How to Calculate Turnover in Futures and Options Trade
India is witnessing a surge in investments and trading in the derivatives segment. Derivatives are financial instruments that derive their value from the underlying assets like indices, stocks, commodities, currencies, etc. Futures and Options are two popular variants of derivatives that can deliver notable returns. Knowing how to calculate your turnover in this business is an integral part of the basics you should know.
Understanding the basics of Futures and Options
A Futures contract is an agreement between the buyer and seller to trade a given quantity of an underlying asset. This takes place on or before a particular date in the future. The price at which the trade takes place is also pre-decided.
An Option is an agreement that gives you the right to purchase or sell a given quantity of the underlying asset at or before a particular date in the future. This transaction will take place at a pre-determined price. Here, it must be emphasized that you have the right, but not the obligation to buy or sell the underlying asset.
If you find the Options contract unfavourable, you can consider postponing the trade to a future date, sell it on an exchange or let it expire. However, if you wish to buy, the seller has to sell it as per the terms of the contract. He cannot deny the trade.
There are two types of options - Call Option & Put Option. A Call Option gives you the right to purchase an underlying asset at a pre-decided price until the contract’s future expiry date. A Put Option gives you the right to sell an underlying asset at a pre-decided price until the contract’s future expiry date.
Investment and trade in Futures and Options are considered to be a business from a taxation point of view. Hence, you have to calculate your turnover in F&O trading for filing your taxes accurately. The first step in this direction will be to tabulate your total income from F&O. Depending on how profitable your trades were, your income could be positive or negative. You can arrive at your net income by deducting expenses like brokerage, utility bills, commission, etc that are directly related to your business of F&O.
Stepwise calculation of turnover in Futures and Options
You can calculate the turnover in your F&O business after taking into consideration the following factors:
- Calculation of the total profit and loss
- The premium paid or received while trading in Options
- The quantum of reverse trades done and the difference in profit/loss incurred
Total Futures turnover (across all transactions done in a given year) = Total profit – total loss
Total Options turnover (across all the transactions done in a given year) = Total profit – total loss + total premium received for the sale of Options – total premium paid for the purchase of Options
Taxation for F&O business
You have to file your returns for your F&O transactions, irrespective of it being positive or negative. You can enjoy tax benefits if your F&O business is running in losses.
Under section 44AB, a tax audit is required if:
- Your F&O turnover is in a loss
- The trading turnover exceeds Rs. 1 crore
- The trading turnover exceeds Rs. 2 crore and it is protected by the presumptive taxation scheme.
You will have to get an expert on the subject matter such as a Chartered Accountant on board for the tax audit in order to:
- Create your balance sheet
- File your tax audit report
- File your ITR
You can avoid a tax audit if you do not claim a refund and carry forward the losses. Here, you can set off the losses against the profits earned in the future and reduce your tax liability.
Tabulating your net income and filing taxes can be tricky when it comes to your F&O business. Hence, along with understanding the ropes of F&O trading, it is also important to know how to calculate your turnover in this business.
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