) |
+ 2,00,000 |
2,00,000 |
|
Trade 2 |
Bank Nifty Futures (Buy/Sell) |
- 1,00,000 |
1,00,000 |
|
Total |
|
Net Profit: + 1,00,000 |
Turnover: 3,00,000 |
2. Options Turnover Calculation
Rule: Sum of Absolute Profit & Absolute Loss (Do not add premium received).
|
Trade |
Instrument |
Profit / Loss (₹) |
Turnover Calculation (Absolute Value) |
|
Trade 3 |
Nifty Call Option |
+ 50,000 |
50,000 |
|
Trade 4 |
Bank Nifty Put Option |
- 25,000 |
25,000 |
|
Total |
|
Net Profit: + 25,000 |
Turnover: 75,000 |
3. Final Consolidated Turnover
|
Component |
Net Profit / Loss (For Tax Calculation) |
Turnover (For Audit Applicability) |
|
Futures |
₹ 1,00,000 |
₹ 3,00,000 |
|
Options |
₹ 25,000 |
₹ 75,000 |
|
Grand Total |
₹ 1,25,000 |
₹ 3,75,000 |
Note: The actual turnover value will depend on the lot size of the respective contracts in this example; we have considered it to be 10. This example provides a basic understanding of how to calculate F&O turnover. In real-world scenarios, there might be numerous transactions, including multiple contracts, different expiry dates, and complex option strategies.
Also Read, What are Options?
F&O Losses and Tax Audit
F&O losses are non-speculative business losses.
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Set-Off: You can set off F&O losses against any other income (Rental, Business, Capital Gains) except Salary in the same year.
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Carry Forward: Unadjusted losses can be carried forward for 8 years to set off against future business profits. Condition: You must file your ITR on time (by July 31st).
When is Tax Audit (Section 44AB) Mandatory? For the Assessment Year 2025-26, an audit is required if:
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High Turnover: Your F&O turnover exceeds ₹10 Crores (since F&O is 100% digital).
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Low Profit Declaration: Your turnover is up to ₹2 Crores, a profit (or loss) of less than 8% (6% in case of digital transactions), and your Total Income exceeds the basic exemption limit.
Conclusion
F&O trading has become an attractive proposition due to the availability of multiple trading platforms. Taxpayers often get confused while filing taxes about the income generated by F&O trading, and it is important to understand how to calculate F&O turnover for income tax purposes, and when tax audit is applicable.
