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.

Futures and options are contracts between parties, which takes place through the trading mechanism in stock exchange. In futures trading, the trader can either buy or sell a security in an index or a stock contract at a predetermined value or price, at a certain date and time. For instance, investors who are interested in investing in either gold or oil can either buy them physically, or can trade in their derivatives, and enter into a futures contract to trade either gold or oil at a future rate that is predetermined.

In futures trading, the trader either makes a profit or loss depending on the market movement through the contract life, and the profit or loss is calculated every day until the end of the contract, or until the trader sells the contract. The buyer however does not have the option to cancel the contract once both parties enter the agreement.

Unlike in futures trading, the buyer does have the option to cancel the contract in options. However, considering the buyer is given this advantage, they have to pay a premium when they enter into the options contract. Furthermore, the buyer has to pay the premium amount even if they opt to cancel the options contract.

What is 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 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 turnover from the F&O trading.

How To Calculate F&O Turnover

To calculate the futures and options turnover, one has to take care of the following:

  1. While calculating the turnover, the total of positive and negative differences are to be considered
  2. The premium received by the trader while selling the options has to be included
  3. In case of reverse trades entered by the trader, the difference thereafter will also be a part of the turnover

In simpler terms, under F&O trading, the turnover of futures will be the absolute profit, which is the sum of positive and negative differences.

Futures Turnover = Absolute Profit (sum of profit and loss made on various transactions throughout the year)

The turnover of options can be calculated by adding the premium obtained on selling the options to the absolute profit.

Options Turnover = Absolute Profit + Premium obtained on selling the options

F&O Losses and Tax Audit

Regardless of the profits or losses, F&O turnover has to be reported. However, F&O losses come with tax benefits; Tax Audit u/s 44AB is applicable when the taxpayer either reports losses in the turnover, or if the trading turnover exceeds Rs. 1 crore, or Rs. 2 crores, if covered by the presumptive taxation scheme. The taxpayer can also decide not to claim, and carry forward the loss, in which case the tax audit can be avoided, and the loss can be set-off against future profits since F&O losses are non-speculative, to reduce income tax liability.

If the taxpayer decides to go with the tax audit, they must appoint a Chartered Accountant in order to:

  1. Prepare Financial Statements (Profit and loss – balance sheet)
  2. Prepare and file Tax Audit Report (Form 3CD)
  3. Prepare and file ITR

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.