How to Calculate F&O Turnover
- 15 Apr 2024
- By: BlinkX Research Team
In the world of finance, for investors who aim to diversify their portfolios and manage risk, a popular choice for them is Futures and Options (F&O) trading. However, understanding how to calculate F&O turnover is important for tax purposes, and assessing trading performance. Understanding F&O turnover calculation is crucial for making wise decisions in the market, regardless of your experience level. With this blog, understand the calculation of F&O turnover and its importance in evaluating trading activities.
What is Futures and Options
The two main categories of stock derivatives traded on a share market are futures and options. These are agreements between two parties for the future exchange of stock assets at a defined price. By fixing the price in advance, these contracts attempt to reduce the market risks associated with stock market trading.
In the stock market, futures and options are contracts whose prices are based on an underlying asset (often referred to as an underlying), which can include shares, stock market indexes, commodities, exchange-traded funds (ETFs), and more. Basics of futures and options allow investors to lower future risk by using predetermined pricing. However, since price swings have no predictable direction, a wrong market prediction might result in significant gains or losses. People who are familiar with how a stock market works usually make the majority of these deals.
Table of Content
- What is Futures and Options
- What is F&O Turnover
- How to Calculate F&O Turnover?
- Example to Calculate Turnover for F&O Trading
- F&O Losses and Tax Audit
- Turnover vs. Audit Requirement:
What is F&O Turnover
In the world of finance, “turnover” signifies the overall business activity within a defined period. Just as a shopkeeper calculates their turnover based on monthly sales, in Futures and Options (F&O) trading, turnover represents the cumulative value of all transactions conducted, encompassing both gains and losses.
F&O turnover includes all the income derived from F&O trading, accounting for both profits and losses incurred along the way. To arrive at an accurate assessment of F&O turnover, it's imperative to deduct all associated expenses, including broker commissions, rent, and utility bills, from the income. This meticulous calculation unveils the true magnitude of F&O turnover, which could swing either positively or negatively, contingent upon the magnitude of profits and losses realised.
How to Calculate F&O Turnover?
Here is how to calculate f&o turnover for income tax:
F&O Turnover = Absolute Profit + Absolute Loss + Premium Received on Sale of Options
Where,
- Absolute Profit: Sum of profits realised from closing out F&O positions
- Absolute Loss: Sum of losses realised from closing out F&O positions
- Premium Received on Sale of Options: Total premiums received from selling options contracts
Example to Calculate Turnover for F&O Trading
Here is an example to make you understand how to calculate F&O turnover:
| Script Name | Transaction Type | Lot Size | Purchase Value | Sale Value | Gains/Loss | Turnover |
|---|---|---|---|---|---|---|
| HDFC Bank | Future | 500 | 2,000 | 2,100 | 50,000 | 50,000 |
| Asian Paints | Future | 200 | 4,200 | 3,900 | (60,000) | 60,000 |
| Maruti | Option | 500 | 50,000 | 60,000 | 50,00,000 | 50,00,000 |
| Tata Motors | Option | 500 | 25,000 | 23,000 | (10,00,000) | 10,00,000 |
| Total | 81,200 | 89,000 | 39,90,000 | 61,10,000 |
Note - Please note that the values presented in the table below are for reference purposes only and do not reflect real data.
For Futures & Options (F&O) trading, turnover is determined by the total sum of profits and losses incurred from transactions. The calculation disregards the total value of contracts traded but focuses solely on the net outcomes of trading activities, encompassing both favourable (profits) and unfavourable (losses) discrepancies, which are treated as turnover.
F&O Losses and Tax Audit
In the realm of trading, understanding the tax implications of your transactions is crucial. Here's a breakdown of F&O turnover reporting and tax audit requirements to keep you informed:
Turnover vs. Audit Requirement:
| Trading Turnover | Audit Requirement |
|---|---|
| Up to ₹2 crore | An audit is required if profit or loss is less than 6% of turnover. If profit constitutes 6% or more, no audit is necessary. |
| Between ₹2 crore & ₹10 crore | Audit mandated if profit or loss is less than 6% of F&O turnover. If profit under the presumptive taxation method exceeds 6%, an audit is not needed. |
| Above ₹10 crore | The audit is mandatory, irrespective of profit or loss. |
Staying within these guidelines ensures compliance with the tax rules and aids in effective financial planning for traders in the F&O market.
Conclusion
In conclusion, understanding F&O turnover is important for taxation as it is categorised similarly to business income. Calculating F&O turnover entails summing up all earnings and deducting expenses associated with F&O trading. Mastery of this calculation holds significant weight as it directly impacts your tax obligations. You can download an online trading app to start your trading journey in the share market.
