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How to Calculate Futures and Options Turnover

Futures Trading and Options Trading have evolved as popular trading avenues for investors. These are derivatives contracts where the value of the contract is based on that of the underlying security. When you trade in futures and options, there are certain tax implications that you need to consider. This is based on the F&O turnover.

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In this article, we will talk about futures and options, F&O turnover, and how you can calculate it.

What are Futures and Options?

In the simplest terms, futures and options are contracts between two parties. These contracts are entered into on a stock exchange.

Futures Trading

So, what are futures in the stock market? Futures are derivative contracts that bind both the parties to the contract to buy and sell a security at a predetermined price at a predetermined date in the future. They are derivative contracts since their value is derived from the underlying security. Once the contract has been entered into, the buyer does not have the right to cancel it.
Know More about Futures Contract

Options Trading

What are options in the stock market? Options are also derivative contracts where the buyer has the right to buy or sell the underlying security at a predetermined price at a predetermined date in the future. Unlike Futures, Options buyers are not obligated to fulfil the contract. They can cancel it if the market movement is against their assessment. However, this additional right comes at a premium.
Also Read: F&O Trading Income Tax

What is F&O Turnover & How to Calculate it?

The tax authorities treat income from futures and options trading as business income. Hence, as an F&O trader, you need to calculate the total income earned by you during a financial year. Since it is treated as business income, you are allowed to deduct expenses directly associated with F&O trading like brokerage, internet and phone bills, office rent, etc., and depreciation on assets to calculate the net F&O Turnover. You can also claim cash expenses up to ₹10,000 (as per current norms). It is important to maintain a proper record of expenses and spend via bank transfers and cheques to claim the tax deduction.

Hence, F&O turnover is the absolute profit earned after deducting all expenses incurred by you to trade in these derivatives contracts. If you are selling an options contract, then you need to add the premium received to the absolute profit to calculate the futures and options turnover.

F&O Losses in a Financial Year

Even if you book a loss in futures and options trading in a financial year, you need to report it to the tax authorities. However, F&O losses have certain tax benefits. You can adjust the losses with the gains made from other sources like rental income, interest earned, etc. Also, if you don’t adjust the losses, then you can carry them forward for eight years. In case of carrying the losses forward, it is important to remember that you can adjust them only against non-speculative income.

Summing Up

In recent years, with a surge in the number of platforms offering futures and options trading, many people have started turning to derivatives for making the most out of the opportunities in the market.

If you are planning to enter the F&O trading segment, then it is important to remember that the government treats income from F&O trading as business income from speculative activities. Hence, it is important to ensure that you maintain your accounts accordingly so that you can file your returns in a hassle-free manner.

 

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Frequently Asked Questions

If you suffer a loss in F&O trading in a financial year, then you can adjust the profits made from other sources against it. This includes profits made from rent or interest received from other investments. You can also choose to carry forward the losses and adjust them in the future for up to eight years. However, the carried forward losses can be adjusted only against non-speculative income.

Yes. Regardless of the profits or losses made by you, reporting futures and options trading turnover is mandatory according to the existing tax laws. You might also be required to get your accounts audited via a Chartered Accountant before filing your returns if your income exceeds the preset limits or if you opt for a presumptive scheme of taxation.

Indian tax authorities treat income from futures and options trading as business income. Hence, the turnover from this business can be calculated by adding all the income made from F&O trading and deducting expenses incurred by you for the trading activities. The three aspects that you need to consider while calculating F&O turnover are:

  • Favourable + Unfavourable differences
  • The total premium received by you by selling Options contracts
  • If you have entered into any reverse trades, then the difference thereon